CAPITAL SENIOR LIVING CORP
EX 10.3-LOAN AGRMNT, PROM NOTE & GUARANTY
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>EX 10.3-LOAN AGRMNT, PROM NOTE & GUARANTY
<TEXT>



                                                               [Newman - Pool C]


                            MEZZANINE LOAN AGREEMENT



         THIS LOAN AGREEMENT (this "Agreement") is made as of August ____, 2000,
by and among CAPITAL SENIOR LIVING P-C, INC., a Delaware  corporation  (together
with its successors and assigns, "Borrower"), CAPITAL SENIOR LIVING ILM-C, INC.,
a Delaware corporation (together with its successors and assigns,  "Owner"), and
NEWMAN  FINANCIAL  SERVICES,  INC., a Delaware  corporation  (together  with its
successors and assigns, "Mezzanine Lender").

                                    RECITALS

         A. Borrower has requested that  Mezzanine  Lender make a mezzanine loan
to Borrower in the principal sum of  $10,300,000.00  in order to assist Owner in
refinancing or acquiring, as the case may be, the Facilities (as defined below).

         B. As a wholly owned subsidiary of Borrower, Owner will materially and
directly benefit from the making of the Loan.

         C.  Mezzanine Lender has agreed to make such loan on the terms and
conditions hereinafter set forth.

                                    AGREEMENT

         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"  has the  meaning  given to that  term in the First
Mortgage.

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

                  "Affiliate" means, with respect to any Person, (a) each Person
that controls, is controlled by or is under common control with such Person, (b)
each Person that, directly or indirectly, owns or controls, whether beneficially
or as a trustee, guardian or other fiduciary, any of


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<PAGE>



the Stock of such Person,  and (c) each of such  Person's  officers,  directors,
members,  joint  venturers  and  partners.  For the purposes of this  Agreement,
"control"  when used with  respect to any  specified  Person  means the power to
direct the  management  and  policies of such  Person,  directly or  indirectly,
whether  through  the  ownership  of  voting   securities  or  other  beneficial
interests,  by contact,  or otherwise;  and terms "controls",  "controlling" and
"controlled" have the meanings correlative to the foregoing.

                  "Assignment   of   Proceeds"   means  those  two  (2)  certain
Assignment  of Net  Proceeds  relating  to the Pool C  Facilities  of even  date
herewith executed by Owner and/or Borrower for the ultimate benefit of Mezzanine
Lender.

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

                  "Business  Day" means a day, other than Saturday or Sunday and
legal holidays, when Mezzanine Lender is open for business.

                  "Capital Senior Properties" means Capital Senior Living
Properties, Inc., a Texas corporation.

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

                  "Commitment  Letter"  means the  commitment  letter  issued by
Mezzanine Lender to Guarantor dated August 3, 2000.

                  "Debt Service Coverage Ratio" means a ratio in which the first
number is the sum of "net pre-tax income" of Owner from normal operations of the
Pool C Facilities as set forth in the financial statements provided to Mezzanine
Lender (without deduction for Actual Management Fees or management expenses paid
or  incurred  in  connection  with  the  operation  of the  Pool C  Facilities),
calculated based upon the preceding twelve (12) months, plus interest expense or
lease  expense to the extent  deducted in  determining  net income and  non-cash
expenses  or  allowances  for  depreciation  and  amortization  of  the  Pool  C
Facilities  for said  period,  less the  greater  of Actual  Management  Fees or
Assumed  Management Fees for said period and the second number is the sum of the
principal amounts due (even if not paid) on the Loan and the First Mortgage Loan
(but which shall not include that portion associated with the balloon payment of
the Loan or the First Mortgage Loan) for the applicable period plus the interest
amount due on the Loan and on the First Mortgage Loan for the applicable  period
not to exceed, with respect to the Loan and the First Mortgage Loan, an interest
amount calculated at the Strike Rate and the applicable  "Strike Rate" described
in the loan documents  evidencing  the First Mortgage Loan. In calculating  "net
pre-tax  income,"  Extraordinary  Income  and  Extraordinary  Expenses  shall be
excluded.

                  "Debt Reserve Fund Agreement"  means that certain Debt Reserve
Fund Collateral  Pledge Agreement of even date herewith by and between Mezzanine
Lender and Borrower.


                                        2


<PAGE>



                  "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" has the meaning given to that term in the Note.

                  "Distribution Coverage Ratio" means a ratio in which the first
number is the sum of "net pre-tax income" of Owner from normal operations of the
Facilities as set forth in the financial statements provided to Mezzanine Lender
(without  deduction for Actual  Management  Fees or management  expenses paid or
incurred in connection  with the operation of the  Facility),  calculated  based
upon the preceding twelve (12) months, plus interest expense or lease expense to
the  extent  deducted  in  determining  net  income  and  non-cash  expenses  or
allowances for  depreciation and amortization of the Facilities for said period,
less the greater of Assumed  Management Fees or Actual  Management Fees for said
period and the second  number is the sum of the  principal  amounts due (even if
not paid) on the Loan and the First  Mortgage  Loan (but which shall not include
that  portion  associated  with the  balloon  payment  of the Loan or the  First
Mortgage Loan) for the  applicable  period plus the interest due on the Loan and
the First Mortgage Loan for the applicable period,  not to exceed,  with respect
to the Loan and the First  Mortgage Loan, an interest  amount  calculated at the
Strike Rate,  and the applicable  "Strike Rate"  described in the loan documents
evidencing  the First  Mortgage  Loan.  In  calculating  "net  pre-tax  income,"
Extraordinary Income and Extraordinary Expenses shall be excluded.

                  "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 Land and/or the
Improvements.

                  "Equipment"  has the  meaning  given to that term in the First
Mortgage.

                  "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 Owner  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 Owner'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 each of the Pool C Facilities.

                  "First  Mortgage" means those certain  Mortgage/Deed  of Trust
and Security Agreements of even date herewith, executed by Owner for the benefit
of First  Mortgage  Lender,  in the  aggregate  principal  amount  of the  First
Mortgage Loan,  encumbering the Mortgage  Property,  as the same may be amended,
modified or supplemented from time to time.


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<PAGE>



                  "First Mortgage  Lender" shall mean GMAC  Commercial  Mortgage
Corporation, a California corporation.

                  "First  Mortgage  Loan" means  individually  and  collectively
those loans in the aggregate  amount of  $38,350,000.00  made in connection with
the Pool C Facilities to the Owner by First  Mortgage  Lender on the date hereof
as more particularly identified on Exhibit "B" attached hereto.

                  "First  Mortgage  Loan  Agreement"   means   individually  and
collectively those certain Loan Agreements  relating to the First Mortgage Loan,
of even date herewith,  between Owner and First Mortgage  Lender as the same may
be amended, modified or supplemented from time to time.

                  "First Mortgage Loan Documents" means, collectively, the "Loan
Documents" (as defined in the First Mortgage Loan Agreement) to evidence, secure
and guaranty all portions of the First  Mortgage  Loan, as such documents may be
amended, modified or supplemented from time to time.

                  "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.

                  "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
Land and/or the  Improvements  or the use,  operation or improvement of the Land
and/or the Facility.

                  "Guarantor" means Capital Senior Living Corporation, a
Delaware corporation.

                  "Guaranty   Agreement"   means  that   certain   Payment   and
Performance Guaranty of even date herewith from Guarantor to Mezzanine 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 Land and/or the  Improvements  is
prohibited by any federal, state or local authority; any substance that requires
special handling;  and any other material or substance now or during the term of
the Loan 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,  written  policies and
other applicable binding governmental  requirements,  administrative rulings and
court judgments and decrees in effect now or in the future


                                        4


<PAGE>



and including all  amendments,  that relate to Hazardous  Materials and apply to
Owner,  Borrower,  the Land 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 Land,
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 storm sashes, and cleaning apparatuses which are or shall be attached to the
Land or said buildings, structures or improvements.

                  "Indebtedness"  means any (a)  obligations for borrowed money,
(b)  obligations,  payment for which is being  deferred by more than ninety (90)
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 or Owner's business,  as the case
may be, (c) 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 (d) 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.

                  "Independent  Director"  means,  with  respect to Borrower and
Owner,  a duly  appointed  member of the board of directors  of such  respective
entity,  reasonably satisfactory to Mezzanine Lender, who shall not have been at
the time of such  individual's  appointment,  and may not have  been at any time
during the preceding  five years,  and shall not be at any time while serving as
Independent Director:  (i) a direct or indirect legal or beneficial owner of, or
an officer,  director,  attorney,  counsel,  partner, member or employee of such
respective entity (other than an Independent  Director thereof) or any Affiliate
thereof except for service as an Independent  Director on the board of directors
of an  Affiliate  of  Borrower,  (ii) a customer or creditor  of, or supplier or
contractor  to, or other  person who derives  more than 10% of its  purchases or
revenues  from its  activities  with such  respective  entity  or any  Affiliate
thereof except for service as an Independent  Director on the board of directors
of an  Affiliate  of  Borrower,  (iii) a  person  or other  entity  controlling,
controlled by or under common  control with any such direct or indirect legal or
beneficial  owner,  officer,  director,   attorney,  counsel,  partner,  member,
employee,  customer,  creditor,  contractor  supplier or other Person, or (iv) a
member  of the  immediate  family  of any  such  direct  or  indirect  legal  or
beneficial  owner,  officer,  director,   attorney,  counsel,  partner,  member,
employee,  customer,  creditor,  contractor,  supplier or other person.  As used
herein, the term "control:" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management, policies or activities
or a person or entity,  whether through  ownership of voting securities or other
beneficial  interest,  by contract or otherwise and the terms  "controlling" and
"controlled" having meanings correlative to the foregoing.


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<PAGE>



                  "Inventory"  has the  meaning  given to that term in the First
Mortgage.

                  "Key Capital" means Key Corporate Capital, Inc., a Michigan
corporation.

                  "Land" means the land described in Exhibit "A" attached hereto
and made a part hereof.

                  "Leases"  has the  meaning  given  to that  term in the  First
Mortgage.

                  "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  $10,300,000.00
made by Mezzanine Lender to Borrower as of the date hereof.

                  "Loan  Documents"  means,  collectively,  this Agreement,  the
Commitment  Letter,  the  Note,  Assignment  of  Proceeds,   Debt  Reserve  Fund
Agreement,  the Guaranty  Agreement,  the Lockbox  Agreement,  Operating Deficit
Reserve  Agreement,  Partnership  Pledge  Agreement,  Promissory  Notes Security
Agreement, the Stock Pledge Agreement and the Subordination Agreement,  together
with any and all other documents  executed by Borrower,  Owner, their Affiliates
or others,  evidencing,  securing or otherwise relating to the Loan, as the same
may be amended, modified or supplemented from time to time.

                  "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,  Mezzanine  Lender pursuant to the
Loan Documents.

                  "Lockbox    Agreement"    means   that    certain    Springing
Lockbox-Deposit  Account  Agreement of even date herewith by and among Mezzanine
Lender, Owner and Bank One, Texas, N.A.

                  "Managed   Care   Plans"   means   any   health    maintenance
organization, preferred provider organization,  individual practice association,
competitive  medical  plan, or similar  arrangement,  entity,  organization,  or
Person.

                  "Management  Agreement"  means  individually  and collectively
those certain Management  Agreements dated of even date herewith between Manager
and Borrower, obligating Manager to operate and manage each of the Facilities.


                                        6


<PAGE>



                  "Manager" means Capital Senior Management 2, Inc., a Texas
corporation  and any successor  manager of the Facilities  approved by Mezzanine
Lender, in its commercially reasonable discretion, in writing.

                  "Maturity  Date" means  August  ___,  2002,  unless  Mezzanine
Lender sooner  accelerates  the maturity of the Loan in accordance  with Section
2.4 hereof.

                  "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.

                  "Mortgaged Property" has the meaning given to that term in the
First Mortgage.

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

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

                  "Operating  Deficit  Reserve  Agreement"  means  that  certain
Operating  Deficit  Reserve and Security  Agreement of even date herewith by and
between Mezzanine Lender and Borrower.

                  "Partnership  Pledge Agreement" means that certain Partnership
Interest Pledge and Security  Agreement  executed by Capital Senior  Properties,
for the benefit of Mezzanine Lender.

                  "Permits" means all licenses, permits and certificates used or
necessary in connection  with the  construction,  ownership,  operation,  use or
occupancy of the  Mortgaged  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   or
quasi-governmental entity or Person whatsoever concerning ownership,  operation,
use or occupancy.

                  "Permitted Encumbrances" has the meaning given to that term in
Section 8.2 hereof.


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<PAGE>



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

                  "Pool C Facilities" means each of the facilities  described in
Exhibit "B" hereto.

                  "Proceeds"  has the  meaning  given to that  term in the First
Mortgage.

                  "Promissory  Notes  Security  Agreement"  means  that  certain
Promissory  Notes Security  Agreement of even date herewith  executed by Capital
Senior Properties and the Mezzanine Lender.

                  "Rating Agency" means Fitch Investors Services, Inc., Moody's
Investors  Service,  Inc.,  Duff & Phelps Credit  Rating Co.  and/or  Standard &
Poor's or any successor thereto, and any other nationally recognized statistical
rating organization to the extent that any of the foregoing have been or will be
engaged  by  Mezzanine  Lender  or  its  designees  in  connection  with  or  in
anticipation of a securitization of the Loan.

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

                  "Rents"  has  the  meaning  given  to that  term in the  First
Mortgage.

                  "Single Purpose Entity" means, with respect to Owner, a Person
which owns no interest or property other than the Mortgaged Property, and means,
with respect to Borrower, a Person which owns no interest or property other than
one hundred percent (100%) of the outstanding stock of the Owner.

                  "Stock"  means  all  shares,  options,  warrants,  general  or
limited partnership  interests,  membership  interests,  participations 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).

                  "Stock  Pledge  Agreement"  means that  certain  Stock  Pledge
Agreement of even date  herewith  executed by the Owner of the Pool C Facilities
for the benefit of Mezzanine Lender.

                  "Strike Rate" means a fixed rate of interest equal to the Note
Rate (as  defined  in the  Note) in effect  on the  Closing  Date plus 200 basis
points.


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<PAGE>



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

                  "Triad II Limited Partnership" means Triad Senior Living II,
L.P., a Texas limited partnership.

                  "Triad  Facilities"  means  those  three (3)  separate  senior
housing  facilities  more fully  described  on Exhibit "C"  attached  hereto and
incorporated herein.

                  "Triad  Notes" means those three (3) Amended and Restated Draw
Promissory Notes,  dated December 31, 1999 made by Triad II Limited  Partnership
to the order of Capital Senior Properties.

         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 Texas.

         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  Mezzanine
Lender, and Mezzanine Lender has agreed to make the Loan to Borrower, subject to
Borrower's and Owner's compliance with and observance of the terms,  conditions,
covenants,  and provisions of this Agreement and the other Loan  Documents,  and
Borrower   and/or  Owner,   as  the  case  may  be,  has  made  the   covenants,
representations,  and warranties herein and therein as a material  inducement to
Mezzanine Lender to make the Loan.

         2.2      Security for the Loan.  The Loan will be evidenced, secured
and guaranteed by the Loan Documents.

         2.3      Limitation on Interest.  All agreements between Borrower and
Mezzanine Lender,  whether now existing or hereafter arising and whether written
or oral, are hereby limited so that in


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<PAGE>



no  contingency,  whether  by  reason of  acceleration  of the  maturity  of any
indebtedness  governed hereby or otherwise,  shall the interest  contracted for,
charged or received by Mezzanine  Lender exceed the maximum  amount  permissible
under  applicable  law. If, from any  circumstance  whatsoever,  interest  would
otherwise be payable to Mezzanine Lender in excess of the maximum lawful amount,
the interest  payable to Mezzanine Lender shall be reduced to the maximum amount
permitted  under  applicable  law; and, if from any  circumstance  the Mezzanine
Lender shall ever receive anything of value deemed interest by applicable law in
excess of the maximum lawful amount,  an amount equal to any excessive  interest
shall be applied to the  reduction  of the  principal of the Loan and not to the
payment of interest,  or, if such excessive  interest exceeds the unpaid balance
of  principal  of the Loan,  such  excess  shall be refunded  to  Borrower.  All
interest  paid or agreed to be paid to  Mezzanine  Lender  shall,  to the extent
permitted by  applicable  law, be  amortized,  prorated,  allocated,  and spread
throughout  the full period until  payment in full of the  principal of the Loan
(including  the period of any renewal or  extension  thereof)  so that  interest
thereon for such full period  shall not exceed the maximum  amount  permitted by
applicable law. This paragraph shall control all agreements between the Borrower
and Mezzanine Lender.

         2.4  Acceleration of Maturity Date.  Mezzanine  Lender shall accelerate
the maturity  date of the Loan upon the eighteen (18) month  anniversary  of the
Closing  Date  ("Acceleration  Date")  unless (i) no Default (as defined  below)
under any of the Loan Documents has occurred and is continuing;  (ii) no Default
under any of the loan documents  evidencing  that certain loan made by Mezzanine
Lender to Capital Senior Living P-B, Inc., a Delaware  corporation,  on or prior
to August 11, 2000, in the amount of $9,700,000.00  ("Pool B Loan") has occurred
and is continuing ("Pool B Loan Documents");  (iii) Mezzanine Lender determines,
based on its review of updated  appraisals for the Facilities,  that the loan to
value ratio for the Facilities  (after taking into account the unpaid  principal
balance of the Loan and the portion of the unpaid principal balance of the First
Mortgage Loan,  attributable  to the  Facilities)  is not more than  ninety-five
percent (95%) ("Loan to Value Test"); and (iv) the Facilities have achieved,  on
a combined basis, a Debt Service  Coverage Ratio of at least 1.0 to 1.0 based on
a per annum interest rate  calculated at the Strike Rate  ("Interest Rate Stress
Test").  For  purposes of this  Agreement,  "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" under the Loan Documents or the
Pool B Loan Documents (as the case may be). In the event the Loan to Value Ratio
Test or the Interest  Rate Stress Test has not been  achieved at the time of the
Acceleration  Date, the Mezzanine Lender will permit the Borrower,  Owner and/or
Guarantor to pay to Mezzanine  Lender on or prior to the  Acceleration  Date, an
amount  which if the same had been applied to reduce the  outstanding  principal
amount of the Loan,  would have resulted in the achievement of the Loan to Value
Ratio Test and the Interest Rate Stress Test.

         2.5 Interest Rate  Protection.  To protection  against  fluctuation  in
interest rates, the Borrower shall make arrangements for an interest rate cap (a
"Cap") to be placed and maintained on or prior to the Closing Date and shall not
terminate  earlier  than  the  Maturity  Date.  The Cap  shall  be  secured  and
documented on terms and conditions  approved by, and with a  counterparty  ("Cap
Provider")  agreement,  acceptable  to  Mezzanine  Lender  in  its  commercially
reasonable discretion.  The Cap Provider shall agree to make certain payments to
or for the benefit of Borrower if one month LIBOR (as  determined  in accordance
with Section 1.4 of the Note), in effect on the Closing Date,  increases by more
than two hundred (200) basis points. Borrower's right, title and interest in the
Cap


                                       10


<PAGE>



shall be assigned to Mezzanine Lender as additional  collateral for repayment of
the Loan ("Cap Assignment").  The Cap shall be evidenced by and governed by such
documents (the "Cap Documents") as shall be reasonably  acceptable to, and which
shall be in form and content reasonably acceptable to Mezzanine Lender.

         2.6  Liquidity  Fees.  In addition to any fees and expenses  payable by
Borrower and/or Owner to Lender on the Closing Date, Liquidity Fees equal to (i)
one half of one percent (1/2%) of the then outstanding  principal balance of the
Loan shall be earned by Mezzanine Lender and payable by Borrower upon the twelve
month  anniversary  of the Closing Date, and (ii) one half of one percent (1/2%)
of the then  outstanding  principal  balance  of the Loan  shall  be  earned  by
Mezzanine   Lender  and  payable  by  Borrower  upon  the  eighteen  (18)  month
anniversary of the Closing Date.

         2.7  Prepayment  Privilege.  Prepayment  of the Loan in full or in part
shall be  permitted  at any time  during the Loan term upon not less than thirty
(30) days and not more than sixty (60) days prior  written  notice to  Mezzanine
Lender, provided, however, that prepayment of the Loan in full shall be required
in the event the First Mortgage Loan is prepaid in full.

         2.8 Excess Sale or  Refinancing  Proceeds.  In the event of the sale of
any of the  Facilities  or  refinancing  of any of the  Facilities,  Owner shall
transfer  and assign to  Borrower  and  Borrower  shall  transfer  and assign to
Mezzanine  Lender all of Owner's  right,  title and  interest in and to all such
sale and  refinancing  proceeds  ("Proceeds")  net of  reasonable  and customary
closing costs and the applicable portion of the First Mortgage Loan attributable
to the Facility or Facilities  (as the case may be) in accordance  with the loan
documents  evidencing  the  First  Mortgage  Loan.  Upon  its  receipt  thereof,
Mezzanine  Lender shall be  permitted  to apply the Proceeds to the  outstanding
principal  balance of the Loan and upon satisfaction  thereof,  Mezzanine Lender
shall be  permitted  to apply the balance of such  Proceeds  to the  outstanding
principal balance of the Pool B Loan.

                                   ARTICLE III
                    BORROWER'S REPRESENTATIONS AND WARRANTIES

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

         3.1 Existence,  Power and  Qualification.  Borrower is a duly organized
and validly existing  Delaware  corporation,  has the corporate 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  corporate  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 necessary action. 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 Borrower have been
obtained or made.


                                       11


<PAGE>



         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 violation of any law,  government  regulation,  decree,
judgment,  Borrower's  articles of organization/  incorporation,  partnership or
operating  agreement  or  by-laws,  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.  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 an Event of Default after the giving
of any  required  notice and the  expiration  of all  applicable  cure  periods.
Borrower is not in  violation  of any  agreement,  the  violation of which might
reasonably  be expected to result in an Event of Default after the giving of any
required notice and the expiration of all applicable cure periods,  and Borrower
is not in violation of any order,  judgment,  or decree of any court, and has no
knowledge of violation by the Borrower of any statute or governmental regulation
to which it is subject.

         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 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 Borrower
have been prepared in accordance with GAAP.  There has been no material  adverse
change in the financial condition 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  Mezzanine  Lender are and will be true and complete in all material
respects as of their respective dates.

         3.7      Compliance with Facility Laws. [Intentionally Deleted]
                  -----------------------------

         3.8      Maintain Unit Capacity. [Intentionally Deleted]
                  ----------------------

         3.9      Independent Director.  An Independent Director is a member of
the board of directors of the Borrower.

         3.10     Third Party Payors. [Intentionally Deleted]
                  ------------------

         3.11     Governmental Proceedings and Notices. [Intentionally Deleted]
                  ------------------------------------

         3.12     Physical Plant Standards. [Intentionally Deleted]
                  ------------------------

         3.13     Pledge of Receivables. [Intentionally Deleted]
                  ---------------------


                                       12


<PAGE>



         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 and assessments  which
are  shown  pursuant  to such  returns  or are  required  to be  shown  thereon,
including, without limitation, provider taxes, which are due and owing as of the
date hereof. All such returns are complete and accurate in all respects.

         3.15     Title to Mortgaged Property. [Intentionally Deleted]
                  ---------------------------

         3.16     Priority of Mortgage. [Intentionally Deleted].
                  --------------------

         3.17     Location of Chief Executive Offices and Places of Business.
The location of Borrower's chief executive  offices are set forth on Exhibit "D"
hereto.

         3.18  Disclosure.  All  information  furnished  or to be  furnished  by
Borrower  to  Mezzanine  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  Mezzanine  Lender with true and  accurate  knowledge  of the subject
matter.

         3.19     Trade Names. [Intentionally Deleted]
                  -----------

         3.20     ERISA.  As of the date hereof and throughout the term of this
Agreement,

                  (a) Borrower is not an "employee  benefit plan," as defined in
Section 3(3) of the Employee  Retirement Income Security Act of 1974, as amended
("ERISA"),  subject to Title I of ERISA, and none of the assets of Borrower will
constitute  "plan assets" (within the meaning of Department of Labor  Regulation
Section 2510.3-101) of one or more such plans, and

                  (b)  Borrower  will not be a  "governmental  plan"  within the
meaning of Section 3(32) of ERISA, and transactions by or with Borrower will not
be  subject  to  state  statutes   regulating   investments  of,  and  fiduciary
obligations with respect to, governmental plans.

                  The  execution  and  delivery  of the Loan  Documents  and the
borrowing of  indebtedness  hereunder do not constitute a non-exempt  prohibited
transaction  under Section 406 of ERISA or Section 4975 of the Internal  Revenue
Code of 1986, as amended (the "Code"). Borrower shall not engage in a non-exempt
prohibited  transaction described in Section 406 of ERISA or Section 4975 of the
Code,  as such sections  relate to Borrower,  or in any  transaction  that would
cause any  obligation or action taken or to be taken  hereunder (or the exercise
by  Mezzanine  Lender of any of its  rights  under the Loan  Documents)  to be a
non-exempt prohibited transaction under ERISA.

         3.21 Ownership.  The ownership interests of the Persons owning Borrower
and each of the  respective  interests in Borrower are correctly and  accurately
set forth on Exhibit "F" hereto.

         3.22     Compliance With Applicable Laws. [Intentionally Deleted]
                  -------------------------------


                                       13


<PAGE>



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

         3.24     Management Agreement. [Intentionally Deleted]
                  --------------------

         3.25     Other Indebtedness.  Borrower has no outstanding Indebtedness,
secured or unsecured,  direct or contingent  (including any  guaranties),  other
than the Loan.

         3.26 Other  Obligations.  Except as  evidenced  by the Loan  Documents,
Borrower has no material  financial  obligation  under any indenture,  mortgage,
deed of trust, loan agreement or other agreement or instrument to which Borrower
is a party or by which Borrower is otherwise bound.

         3.27  Fraudulent  Conveyances.  Borrower  (a) 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 (b) has received reasonably  equivalent value
in exchange for its obligations  under the Loan Documents.  Giving effect to the
transactions  contemplated  by the Loan  Documents,  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 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).

         3.28 No  Change  in  Facts or  Circumstances.  All  information  in any
application  for the Loan  submitted by Borrower to Mezzanine  Lender (the "Loan
Application") and in all financial statements, rent rolls, reports, certificates
and other  documents  submitted  in  connection  with the Loan  Application  are
complete and accurate in all material respects as of the date hereof.  There has
been no material adverse change in any fact or circumstance known to Borrower on
the date hereof  that would cause any such  information  or  certificates  to be
incomplete or inaccurate after the date hereof.

         3.29     Utilities and Public Access. [Intentionally Deleted]
                  ---------------------------


                                   ARTICLE IV
                     OWNER'S REPRESENTATIONS AND WARRANTIES

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

         4.1      Existence, Power and Qualification.  Owner is a duly organized
and validly existing  Delaware  corporation,  has the corporate 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


                                       14


<PAGE>



jurisdiction  in which the character of the  properties  owned by it or in which
the transaction of its business makes its qualification necessary.

         4.2 Power and Authority.  Owner has full corporate  power and authority
to incur  the Loan  Obligations  provided  for  herein,  all of which  have been
authorized  by  all  proper  and  necessary  action.  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 Owner have been obtained or made.

         4.3 Due Execution and Enforcement.  Each of the Loan Documents to which
Owner is a party  constitutes a valid and legally  binding  obligation of Owner,
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  violation of any law,  government  regulation,  decree,  judgment,  Owner's
articles of organization/  incorporation,  partnership or operating agreement or
by-laws, as applicable, or any other agreement or instrument binding upon Owner.

         4.4      Single Purpose Entity.  Owner is a Single Purpose Entity.
                  ---------------------

         4.5      Pending Matters.
                  ---------------

                  (a) Operating.  No action or  investigation  is pending or, to
the  best  of  Owner's   knowledge,   threatened  before  or  by  any  court  or
administrative agency which might result in an Event of Default after the giving
of any required notice and the expiration of all applicable cure periods.  Owner
is not in violation of any agreement, the violation of which might reasonably be
expected  to result in an Event of  Default  after  the  giving of any  required
notice and the  expiration of all applicable  cure periods,  and Owner is not in
violation of any order,  judgment,  or decree of any court, and has no knowledge
of violation by the Owner of any statute or governmental  regulation to which it
is subject.

                  (b) Land and Improvements.  There are no proceedings  pending,
or,  to the best of  Owner's  knowledge,  threatened,  to  acquire  through  the
exercise of any power of condemnation,  eminent domain or similar proceeding any
part of the Land,  the  Improvements  or any interest  therein,  or to enjoin or
similarly  prevent  or  restrict  the use of the  Land or the  operation  of the
Facility in any manner.  None of the  Improvements  is subject to any unrepaired
casualty or other damage other than as previously  disclosed to Mezzanine Lender
in writing,  including  without  limitation  anything  disclosed  in the written
reports of Property Solutions, Incorporated provided to Mezzanine Lender.

         4.6 Financial Statements Accurate.  All financial statements heretofore
or hereafter provided by Owner are and will be true and complete in all material
respects as of their respective dates and fairly present the financial condition
of Owner, 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 Owner have been prepared in
accordance with GAAP. There has been no material adverse change in the financial
condition of Owner since the dates of such statements except as fully


                                       15


<PAGE>



disclosed  in  writing  with the  delivery  of such  statements.  All  financial
statements of the  operations of the Owner  heretofore or hereafter  provided to
Mezzanine  Lender are and will be true and complete in all material  respects as
of their respective dates.

         4.7 Compliance with Facility Laws. The Owner is the lawful owner of all
Permits for the Facility,  including,  without  limitation,  the  Certificate of
Need, 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,  except  the  First  Mortgage  Loan,  (d) are held  free  from any
restriction or any encumbrance  which would materially  adversely affect the use
or operation of the Facility and (e) are not  provisional or probationary in any
way.  Owner  and  Manager,  as well as the  operation  of the  Facility,  are in
compliance in all material respects with the applicable  provisions of all 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 unit) are required for the
Facility to operate at the current  licensed unit  capacity.  All  Reimbursement
Contracts are in full force and effect with respect to the  Facility,  and Owner
and Manager are in good standing with all the respective agencies governing such
applicable Facility licenses, program certification and Reimbursement Contracts.
Owner and Manager are current in the payment of all so- called provider specific
taxes or other assessments with respect to such Reimbursement  Contracts.  Owner
will  maintain  the  Certificate  of Need,  if  applicable,  and/or any required
Permits in full force and effect.  In the event  Mezzanine  Lender  acquires the
Facility  through  foreclosure  or  otherwise,  neither  Mezzanine  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 residents having
coverage thereunder provided that no service or unit complement is changed.

         4.8 Maintain  Unit  Capacity.  Neither Owner nor Manager has granted to
any third party the right to reduce the number of licensed units in the Facility
or to apply for  approval  to transfer  the right to any or all of the  licensed
Facility units to any other location.

         4.9      Independent Director.  An Independent Director is a member of
the board of directors of the Owner.

         4.10 Third Party Payors. There is no pending or, to the best of Owner's
knowledge   threatened,   revocation,   suspension,    termination,   probation,
restriction,  limitation, or nonrenewal affecting Owner, Manager or the Facility
of 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  Owner or  Manager
presently  is subject.  All  Medicare  (if any),  Medicaid  (if any) and private
insurance cost reports and financial  reports  submitted by Owner 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
unsettled except as otherwise disclosed to First Mortgage Lender.


                                       16


<PAGE>



         4.11  Governmental  Proceedings and Notices.  Neither Owner 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:

                  (a) have a  material  adverse  impact on  Owner's  ability  to
accept and/or retain  residents or result in the imposition of a fine related to
any of the  Facilities,  a  sanction,  a  lower  rate  certification  or a lower
reimbursement   rate  for  services  rendered  to  eligible  residents  for  the
Facilities;

                  (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 Owner'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.

         4.12 Physical Plant Standards.  The Facility and the use thereof comply
in all material respects with all applicable  local,  state and federal building
codes, fire codes, health care, nursing/assisted  living/senior housing facility
(as applicable) and other similar  regulatory  requirements (the "Physical Plant
Standards"), and no waivers of Physical Plant Standards exist at the Facility.

         4.13     Pledge of Receivables.  Owner has not pledged its Accounts as
collateral security for any loan or Indebtedness other than, if applicable,  the
First Mortgage Loan.

         4.14  Payment of Taxes and  Property  Impositions.  Owner 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 and assessments  which
are  shown  pursuant  to such  returns  or are  required  to be  shown  thereon,
including, without limitation, provider taxes, which are due and owing as of the
date hereof.  All such returns are complete and accurate in all respects.  Owner
has paid or made adequate  provision for the payment of all applicable water and
sewer charges,  ground rents (if  applicable) and Taxes (as defined in the First
Mortgage)  with  respect to the Land and/or the  Improvements  which are due and
owing as of the date hereof.

         4.15 Title to Mortgaged  Property.  Owner has good and marketable title
to all  of  the  Mortgaged  Property,  subject  to no  lien,  mortgage,  pledge,
encroachment,  zoning violation,  or encumbrance,  except the First Mortgage and
Permitted Encumbrances which do not materially interfere with the current use or
operation  of the  Land  and the  Improvements  or the  current  ability  of the
Facility to generate net operating  income  sufficient to service the Loan.  All
Improvements  situated on the Land are situated  wholly within the boundaries of
the Land.  In  addition,  Owner shall obtain one or more  currently  dated title
policies issued by the title insurer,  insuring ownership of the fee interest in
the Mortgage  Property,  subject to matters  acceptable to the Mezzanine Lender,
with a copy of each such title policy to be delivered to Mezzanine Lender on the
Closing  Date.  In the  event  that  Mezzanine  Lender  exercises  its  right to
foreclose on the ownership interests of the Owner granted under the Stock Pledge
Agreement  following an Event of Default,  Owner shall (and hereby covenants and
agrees that it will) execute and deliver such further affidavits and indemnities
as may


                                       17


<PAGE>



be required by the title  insurer to issue  endorsements  required by  Mezzanine
Lender in connection with issuance of a new owner's title policy pursuant to any
open commitment.

         4.16     Priority of Mortgage.  [Intentionally Deleted]
                  --------------------

         4.17     Location of Chief Executive Offices and Places of Business.
The  location of Owner's  chief  executive  offices are set forth on Exhibit "E"
hereto.  Owner has no  place(s)  of business  other than the  locations  of each
Facility.

         4.18 Disclosure.  All information furnished or to be furnished by Owner
to Mezzanine 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 Mezzanine Lender with true and accurate knowledge of the subject matter.

         4.19     Trade Names.  Each Facility operates under the respective
tradename listed on Exhibit "B".


         4.20     ERISA.  As of the date hereof and throughout the term of this
Agreement,

                  (a) Owner is not an  "employee  benefit  plan," as  defined in
Section 3(3) of the Employee  Retirement Income Security Act of 1974, as amended
("ERISA"),  subject  to Title I of ERISA,  and none of the  assets of Owner will
constitute  "plan assets" (within the meaning of Department of Labor  Regulation
Section 2510.3-101) of one or more such plans, and

                  (b) Owner will not be a "governmental plan" within the meaning
of Section 3(32) of ERISA, and transactions by or with Owner will not be subject
to state statutes  regulating  investments  of, and fiduciary  obligations  with
respect to, governmental plans.

                  The  execution  and  delivery  of the Loan  Documents  and the
borrowing of  indebtedness  hereunder do not constitute a non-exempt  prohibited
transaction  under Section 406 of ERISA or Section 4975 of the Internal  Revenue
Code of 1986,  as amended (the  "Code").  Owner shall not engage in a non-exempt
prohibited  transaction described in Section 406 of ERISA or Section 4975 of the
Code, as such sections relate to Owner,  or in any transaction  that would cause
any  obligation  or action  taken or to be taken  hereunder  (or the exercise by
Mezzanine  Lender  of  any of its  rights  under  the  Loan  Documents)  to be a
non-exempt prohibited transaction under ERISA.

         4.21 Ownership. The ownership interests of the Persons owning Owner and
each of the respective interests in Owner are correctly and accurately set forth
on Exhibit "G" hereto.

         4.22 Compliance  With Applicable  Laws. The Facility and its operations
and the Land and Improvements 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
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.  No
proceedings are pending or to the best knowledge of


                                       18


<PAGE>



Owner and Guarantor, threatened, which would result in a change of zoning of the
Land and the Facility.  The existing use of the Facility is consistent  with the
zoning  classification of the Facility or is a legal  non-conforming use that is
permitted notwithstanding any inconsistency with such classification.

         4.23     Solvency. [Intentionally Deleted]
                  --------

         4.24     Management Agreement.  The Management Agreement is in full
force  and  effect,   and  there  are  no   defaults   (either   monetarily   or
non-monetarily) by Manager or Owner thereunder.

         4.25 Other Indebtedness. Owner has no outstanding Indebtedness, secured
or unsecured,  direct or contingent  (including any guaranties),  other than (a)
the First Mortgage Loan, and (b) indebtedness which represents trade payables or
accrued  expenses  incurred  in  the  ordinary  course  of  business  (based  on
historical  amounts and payable  within 90 days of the date  incurred) of owning
and operating the Mortgaged Property;  no other debt incurred by Owner after the
date hereof will be secured (senior, subordinate or pari passu) by the Mortgaged
Property except the indebtedness evidenced by the First Mortgage Loan.

         4.26 Other  Obligations.  Owner has no  material  financial  obligation
under any indenture,  mortgage, deed of trust, loan agreement or other agreement
or  instrument  to which  Owner is a party  or by which  Owner or the  Mortgaged
Property is otherwise  bound,  other than  obligations  incurred in the ordinary
course of the operation of the Mortgaged  Property,  other than its  obligations
under  the Loan  Documents,  and  other  than the  obligations  under  the First
Mortgage Loan Documents.

         4.27  Fraudulent  Conveyances.  Owner  (a) 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 (b) has received reasonably  equivalent value
in exchange for its obligations  under the Loan Documents.  Giving effect to the
transactions  contemplated  by the Loan  Documents,  the fair saleable  value of
Owner's  assets  exceeds  and will,  immediately  following  the  execution  and
delivery of the Loan Documents,  be greater than Owner's  probable  liabilities,
including the maximum amount of its contingent  liabilities or its debts as such
debts  become  absolute  and  mature.  Owner'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.  Owner  does  not  intend  to  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 Owner).

         4.28 No  Change  in  Facts or  Circumstances.  All  information  in any
application  for the Loan  submitted  by Owner to  Mezzanine  Lender  (the "Loan
Application") and in all financial statements, rent rolls, reports, certificates
and other  documents  submitted  in  connection  with the Loan  Application  are
complete and accurate in all material respects as of the date hereof.  There has
been no material  adverse change in any fact or  circumstance  known to Owner on
the date hereof  that would cause any such  information  or  certificates  to be
incomplete or inaccurate after the date hereof.


                                       19


<PAGE>



         4.29 Utilities and Public Access.  The Facility has adequate  rights of
access to public ways and is served by adequate water, sewer, sanitary sewer and
storm drain  facilities as are adequate for full utilization of the Facility for
its current purpose.  Except as otherwise  disclosed by the surveys delivered to
Mezzanine  Lender prior to the Closing Date, all public  utilities  necessary to
the continued  use and  enjoyment of the Facility as presently  used and enjoyed
are  located in the public  right-of-way  abutting  the  Facility,  and all such
utilities are connected so as to serve the Facility  either (i) without  passing
over  other  property  or,  (ii) if such  utilities  pass over  other  property,
pursuant to valid easements. All roads necessary for the full utilization of the
Facility for its current purpose have been completed and dedicated to public use
and  accepted  by all  Governmental  Authorities  or are the  subject  of access
easements for the benefit of the Facility.

         4.30 Execution of Documents.  Neither the execution and delivery of the
other Loan Documents to which Owner is a party, Owner's performance  thereunder,
nor the  recordation of any of the Loan  Documents,  will  adversely  affect the
Permits.

         4.31 Facility  Condition.  Except as disclosed to First Mortgage Lender
in connection  with its making of the First  Mortgage  Loan,  the Facility is in
good and  habitable  condition  and there are no  deficiencies  in the repair or
maintenance  of the Property that threaten the health or safety of its residents
and their invited guests. There is no material uncured violation at the Property
of any  building or housing code or similar law or  ordinance,  and the physical
configuration of the Property is not in material violation of the Americans With
Disabilities Act.

                                    ARTICLE V
                        AFFIRMATIVE COVENANTS OF BORROWER

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

         5.1  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.

         5.2  Maintenance  of  Existence.  Maintain its  existence as a Delaware
corporation,  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.

         5.3      Maintenance of Single Purpose/Independent Director.
                  --------------------------------------------------

                  (a) Maintain its existence as a Single Purpose Entity; and

                  (b) At all times cause there to be at least one duly appointed
Independent Director as a member of the board of directors of Borrower.


                                       20


<PAGE>



         5.4  Accrual  and  Payment of Taxes.  During  each  fiscal  year,  make
provision  for the payment in full of all current tax  liabilities  of all kinds
including, without limitation,  federal and state income taxes, franchise taxes,
payroll  taxes,  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.

         5.5      Insurance.  [Intentionally Deleted]
                  ---------

         5.6      Proceeds of Insurance or Condemnation. [Intentionally Deleted]
                  -------------------------------------

         5.7 Financial and Other  Information.  Provide  Mezzanine  Lender,  and
cause  Guarantor  to provide to  Mezzanine  Lender,  at its address set forth in
Section 11.11,  the following  financial  statements and information  during the
term of the Loan:

                  (a) Within one hundred twenty (120) days after the end of each
fiscal year of the Guarantor,  audited financial statements of the operations of
the  Guarantor,   Capital  Senior   Properties,   and  Borrower  prepared  on  a
consolidated  basis  and in  accordance  with  GAAP by a  nationally  recognized
accounting firm or independent  certified  public  accounting firm acceptable to
the  Mezzanine  Lender,  which  statements  shall  include a balance sheet and a
statement  of income and  expenses  for the year then  ended.  In lieu  thereof,
Guarantor may submit to Mezzanine Lender, upon its filing thereof, a copy of its
Form 10-K as filed with the United States Securities and Exchange Commission.

                  (b)      [Intentionally Deleted]

                  (c) Within one hundred twenty (120) days after the end of each
fiscal year of Triad II Limited Partnership, audited financial statements of the
operations of Triad II Limited Partnership,  prepared in accordance with GAAP by
a  regionally   recognized  accounting  firm  or  independent  certified  public
accounting firm acceptable to Mezzanine  Lender,  which  acceptance shall not be
unreasonably  withheld, and which statements shall include a balance sheet and a
statement of income and expenses for the year then ended.

                  (d)      [Intentionally Deleted]

                  (e)      [Intentionally Deleted]

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

                  (g) Within  forty-five  (45) days after the end of each fiscal
quarter  (except  the last  fiscal  quarter)  of  Guarantor,  unaudited  interim
financial  statements  of the  operations  of  Guarantor,  certified as true and
correct in all material respects by a financial officer of Guarantor prepared in


                                       21


<PAGE>



accordance  with GAAP,  which  statements  shall  include a balance  sheet and a
statement  of income and  expenses  for the quarter  then ended.  In lieu of its
obligations  hereunder,  Guarantor may submit to Mezzanine  Lender a copy of its
Form 10-Q as filed by Guarantor  with the United States  Securities and Exchange
Commission.

                  (h)      [Intentionally Deleted]

                  (i)      [Intentionally Deleted]

                  (j) If requested by Mezzanine Lender,  within 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 (which may be consolidated into
those  returns  of  Guarantor)  and  Guarantor,  together  with  all  supporting
documentation and required schedules.

                  (k)      [Intentionally Deleted]

                  (l)      [Intentionally Deleted]

                  (m) Within  forty-five  (45) days after the end of each fiscal
quarter of Triad II Limited Partnership,  unaudited interim financial statements
of the operations of Triad II Limited  Partnership  and of the operations of any
assets owned by Triad II Limited  Partnership,  certified as true and correct in
all material  respects by an officer of the general  partner of Triad II Limited
Partnership,  prepared in accordance with GAAP, which statements shall include a
balance sheet and statement of income and expenses for the quarter then ended.

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

         The Mezzanine  Lender further  reserves the right to require such other
financial  information  of  Borrower,  Guarantor,  Triad II Limited  Partnership
and/or Capital Senior Properties, at such other times (including monthly or more
frequently)  as  it  shall  deem  necessary,   in  its  commercially  reasonable
discretion.  All  financial  statements  must be in such form and  detail as the
Mezzanine Lender shall from time to time request, in its commercially reasonable
discretion.

         5.8  Compliance  Certificate.  At the time of furnishing  the quarterly
operating statements required under Section 5.7(f) herein,  furnish to Mezzanine
Lender a  compliance  certificate  in the form  attached  hereto as Exhibit  "H"
executed by a financial officer of Borrower.

         5.9      Books and Records. [Intentionally Deleted]
                  -----------------

         5.10     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


                                       22


<PAGE>



Indebtedness,  except  such  Indebtedness  owing to those  other than  Mezzanine
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 in sufficient  amounts as determined by Mezzanine Lender in its sole
commercially reasonable discretion.

         5.11 Records of  Accounts.  Maintain  all  records,  including  records
pertaining to the Accounts of Borrower,  at the  principal  place of business of
Borrower as set forth in this Agreement.

         5.12     Conduct of Business. [Intentionally Deleted]
                  -------------------

         5.13     Periodic Surveys. [Intentionally Deleted]
                  ----------------

         5.14     Debt Service Coverage Requirements.  [Intentionally Deleted]
                  ----------------------------------

         5.15     Occupancy.  [Intentionally Deleted]
                  ---------

         5.16     Capital Expenditure.  [Intentionally Deleted]
                  -------------------

         5.17     Management Agreement. [Intentionally Deleted]
                  --------------------

         5.18     Updated Appraisals. [Intentionally Deleted]
                  ------------------

         5.19     Comply with Covenants and Laws. [Intentionally Deleted]
                  ------------------------------

         5.20 Taxes and Other  Charges.  Subject to Borrower's  right to contest
the same as set forth in  Section  9(c) of the First  Mortgage,  pay all  taxes,
assessments,  charges,  claims for labor, supplies,  rent, and other obligations
which, if unpaid, might give rise to a Lien against real or personal property of
the Borrower.

         5.21 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.

         5.22 Certificate.  Upon Mezzanine Lender's  reasonable written request,
furnish  Mezzanine  Lender with a  certificate  stating  that  Borrower,  to its
knowledge,  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.

         5.23     Capital Improvements Escrow.  [Intentionally Deleted].
                  ---------------------------


                                       23


<PAGE>



         5.24 Notice of Fees or Penalties.  Promptly  notify  Mezzanine  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.

         5.25 Loan Closing Certification. Immediately notify Mezzanine Lender in
writing,  in the event any  representation or warranty contained in that certain
Loan Closing Certification of even date herewith, executed by Borrower and Owner
for the benefit of Mezzanine Lender, becomes untrue or there shall have been any
material adverse change in any such representation or warranty.

         5.26     ERISA.   As of the date hereof and throughout the term of this
Agreement,


                  (a)  Borrower  will  not be an  "employee  benefit  plan,"  as
defined in Section 3(3) of the Employee  Retirement Income Security Act of 1974,
as amended  ("ERISA"),  subject  to Title I of ERISA,  and none of the assets of
Borrower  will  constitute  "plan  assets"  (within the meaning of Department of
Labor Regulation Section 2510.3-101) of one or more such plans, and

                  (b)  Borrower  will not be a  "governmental  plan"  within the
meaning of Section 3(32) of ERISA, and transactions by or with Borrower will not
be  subject  to  state  statutes   regulating   investments  of,  and  fiduciary
obligations with respect to, governmental plans.

                  Borrower   shall  not  engage  in  a   non-exempt   prohibited
transaction  described in Section 406 of ERISA or Section  4975 of the Code,  as
such sections  relate to Borrower,  or in any  transaction  that would cause any
obligation  or  action  taken  or to be  taken  hereunder  (or the  exercise  by
Mezzanine  Lender  of  any of its  rights  under  the  Loan  Documents)  to be a
non-exempt prohibited transaction under ERISA.

         5.27     Further Assurances.  Borrower shall, at Borrower's sole cost
and expense:

                  (a) upon Mezzanine  Lender's  request therefor given from time
to time after the occurrence of any Default or Event of Default, pay for reports
of Uniform Commercial Code ("UCC"),  federal tax lien, state tax lien,  judgment
and pending litigation searches with respect to Borrower and Guarantor;

                  (b)  furnish  to  Mezzanine  Lender  instruments,   documents,
certificates,  and agreements,  and each and every other document,  certificate,
agreement and  instrument  required of Borrower to be furnished  pursuant to the
terms of the Loan Documents; and

                  (c) do and execute, and cause Guarantor to do and execute, all
such further  lawful acts,  conveyances  and  assurances for the better and more
effective  carrying  out of the intents and purposes of this  Agreement  and the
other Loan Documents, as Mezzanine Lender shall require from time to time in its
commercially reasonable discretion.

         5.28     Entity Status.  Borrower will (i) continue to comply with the
provisions of all of its organizational  documents, and the laws of the state in
which  such  entity  was  formed  and  (ii)  enter  into  such   amendments  and
modifications to such organizational documents as may reasonably be required


                                       24


<PAGE>



by Mezzanine Lender or any Rating Agency.  All customary  formalities  regarding
the entity existence of Borrower will continue to be observed.

         5.29 Assumptions in Non-Consolidation  Opinion.  Borrower shall conduct
its  business  so  that  the  assumptions  made  in  that  certain   substantive
nonconsolidation  opinion letter dated the date hereof,  delivered by counsel in
connection with the Loan shall be true and correct in all material respects.

         5.30  Establishment  of Debt Reserve Fund.  Borrower will  establish at
closing and maintain during the term of the Loan, a debt reserve fund (the "Debt
Reserve Fund") in an amount equal to $566,500.00 which Debt Reserve Fund may not
be used by  Borrower  to make debt  service  payments  under the Loan.  The Debt
Reserve Fund shall be invested in an interest bearing investment account offered
by a financial  institution  approved by  Mezzanine  Lender in its  commercially
reasonable  discretion  ("Debt  Reserve  Fund  Holder").  Mezzanine  Lender  and
Borrower  agree that all  interest  which shall  accrue on the Debt Reserve Fund
shall  remain in the Debt  Reserve  Fund to be  disbursed  quarterly to Borrower
provided that there is no outstanding Default or Event of Default. Borrower will
grant to  Mezzanine  Lender a first lien  security  interest in the Debt Reserve
Fund as collateral for repayment of the Loan. Mezzanine Lender, Borrower and the
Debt  Reserve  Fund  Holder  shall  enter  in a pledge  agreement,  the form and
substance of which must be approved by Mezzanine  Lender in its sole discretion,
governing  Mezzanine  Lender's  rights and  remedies  with  respect to Mezzanine
Lender's  first lien in the Debt Reserve Fund.  Mezzanine  Lender shall promptly
release its first lien  security  interest in the Debt Reserve Fund at such time
as the  original  principal  balance  of the Loan has been  reduced  by at least
$2,575,000.00  and the  original  principal  amount  of the Pool B Loan has been
reduced by at least $2,425,000.00.  At the time of its release of its first lien
security interest in the Debt Reserve Fund in accordance hereof, upon Borrower's
written  request,  Mezzanine Lender shall direct the Debt Reserve Fund Holder to
wire transfer the Debt Reserve Fund to Borrower.

         5.31 Triad II Limited Partnership  Documentation.  Borrower shall cause
Guarantor  to  provide  Mezzanine  Lender  with  (i)  certified  copies  (by the
appropriate  officer  of the  general  partner of Triad II  Partnership)  of the
limited partnership agreement and certificate of limited partnership  evidencing
the Triad II Limited  Partnership,  (ii) certified  copies of any loan documents
evidencing  any loan  made to  Triad  II  Limited  Partnership  from any  source
whatsoever,  including  without  limitation,  Key  Capital  and  Capital  Senior
Properties,  (iii)  appraisals of the Triad  Facilities as approved by Mezzanine
Lender in its  commercially  reasonable  discretion,  (iv)  certified  pro-forma
budgets  as  submitted  to Key  Capital  in  connection  with  its  construction
financing for the Triad Facilities and (v) an estoppel  certificate  executed by
Key Capital certifying,  among other things, the unpaid principal balance of any
construction financing relating to the Triad Facilities.

         5.32 Capital  Senior  Properties  Documentation.  Borrower  shall cause
Capital Senior Properties to provide to Mezzanine Lender (i) certified copies of
the  Triad II Notes  and any  other  document  evidencing  and/or  securing  the
indebtedness  represented  thereby (ii) certified  copies of its  organizational
documents and evidence of its good standing in the State of its formation and in
the State where the Triad  Facilities  are located  and (iii) any  consents  and
resolutions  required or deemed necessary under its organizational  documents or
under the agreement governing the Triad II Limited


                                       25


<PAGE>



Partnership in connection with Mezzanine  Lender's first lien security  interest
in and assignment of (a) one hundred  percent (100%) of the legal and beneficial
interests of Capital Senior  Properties in the Triad II Partnership  and (b) one
hundred  percent (100%) of the legal and beneficial  interests of Capital Senior
Properties  in the Triad II Notes.  Borrower  shall also  provide  to  Mezzanine
Lender,  evidence satisfactory to Mezzanine Lender in its sole discretion,  that
the outstanding  principal  balance of the Triad II Notes, in the aggregate,  is
not less than $11,200,000.00.  Furthermore,  Borrower shall cause Capital Senior
Properties  to provide to  Mezzanine  Lender,  a certified  copy of that certain
Subordination  Agreement  between  Capital  Senior  Properties and Key Corporate
Capital, Inc. dated January 19, 1999 as described in the Triad Notes.

         5.33     Cap Assignment: Delivery of Cap Payments.  Assign the Cap in
effect from time to time pursuant to this Agreement to Mezzanine Lender pursuant
to the Cap  Assignment,  which Cap Assignment  must be reasonably  acceptable in
form and content to Mezzanine Lender.

         5.34  Performance  Under  Cap  Documents.  Fully  comply  with,  and to
otherwise  perform when due, its  obligations  under,  all Cap Documents and all
other  agreements  evidencing,  governing or securing any Cap  arrangement.  The
Borrower shall not exercise,  without Mezzanine  Lender's prior written consent,
and shall exercise at Mezzanine Lender's direction, any rights or remedies under
any Cap Documents, including without limitation the right of termination.

                                   ARTICLE VI
                         AFFIRMATIVE COVENANTS OF OWNER

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

         6.1      Performance of Loan Obligations.  Duly and punctually perform
all Loan Obligations required of it under the Loan Documents.

         6.2  Maintenance  of  Existence.  Maintain its  existence as a Delaware
corporation,  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.

         6.3      Maintenance of Single Purpose.
                  -----------------------------

                  (a) Maintain its existence as a Single Purpose Entity; and

                  (b) At all times cause there to be at least one duly appointed
Independent Director as a member of the board of directors of Owner.

         6.4  Accrual  and  Payment of Taxes.  During  each  fiscal  year,  make
provision  for the payment in full of all current tax  liabilities  of all kinds
including, without limitation,  federal and state income taxes, franchise taxes,
payroll  taxes,  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.


                                       26


<PAGE>



         6.5  Insurance.  Maintain,  at its  expense,  the  following  insurance
coverages and policies with respect to the Mortgaged  Property and the Facility,
which coverages and policies must be acceptable to Mezzanine  Lender's insurance
consultant  in its sole  discretion  and with  coverage  amounts  acceptable  to
Mezzanine Lender's insurance consultant in its commercial reasonable discretion:

                  (a) Comprehensive "all risk" insurance, including coverage for
windstorms and hail, in an amount equal to 100% of the full  replacement cost of
the Facility,  which  replacement  cost shall be  determined  by the  "Insurable
Value" or "Cost Approach to Value" reflected in the most recent Mezzanine Lender
approved  appraisal for the Facility,  without deduction for depreciation.  Such
insurance shall also include (a) agreed insurance amount endorsement waiving all
co-insurance  provisions,  and (b) an "Ordinance or Law Coverage" endorsement if
the  Facility  or the  use  thereof  shall  constitute  a  legal  non-conforming
structure or use.

                  (b) Commercial general liability  insurance against claims for
sexual harassment, abuse of residents,  personal injury, bodily injury, death or
property  damage,  in or about the  Facility to be on a  so-called  "occurrence"
basis  for at  least  $1,000,000.00  per  occurrence  and  $2,000,000.00  in the
aggregate with a $25,000,000.00 umbrella coverage.

                  (c)  Professional   liability  insurance  against  claims  for
personal  injury,  bodily  injury or death,  in or about the Facility to be on a
so-called  "occurrence"  basis for at least  $1,000,000.00  per  occurrence  and
$2,000,000.00 in the aggregate with a $25,000,000 umbrella coverage and insuring
Borrower for acts occurring prior to the date of this Agreement.

                  (d) Business interruption income insurance for the Facility in
an amount equal to 100% of the net income plus carrying costs and  extraordinary
expenses of the  Facility  for a period of twelve (12)  months as  projected  by
Mezzanine Lender, containing a 120-day extended period of indemnity endorsement.

                  (e) Flood Hazard  insurance if any portion of the Improvements
is located in a federally  designated  "special  flood hazard area" and in which
flood  insurance is  available.  In lieu thereof,  Mezzanine  Lender will accept
proof,  satisfactory to it in its commercially  reasonable discretion,  that the
Improvements are not within the boundaries of a designated area.

                  (f)  Workers'  compensation   insurance,   if  applicable  and
required  by state law,  subject  to  applicable  state  statutory  limits,  and
employer's  liability  insurance with a limit of $1,000,000.00  per accident and
per disease per employee with respect to the Facility.

                  (g) Comprehensive  boiler and machinery  insurance,  including
property damage coverage and time element coverage in an amount equal to 100% of
the full replacement cost,  without deduction for depreciation,  of the Facility
housing the machinery, if steam boilers,  pipes, turbines,  engines or any other
pressure  vessels are in operation with respect to the Facility.  Such insurance
coverage  shall include a "joint loss" clause if such coverage is provided by an
insurance  carrier other than that which provides the  comprehensive  "all risk"
insurance described above.


                                       27


<PAGE>



                  (h) During the period of any construction and/or renovation of
capital improvements with respect to the Facility or any new construction at the
Facility,  builder's  risk  insurance for any  improvements  under  construction
and/or  renovation,  including,  without  limitation,  costs of  demolition  and
increased cost of construction  or renovation,  in an amount equal the amount of
the general contract plus the value of any existing purchase money financing for
improvements  and  materials  stored on or off the Land,  including  "soft cost"
coverage.

                  (i) If the Facility is located in a seismically active area or
an area prone to geologic instability and mine subsidence,  Mezzanine Lender may
require  an  inspection  by  a  qualified   structural  or  geological  engineer
satisfactory to Mezzanine Lender,  and at Owner's expense.  The Facility must be
structurally and geologically  sound and capable of withstanding  normal seismic
activity or geological movement.  Mezzanine Lender reserves the right to require
earthquake  insurance or Maximum Probable Loss insurance on a case by case basis
in amounts determined by Mezzanine Lender.

                  (j) Such other insurance  coverage as may be deemed  necessary
and as shall be  provided  within  such time  periods  as  Mezzanine  Lender may
determine,  in each case, in the commercially reasonable discretion of Mezzanine
Lender.

         All insurance  policies 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  acceptable  to  Mezzanine  Lender  in  its  commercially   reasonable
discretion.  All such policies  shall provide for loss payable to First Mortgage
Lender and subject to the terms of the First Mortgage Loan Documents, shall also
be payable to Mezzanine  Lender and shall  contain a standard  "non-contributory
mortgagee"  endorsement  or its  equivalent  relating,  among other  things,  to
recovery by Mezzanine  Lender  notwithstanding  the negligent or willful acts or
omissions of Owner and  notwithstanding (i) occupancy or use of the Facility for
purposes more hazardous than those  permitted by the terms of such policy,  (ii)
any foreclosure or other action taken by Mezzanine  Lender pursuant to the Stock
Pledge Agreement upon the occurrence of an Event of Default thereunder, or (iii)
any change in title or ownership of the Facility.

         All insurance  policies must be written by a licensed insurance carrier
in the State in which the  Facility is located and such  insurance  carrier must
have a long-term  senior  debt  rating of at least "AA" by  Standard  and Poor's
Rating Service, provided,  however, that Owner shall have thirty (30) days after
the  Closing  Date  to  substitute  the  insurance  carrier  providing  workers'
compensation  insurance for the Owner with a carrier  having a long-term  senior
debt rating of at least "AA" by Standard and Poor's Rating Service.

         All liability  insurance  policies must name "GMAC Commercial  Mortgage
Corporation,  Newman  Financial  Services,  Inc.,  and their  successors  and/or
assigns as their interests may appear" as additional insureds,  and all property
insurance  policies  must name "GMAC  Commercial  Mortgage  Corporation,  Newman
Financial  Services,  Inc., and their  successors  and/or  assigns" as the named
mortgage holder entitled to all insurance proceeds.  Mezzanine Lender shall have
the right,  without Borrower's  consent,  by notice to the insurance company, to
change the additional  insured and named  mortgagee  endorsements  in connection
with any sale of the Loan.


                                       28


<PAGE>



         All insurance  policies for the above  required  insurance must provide
for thirty (30) days prior written notice of cancellation to Mezzanine Lender.

         Policies  or binders,  together  with  evidence  of the above  required
insurance  on ACORD Form 27 or its  equivalent,  must be  submitted to Mezzanine
Lender prior to setting the interest rate on the Loan.

         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,  Owner shall pay such
amount,  except to the  extent  First  Mortgage  Lender or  Mezzanine  Lender is
escrowing sums therefor  pursuant to the Loan Documents.  Not less than ten (10)
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 Mezzanine
Lender of such payment,  which premiums shall not be paid by Owner through or by
any financing  arrangement  without  Mezzanine  Lender's  consent  (other than a
financing arrangement in effect as of the Closing Date, a copy of which has been
provided  to  Mezzanine  Lender by  Borrower),  shall be  delivered  by Owner to
Mezzanine Lender.  Owner shall not carry separate insurance,  concurrent in kind
or form or contributing in the event of loss, with any insurance  required under
this Section 6.5. If the limits of any policy required  hereunder are reduced or
eliminated  due to a covered loss,  Owner shall pay the additional  premium,  if
any, in order to have the required limits of insurance  reinstated,  or Borrower
shall purchase new insurance in the same type that existed  immediately prior to
the loss and in the required amount.

         If Owner fails to maintain and deliver to Mezzanine Lender the original
policies or  certificates  of insurance  required by this  Agreement,  Mezzanine
Lender may, at its option, procure such insurance and Owner shall pay or, as the
case may be, reimburse Mezzanine Lender for, all premiums thereon promptly, upon
demand by Mezzanine  Lender,  with interest thereon at the Default Rate from the
date  paid by  Mezzanine  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 Owner,
be  effected  by  blanket  and/or  umbrella  policies  issued  to Owner or to an
Affiliate of Owner 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,  Owner shall furnish to Mezzanine 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  Mezzanine  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 (a) Owner shall look
solely to its  insurance  company for the  recovery of such loss or damage,  (b)
such  insurance  company shall have no rights of subrogation  against  Mezzanine
Lender, its agents


                                       29


<PAGE>



or  employees,  and (c) Owner  shall use its best  efforts to procure  from such
insurance company a waiver of subrogation  rights against Mezzanine Lender.  If,
however,  such  insurance  policies do not  provide for a waiver of  subrogation
rights against Mezzanine Lender (whether because such a waiver is unavailable or
otherwise),  then Owner 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 Mezzanine 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
Owner from  waiving  such  claims,  then Owner must obtain  from such  insurance
company a waiver of subrogation rights against Mezzanine Lender.

         Owner appoints  Mezzanine Lender as Owner's  attorney-in-fact  to cause
the  issuance  of an  endorsement  of any  insurance  policy to bring Owner into
compliance herewith and, as limited above, at Mezzanine 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 Mezzanine Lender be liable
for failure to collect any amounts payable under any insurance policy. Mezzanine
Lender  will use best  efforts to give Owner  notice  prior to any action  being
taken by Mezzanine Lender as Owner's attorney-in-fact, but failure to do so will
not in any way restrict Mezzanine Lender's rights under this paragraph.

         6.6 Proceeds of Insurance or Condemnation.  Subject to the prior rights
of the First Mortgage Lender under the First Mortgage Loan Documents,  if, after
damage to or destruction of or  condemnation  of the Mortgaged  Property (or any
part thereof),  the net Proceeds of insurance or condemnation  (after payment of
Mezzanine  Lender's  reasonable  costs  and  expenses  in  connection  with  the
administration   thereof)  are  (a)  less  than  One  Hundred  Thousand  Dollars
($100,000) or (b) One Hundred Thousand Dollars  ($100,000) or more and Mezzanine
Lender  agrees,  at its option,  to make such net  Proceeds  available to Owner,
satisfy the following conditions for the repair,  restoration and replacement by
Owner of the Improvements,  Equipment and Inventory damaged, destroyed or taken,
in which case Mezzanine  Lender shall make such net Proceeds  available to Owner
on the following terms:

                  (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  Mezzanine  Lender or First  Mortgage  Lender is  holding  any
portion of such Proceeds, there shall exist no Default or Event of Default;

                  (c) The Improvements,  Equipment,  and Inventory to 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;


                                       30


<PAGE>



                  (d) Within  forty-five (45) days from the date of such loss or
damage  Borrower shall have given  Mezzanine  Lender and First Mortgage Lender a
written notice electing to have the Proceeds applied for such purpose;

                  (e) Within ninety (90) days following the date of notice under
the  preceding  subparagraph  (d) and prior to any Proceeds  being  disbursed to
Borrower, Borrower shall have provided to Mezzanine 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 (c) above,

                           (ii)     if loss or damage exceeds Fifty Thousand
Dollars ($50,000),  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 Mezzanine Lender and if applicable,  First Mortgage Lender
named under a standard mortgagee loss-payable clause

                           (iv)     such additional funds as in Mezzanine
Lender's and if  applicable,  First  Mortgage  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) Mezzanine  Lender may, at Borrower's  reasonable  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
Mezzanine 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  to 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; and

                  (i) Each  disbursement  by Mezzanine  Lender or First Mortgage
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 Mezzanine Lender and, if applicable, First Mortgage
Lender)


                                       31


<PAGE>



signed and certified by Borrower  and, if required by Mezzanine  Lender or First
Mortgage Lender, their architect or general contractor with appropriate invoices
and lien waivers as required by Mezzanine Lender or First Mortgage Lender.

         In the  event and to the  extent  that such  Proceeds  are One  Hundred
Thousand  Dollars  ($100,000.00)  or more  and not  required  to be used for the
repair, restoration and replacement of the Improvements, Equipment and Inventory
to which a loss or damage has occurred,  or, if the  conditions set forth herein
for such application are otherwise not satisfied, then Mezzanine Lender, subject
to the prior rights of the First  Mortgage  Lender under the First Mortgage Loan
Documents,  shall be entitled  without  notice to or consent from Owner to apply
such Proceeds,  or the balance thereof,  at Mezzanine Lender's option either (a)
to the full or partial  payment or prepayment of the Loan  Obligations  (without
premium)  in the  manner  aforesaid  or (b) to the  repair,  restoration  and/or
replacement of all or any part of such Improvements,  Equipment and Inventory to
which a loss or damage has occurred.  Any excess Proceeds after such application
by Mezzanine Lender shall be paid to Owner.

         6.7 Financial and Other Information. Provide Mezzanine Lender and cause
Manager to provide to Mezzanine Lender, at its address set forth in Section 8.7,
the following financial statements and information during the term of the Loan:

                  (a) Within one hundred twenty (120) days after the end of each
fiscal year of the Guarantor,  audited financial statements of the operations of
the Owner and Manager  prepared on a consolidated  basis and in accordance  with
GAAP by a nationally  recognized accounting firm or independent certified public
accounting  firm  acceptable to the Mezzanine  Lender,  which  statements  shall
include a balance sheet and a statement of income and expenses for the year then
ended.  In lieu  thereof,  Guarantor  may submit to Mezzanine  Lender,  upon its
filing  thereof,  a copy of its form  10-K,  as filed  with  the  United  States
Securities and Exchange Commission.

                  (b) Within one hundred twenty (120) days after the end of each
fiscal  year of  Facility  (if  different  from the Owner)  internally  prepared
financial  statements of the operations of the Facility,  prepared in accordance
with GAAP,  which  statements  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 by a financial officer of Owner.

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

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


                                       32


<PAGE>



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

                  (f) If and to the extent  applicable,  within  forty-five (45)
days after the end of each fiscal quarter of Facility, a statement (which may be
the same statement provided to First Mortgage Lender) of the number of unit days
available and the actual resident days incurred for such quarter,  together with
quarterly  census  information  of the Facility as of the end of such quarter in
sufficient detail to show resident-mix (i.e., private,  Medicare,  Medicaid, and
VA) on a daily  average  basis for such year  through  the end of such  quarter,
certified by a financial  officer of Manager or Borrower to be true and correct,
in all material respects.

                  (g) If requested by Mezzanine Lender,  within 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 Owner (which may be  consolidated  into
those returns of  Guarantor),  together with all  supporting  documentation  and
required schedules.

                  (h) Within  five (5) days after  receipt,  any and all notices
(regardless  of form) from any and all  licensing  and/or  certifying  agencies,
including but not limited to Medicaid  and/or Medicare  certification,  that the
Facility's license is being downgraded to a substandard  category,  revoked,  or
suspended,  or that  action is pending or being  considered  to  downgrade  to a
substandard   category,   revoke,   or  suspend   the   Facility's   license  or
certification.

                  (i) If and to the extent  applicable,  within  forty-five (45)
days after the end of each of Owner's and Manager's  fiscal  quarters,  and more
frequently,  if requested by Mezzanine  Lender,  an aged accounts payable report
and an aged accounts  receivable report for the Facility in sufficient detail to
show  amounts  due from each class of  resident-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.

         Mezzanine  Lender  reserves  the  right  to  require  that  the  annual
unaudited  financial  statements  of the  Facility be audited and  prepared by a
nationally recognized accounting firm or independent certified public accounting
firm acceptable to Mezzanine Lender, at Owner's sole cost and expense, 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 Mezzanine Lender has reasonable  grounds to
believe that such unaudited financial statements do not accurately represent the
financial condition thereof.

         The Mezzanine  Lender further  reserves the right to require such other
financial  information of Owner, Manager and/or the Facility at such other times
(including  monthly  or more  frequently)  as it shall  deem  necessary,  in its
commercially  reasonable  discretion.  All financial  statements must be in such
form and detail as the Mezzanine Lender shall from time to time request,  in its
commercially reasonable discretion.


                                       33


<PAGE>



         6.8  Compliance  Certificate.  At the time of furnishing  the quarterly
operating statements required under Section 6.7(d) herein,  furnish to Mezzanine
Lender a  compliance  certificate  in the form  attached  hereto as Exhibit  "I"
executed by a financial officer of Owner.

         6.9 Books and  Records.  Keep and maintain at all times at the Facility
or Manager's offices,  and upon Mezzanine Lender's request 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 Mortgaged  Property,  which books,
records,  contracts,  leases (if any) and other  instruments shall be subject to
examination  and  inspection at any  reasonable  time by Mezzanine  Lender (upon
reasonable  advance  notice,  which  for such  purposes  only  shall be given in
writing, 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,  Owner  shall  deliver  to
Mezzanine Lender upon written demand all books, records,  contracts,  leases (if
any) and other  instruments  relating to the Facility or its operation and Owner
authorizes Mezzanine Lender to obtain a credit report on Owner at any time.

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

         6.11 Records of  Accounts.  Maintain  all  records,  including  records
pertaining to the Accounts of Owner, at the principal place of business of Owner
as set forth in this Agreement.

         6.12 Conduct of Business.  Conduct,  or cause  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:

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

                  (b)  to  operate  the  Facility  in a  prudent  manner  and in
compliance  in all  material  respects  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  (if any) to remain in effect  without  reduction in the
number of licensed beds authorized for use in the Medicaid,  Medicare,  or other
applicable reimbursement programs;

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


                                       34


<PAGE>



                  (d) to keep all Improvements and Equipment  located on or used
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;

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

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

         6.13 Periodic Surveys. Furnish or cause Manager to furnish to Mezzanine
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  Mezzanine  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
residents  or for  new  residents  to be  admitted  with  Medicaid  or  Medicare
coverage,  by the date required for cure by such agency (plus extensions granted
by such agency).

         6.14     Debt Service Coverage Requirements.  [Intentionally Deleted]
                  ----------------------------------

         6.15     Occupancy.  [Intentionally Deleted]
                  ---------

         6.16     Capital Expenditure.  [Intentionally Deleted]
                  -------------------

         6.17 Management  Agreement.  Maintain the Management  Agreement in full
force and effect and timely  perform all of Owner's  obligations  thereunder and
enforce  performance  in all  material  respects of all  obligations  of Manager
thereunder  and not permit  the  termination,  amendment  or  assignment  of the
Management  Agreement  unless the prior written  consent of Mezzanine  Lender is
first  obtained,  which  consent may be in the sole and absolute  discretion  of
Mezzanine Lender, provided, however, Manager may assign the Management Agreement
to  a  wholly-owned   subsidiary  of  Guarantor  ("Successor  Manager")  without
Mezzanine  Lender's  consent but only with prior notice to Mezzanine  Lender and
execution  by Owner of a  Collateral  Assignment  of  Management  Agreement  and
Subordination  of  Management  Agreement  with  respect  to any  new  Management
Agreement,  in  form  and  substance  acceptable  to  Mezzanine  Lender  in  its
commercially  reasonable  discretion.  Owner will cause the Successor Manager to
enter into such Collateral  Assignment of Management Agreement and Subordination
of  Management  Agreement.  Owner  will  not  enter  into any  other  management
agreement (other than the Management Agreement) without Mezzanine Lender's prior
written  consent,  which  consent may be in the sole and absolute  discretion of
Mezzanine Lender.

         6.18     Updated Appraisals.  For so long as the Loan remains
outstanding,  if any Event of Default shall occur hereunder, or if, in Mezzanine
Lender's commercially reasonable judgment, a


                                       35


<PAGE>



material  depreciation  in the value of the Land and/or the  Improvements  shall
have occurred,  then in any such event, Mezzanine Lender, may cause the Land and
Improvements to be appraised by an appraiser  selected by Mezzanine Lender,  and
in accordance with Mezzanine Lender's  appraisal  guidelines and procedures then
in effect,  and Owner agrees to cooperate in all respects  with such  appraisals
and furnish to the appraisers all requested  information  regarding the Land and
Improvements and the Facility. Owner agrees to pay all reasonable costs incurred
by Mezzanine Lender in connection with such appraisal, costs shall be secured by
the Loan Documents and shall accrue interest at the Default Rate until paid.

         6.19 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 Land and
Improvements  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.

         6.20 Taxes and Other  Charges.  Subject to Owner's right to contest the
same  as set  forth  in  Section  9(c) of the  First  Mortgage,  pay all  taxes,
assessments,  charges,  claims for labor, supplies,  rent, and other obligations
which, if unpaid, might give rise to a Lien against real or personal property of
the Owner, except Liens to the extent permitted by this Agreement.

         6.21 Commitment Letter.  Provide all items and pay all amounts required
of Owner 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.

         6.22     Certificate.  [Intentionally Deleted].
                  -----------

         6.23     Capital Improvements Escrow.  [Intentionally Deleted].
                  ---------------------------

         6.24 Notice of Fees or Penalties.  Promptly  notify  Mezzanine  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
Owner, Manager, or the Facility.

         6.25 Loan Closing Certification. Immediately notify Mezzanine Lender in
writing,  in the event any  representation or warranty contained in that certain
Loan Closing Certification of even date herewith, executed by Borrower and Owner
for the benefit of Mezzanine Lender, becomes untrue or there shall have been any
material adverse change in any such representation or warranty.

         6.26     ERISA.   As of the date hereof and throughout the term of this
Agreement,



                                       36


<PAGE>



                  (a) Owner will not be an "employee  benefit  plan," as defined
in Section  3(3) of the Employee  Retirement  Income  Security  Act of 1974,  as
amended ("ERISA"),  subject to Title I of ERISA, and none of the assets of Owner
will  constitute  "plan  assets"  (within  the  meaning of  Department  of Labor
Regulation Section 2510.3-101) of one or more such plans, and

                  (b) Owner will not be a "governmental plan" within the meaning
of Section 3(32) of ERISA, and transactions by or with Owner will not be subject
to state statutes  regulating  investments  of, and fiduciary  obligations  with
respect to, governmental plans.

                  Owner shall not engage in a non-exempt prohibited  transaction
described in Section 406 of ERISA or Section 4975 of the Code,  as such sections
relate to Owner, or in any transaction that would cause any obligation or action
taken or to be taken  hereunder  (or the exercise by Mezzanine  Lender of any of
its rights under the Loan Documents) to be a non-exempt  prohibited  transaction
under ERISA.

         6.27     Further Assurances.  Owner shall, at Owner's sole cost and
expense:

                  (a) upon Mezzanine  Lender's  request therefor given from time
to time after the occurrence of any Default or Event of Default, pay for reports
of Uniform Commercial Code ("UCC"),  federal tax lien, state tax lien,  judgment
and pending litigation searches with respect to Owner, Manager and the Mortgaged
Property;

                  (b)  furnish  to  Mezzanine  Lender  instruments,   documents,
certificates,  and agreements,  and each and every other document,  certificate,
agreement and instrument required of Owner to be furnished pursuant to the terms
of the Loan Documents; and

                  (c) execute,  and deliver to Mezzanine  Lender such documents,
instruments, certificates, assignments and other writings and do such other acts
necessary,  in  Mezzanine  Lender's  commercially   reasonable  discretion,   to
evidence, preserve and/or protect the Mortgaged Property at any time securing or
intended  to secure  the Loan,  as  Mezzanine  Lender may  require in  Mezzanine
Lender's  commercially  reasonable  discretion  including,  without  limitation,
filing of any financing or continuation statements under the UCC with respect to
the  Mortgaged  Property,  transferring  the  Mortgaged  Property  to  Mezzanine
Lender's  possession (if a security  interest in such Mortgaged  Property can be
perfected  by  possession)  and  endorsing  to  Mezzanine  Lender any  Mortgaged
Property  which may be evidenced by an instrument  and executing and  delivering
any and all affidavits,  certificates or similar documents required by any title
insurance  company as a condition to its issuing or  continuing  to maintain any
insurance  covering  Mezzanine  Lender's  interest  in the  Mortgaged  Property,
including any endorsements required by Mezzanine Lender; and

                  (d) do and execute,  and cause Manager to do and execute,  all
such further  lawful acts,  conveyances  and  assurances for the better and more
effective  carrying  out of the intents and purposes of this  Agreement  and the
other Loan Documents, as Mezzanine Lender shall require from time to time in its
commercially reasonable discretion.


                                       37


<PAGE>



         6.28  Entity  Status.  Owner  will  (i)  continue  to  comply  with the
provisions of all of its organizational  documents, and the laws of the state in
which  such  entity  was  formed  and  (ii)  enter  into  such   amendments  and
modifications to such organizational  documents as may reasonably be required by
Mezzanine Lender or any Rating Agency. All customary  formalities  regarding the
entity existence of Owner will continue to be observed.

         6.29 Assumptions in Non-Consolidation  Opinion. Owner shall conduct its
business   so  that   the   assumptions   made  in  that   certain   substantive
nonconsolidation  opinion letter dated the date hereof,  delivered by counsel in
connection with the Loan shall be true and correct in all material respects.

         6.30     Establishment of Debt Reserve Fund. [Intentionally Deleted]
                  ----------------------------------

         6.31       Triad II Limited Partnership Documentation. [Intentionally
Deleted]


         6.32     Capital Senior Properties Documentation. [Intentionally
Deleted]

                                   ARTICLE VII
                         NEGATIVE COVENANTS OF BORROWER

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

         7.1      Assignment of Licenses and Permits. [Intentionally Deleted]
                  ----------------------------------

         7.2      No Liens; Exceptions. [Intentionally Deleted]
                  --------------------

         7.3 Merger,  Consolidation,  etc.  Except as otherwise  provided in the
Loan Documents,  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 assets (whether now or
hereafter  acquired),  without the prior  written  consent of Mezzanine  Lender,
which consent may be granted or refused in Mezzanine Lender's sole discretion.

         7.4      Maintain Single Purpose Entity Status.
                  -------------------------------------

                  (a) Merge into or  consolidate  with any  Person or  dissolve,
terminate or liquidate in whole or in part, transfer or otherwise dispose of all
or substantially  all of its assets  (permitted in the Loan Documents) or change
its legal structure, without in each case Mezzanine

                  (b) Fail to preserve its valid existence and good standing (if
applicable) under the laws of the jurisdiction of its organization or formation,
or  without  the prior  written  consent of  Mezzanine  Lender,  amend,  modify,
terminate or fail to comply with the  provisions of its Articles or  Certificate
of  Incorporation,  as same may be  further  amended  or  supplemented,  if such
amendment, modification, termination or failure to comply would adversely affect
its ability to perform its obligations  hereunder or under any of the other Loan
Documents;


                                       38


<PAGE>



                  (c)  Commingle  its  assets  with  the  assets  of  any of its
shareholders,  Affiliates,  principals or of any other Person, except for loans,
advances,   dividends  and   distributions   to  shareholders  of  Borrower  and
Affiliates;

                  (d) Incur any debt, secured or unsecured, direct or contingent
(including guaranteeing any obligation),  other than the Loan and trade payables
incurred in the ordinary course of business,  payable within 90 days of the date
incurred, based on historical amounts;

                  (e) Fail to maintain  its  records,  books of account and bank
accounts  separate  and apart from  those of its  shareholders,  principals  and
Affiliates and the Affiliates of any of its  shareholders,  principals,  and any
other Person except as otherwise permitted in the Loan Documents;

                  (f)  Enter  into any  contract  or  agreement  with any of its
shareholders,  principals  or  Affiliates,  or  the  Affiliates  of  any  of its
shareholders   or  principals,   except  upon  terms  and  conditions  that  are
substantially  similar to those that would be available on an arms-length  basis
with third parties except as otherwise permitted in the Loan Documents;

                  (g)  Seek its dissolution or winding up in whole, or in part;

                  (h)  Maintain  its  assets  in such a  manner  that it will be
costly or difficult to segregate,  ascertain or identify its  individual  assets
from those of any of its shareholders, principals and Affiliates, the Affiliates
of any of its shareholders, principals or any other Person;

                  (i)  Hold itself out to be responsible for the debts of
another Person;

                  (j)  Make any loans or advances to any third party;

                  (k)  Fail to file its own tax returns, which may be filed by
Guarantor on a consolidated basis;

                  (l) Agree to, enter into or consummate any  transaction  which
would render it unable to confirm that (i) it is not an "employee  benefit plan"
as defined in Section 3(32) of ERISA, which is subject to Title I of ERISA, or a
"governmental plan" within the meaning of Section 3(32) of ERISA; (ii) it is not
subject to state statutes regulating  investments and fiduciary obligations with
respect to governmental  plans; and (iii) less than twenty-five percent (25%) of
each of its  outstanding  class of equity  interests  are held by "benefit  plan
investors" within the meaning of 29 C.F.R. ss. 2510.3-101(f)(2);

                  (m) Fail  either to hold  itself  out to the public as a legal
Person  separate and  distinct  from any other Person or to conduct its business
solely in its own name,  in order not (i) to mislead  others as to the  identity
with which such other party is transacting  business, or (ii) to suggest that it
is  responsible  for  the  debts  of  any  third  party  (including  any  of its
shareholders,  principals or Affiliates,  or any general  partner,  principal or
Affiliate thereof);


                                       39


<PAGE>



                  (n) Make an assignment  for the benefit of  creditors,  file a
petition in bankruptcy, petition or apply to any tribunal for the appointment of
a  custodian,  receiver,  trustee  or other  similar  official  for it, or for a
substantial part of its property,  commence any proceeding under any bankruptcy,
reorganization,  arrangement,  readjustment  or debt or  liquidation  law and/or
admit its inability to pay its debts as they become due; or

                  (o) Cause or permit the board of  directors to take any action
which, under the terms of any certificate of incorporation, bylaws or any voting
trust agreement with respect to any common stock requires a vote of the board of
directors,  unless at the time of such action there shall be at least one member
of the board of directors who is an Independent Director.

         7.5      Change of Business.  Make any material change in the nature of
its business as it is being conducted as of the date hereof.

         7.6 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.

         7.7 ERISA.  Engage in any transaction which would cause any obligation,
or action taken or to be taken,  hereunder (or the exercise by Mezzanine  Lender
of any of its  rights  under this  Agreement,  the Note or any of the other Loan
Documents)  to be a  non-exempt  (under  a  statutory  or  administrative  class
exemption) prohibited transaction under ERISA.

         7.8      Transactions with Affiliates.  [Intentionally Deleted].
                  ----------------------------

         7.9 Transfer of Ownership  Interests.  Permit a change in the ownership
interests of Borrower,  unless the written consent of Mezzanine  Lender is first
obtained,  which  consent may be granted or refused in Mezzanine  Lender's  sole
discretion.

         7.10     Change of Use. [Intentionally Deleted]
                  -------------

         7.11  Place  of  Business.  Change  its  chief  executive  offices  (if
applicable)  without  first  giving  Mezzanine  Lender at least thirty (30) days
prior  written  notice  thereof and  promptly  providing  Mezzanine  Lender such
information and amendatory  financing statements as Mezzanine Lender may request
in connection therewith.

         7.12     Acquisitions. [Intentionally Deleted]
                  ------------

         7.13  Dividends,  Distributions  and  Redemptions.  Except as otherwise
consented to by Mezzanine  Lender in writing,  if the  Facilities do not have at
the time in question,  on a combined basis, a Distribution  Coverage Ratio of at
least 1.0 to 1.0,  exclusive of any deposits held by First Mortgage Lender under
Section 4.14 of the First Mortgage Loan Agreement,  declare or pay any dividends
to its shareholders,  members or partners, as applicable,  or purchase,  redeem,
retire, or otherwise acquire for value, any ownership  interests in Borrower now
or hereafter outstanding, return any capital to its


                                       40


<PAGE>



shareholders,  members or partners,  as applicable,  or make any distribution of
assets to its shareholders, members, or partners, as applicable.

         7.14     First Mortgage Loan Documents and First Mortgage Loan.
[Intentionally Deleted]

         7.15     Debt Cancellation.  Cancel or otherwise, forgive or release
any material  claim or debt owed to Borrower by any Person,  except for adequate
consideration in the ordinary course of Borrower's business.

         7.16     Certain Restrictions. Enter into any agreement which expressly
restricts  the ability of Borrower to enter into  amendments,  modifications  or
waivers of any of the Loan Documents.

         7.17 Identity. Change its name, identity or organizational structure in
any manner which might make any  financing or  continuation  statement  filed in
connection herewith seriously  misleading within the meaning of Section 9-402(7)
of the UCC (or any other applicable provision of the UCC).

                                  ARTICLE VIII
                           NEGATIVE COVENANTS OF OWNER

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

         8.1  Assignment of Licenses and Permits.  Assign or transfer any of its
interest in any Permits or Reimbursement  Contracts (including rights to payment
thereunder)  pertaining  to the  Facility  subject  to the  rights  of the First
Mortgage Lender under the First Mortgage Loan Documents, or assign, transfer, or
remove or permit any other  Person to assign,  transfer,  or remove any  records
pertaining to the Facility  including,  without  limitation,  resident  records,
medical and clinical  records  (except for removal of such  resident  records as
directed by the residents owning such records), without Mezzanine Lender's prior
written consent,  which consent may be granted or refused in Mezzanine  Lender's
sole discretion.

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

                  (a)     Liens at any time existing in favor of First Mortgage
Lender and Mezzanine Lender;

                  (b)     Liens which are listed in Exhibit "J" attached hereto;


                  (c)     Leases to residents and commercial leases for resident
services  incidental to the operation of the Facility (e.g.  barber shop, beauty
parlor) provided such commercial leases, in the aggregate,  do not generate more
than 20% of gross income of the Facility;


                                       41


<PAGE>



                  (d) Easements,  rights of way, restrictions,  minor defects or
irregularities  in title  and  other  similar  charges  or  encumbrances,  which
Mezzanine  Lender has determined  upon Owner's  request,  in Mezzanine  Lender's
commercially  reasonable discretion,  will not interfere in any material respect
with the  ordinary  conduct of the  business of the Facility or the value of the
Mortgaged Property or Mezzanine Lender's interest in the Mortgaged Property, and
Borrower pays to Mezzanine Lender,  upon demand, all costs and expenses incurred
by Mezzanine Lender in connection with reviewing Owner's request;

                  (e) The creation of a mechanic's,  materialman's,  or judgment
lien against the Mortgaged  Property  which is fully  disclosed to the Mezzanine
Lender and  released  of record or  otherwise  remedied  to  Mezzanine  Lender's
satisfaction  within  thirty  (30) days  after  Borrower  has  knowledge  of the
creation of such Lien;

                  (f) 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; and

                  (g)  Liens  for   current   year's   taxes,   assessments   or
governmental   charges  or  levies,   provided  payment  thereof  shall  not  be
delinquent.

         8.3 Merger,  Consolidation,  etc.  Except as otherwise  provided in the
Loan Documents or First Lien 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
assets (whether now or hereafter acquired), without the prior written consent of
Mezzanine Lender,  which consent may be granted or refused in Mezzanine Lender's
sole discretion,  except leases to residents and commercial  leases for resident
services  incidental to the operation of the Facility (e.g.  barber shop, beauty
parlor)  provided such  commercial  leases in the aggregate do not generate more
than 20% of gross income of the Facility.

         8.4      Maintain Single Purpose Entity Status.  Maintain compliance
with those certain Single Purpose Entity  covenants  described in Section 5.4 of
the First Mortgage Loan Agreement.

         8.5      Change of Business.  Make any material change in the nature of
its business as it is being conducted as of the date hereof.

         8.6 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.

         8.7 ERISA.  Engage in any transaction which would cause any obligation,
or action taken or to be taken,  hereunder (or the exercise by Mezzanine  Lender
of any of its  rights  under this  Agreement,  the Note or any of the other Loan
Documents)  to be a  non-exempt  (under  a  statutory  or  administrative  class
exemption) prohibited transaction under ERISA.


                                       42


<PAGE>



         8.8      Transactions with Affiliates.  [Intentionally Deleted].
                  ----------------------------

         8.9 Transfer of  Ownership  Interests.  Except as  otherwise  permitted
under the  First  Mortgage  Loan  Documents,  permit a change  in the  ownership
interests of the Owner,  unless the written consent of Mezzanine Lender is first
obtained,  which  consent may be granted or refused in Mezzanine  Lender's  sole
discretion.

         8.10  Change of Use.  Alter or change the use of the  Facility or enter
into any  management  agreement  for any  Facility  other  than  the  Management
Agreement or enter into any operating  lease for any Facility  (except leases to
residents  and  commercial  leases  for  resident  services  incidental  to  the
operation of the  Facility  (e.g.  barber shop,  beauty  parlor)  provided  such
commercial leases in the aggregate do not generate more than 20% of gross income
of the  Facility),  unless Owner first  notifies  Mezzanine  Lender and provides
Mezzanine Lender a copy of the proposed lease agreement or management agreement,
obtains  Mezzanine  Lender's  written  consent  thereto,  which  consent  may be
withheld in  Mezzanine  Lender's  sole  discretion,  and  obtains  and  provides
Mezzanine  Lender  with  a  subordination  agreement  in  form  satisfactory  to
Mezzanine Lender, as determined by Mezzanine Lender in its sole discretion, from
such manager or lessee subordinating to all rights of Mezzanine Lender.

         8.11  Place  of  Business.  Change  its  chief  executive  offices  (if
applicable)  without  first  giving  Mezzanine  Lender at least thirty (30) days
prior  written  notice  thereof and  promptly  providing  Mezzanine  Lender such
information and amendatory  financing statements as Mezzanine Lender may request
in connection therewith.

         8.12 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 Facilities.

         8.13  Dividends,  Distributions  and  Redemptions.  Except as otherwise
consented to by Mezzanine  Lender in writing,  if the  Facilities do not have at
the time in question,  on a combined basis, a Distribution  Coverage Ratio of at
least 1.0 to 1.0 (exclusive of any deposits held by First Mortgage  Lender under
Section  4.14  of the  Loan  Agreement),  declare  or pay any  dividends  to its
shareholders,  members or partners, as applicable, or purchase,  redeem, retire,
or  otherwise  acquire  for  value,  any  ownership  interests  in Owner  now or
hereafter  outstanding,  return  any  capital  to its  shareholders,  members or
partners, as applicable, or make any distribution of assets to its shareholders,
members, or partners, as applicable.

         8.14 First Mortgage Loan Documents and First Mortgage Loan. Without the
prior  written  consent of  Mezzanine  Lender,  which  consent may be  withheld,
delayed or  conditioned  in the sole  discretion of Mezzanine  Lender,  give its
consent or approval or agree to any of the following:

                           (i)   (A) any refinancing of the First Mortgage Loan,
(B) any  prepayment in full of the First Mortgage Loan without the prepayment in
full of the Loan,  (C) any  transfer  of the  Mortgaged  Property or any portion
thereof or interest therein except as permitted under the Loan Documents, or (D)
any action in connection with or in furtherance of the foregoing;


                                       43


<PAGE>



                           (ii)   placing or permitting to attach any additional
Liens on any of the  Mortgaged  Property  (except  as set forth in  Section  8.2
hereof); or

                           (iii)   any modification, amendment, consolidation,
spread,  restatement  or waiver of any  provision  of the  First  Mortgage  Loan
Documents.

         8.15     Debt Cancellation. Cancel or otherwise, forgive or release any
material  claim  or debt  owed to  Owner  by any  Person,  except  for  adequate
consideration in the ordinary course of Owner's business.

         8.16     Certain Restrictions. Enter into any agreement which expressly
restricts  the ability of Borrower to enter into  amendments,  modifications  or
waivers of any of the Loan Documents.

         8.17     Identity. Change its name, identity or organizational
structure in any manner which might make any financing or continuation statement
filed in connection herewith seriously  misleading within the meaning of Section
9-402(7) of the UCC (or any other applicable provision of the UCC).

                                   ARTICLE IX
                              ENVIRONMENTAL HAZARDS

         9.1 Prohibited Activities and Conditions. Except for matters covered by
a written program of operations and maintenance approved in writing by Mezzanine
Lender  (an "O&M  Program")  or  matters  described  in  Section  9.2 or matters
described  in Exhibit "K" hereto,  during the term of the Loan,  Owner shall not
cause or permit to exist any of the following:

                  (a)  The  presence,  use,  generation,   release,   treatment,
processing,  storage (including storage in above ground and underground  storage
tanks),  handling,  or disposal-of  any Hazardous  Materials in, on or under the
Land,  any  Improvements,  or any other property of Borrower that is adjacent to
the Land in violation of applicable Hazardous Materials Laws;

                  (b)  The transportation of any Hazardous Materials to, from,
or across the Land;

                  (c)  Any  occurrence  or  condition  on  the  Land  or in  the
Improvements  or any other  property of  Borrower  that is adjacent to the Land,
which occurrence or condition is in violation of Hazardous Materials Laws;

                  (d)  Any violation of or noncompliance with the terms of any
Environmental  Permit with respect to the Land, the Improvements or any property
of Borrower that is adjacent to the Land; or

                  (e) Any Lien  (whether or not such Lien has priority  over the
Lien created by the First  Mortgage) upon the Land or any  Improvements  imposed
pursuant to any Hazardous Materials Laws.


                                       44


<PAGE>



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

         9.2  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 (a) pre-packaged  supplies,  medical
waste,  cleaning  materials  and  petroleum  products  customarily  used  in the
operation and  maintenance  of comparable  facilities,  (b) cleaning  materials,
personal  grooming  items and other items sold in  pre-packaged  containers  for
consumer use and used by occupants of the Facility;  and (c) petroleum  products
used in the  operation  and  maintenance  of motor  vehicles  from  time to time
located on the Land's parking  areas,  so long as all of the foregoing are used,
stored,  handled,  transported  and  disposed of in  compliance  with  Hazardous
Materials Laws.

         9.3  Preventive   Action.   Owner  shall  take  all  appropriate  steps
(including  the inclusion of  appropriate  provisions in any Leases  approved by
Mezzanine 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.

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

         9.5  Owner's  Environmental   Representations  and  Warranties.   Owner
represents and warrants to Mezzanine Lender that, except as previously disclosed
by Owner to  Mezzanine  Lender in Exhibit  "K"  attached  hereto and made a part
hereof:

                  (a) Owner has not at any time caused or, to its knowledge,
permitted any Prohibited Activities and Conditions on the Land.

                  (b) No Prohibited  Activities and  Conditions  exist or to the
best of Owner's knowledge after due inquiry, have existed on the Land.

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


                                       45


<PAGE>



                  (d) Owner has  complied  with all  Hazardous  Materials  Laws,
including all  requirements  for  notification  regarding  releases of Hazardous
Materials  relating  to  the  Land.  Without  limiting  the  generality  of  the
foregoing,  Owner  has  obtained  all  Environmental  Permits  required  for the
operation  of the  Land  and  the  Improvements  in  accordance  with  Hazardous
Materials  Laws now in effect  and all such  Environmental  Permits  are in full
force and  effect.  During  Owner's  ownership  of the Land and,  to the best of
Owner's knowledge after reasonable and diligent  inquiry,  no event has occurred
with  respect to the Land  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 Owner's  knowledge  after  reasonable  and diligent  inquiry,
threatened that involves the Land and/or the Improvements and allege,  arise out
of, or relate to any Prohibited Activity and Condition.

                  (f) Owner  has not  received  any  written  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
Land,  the  Improvements  or any other property of Owner that is adjacent to the
Land. The  representations and warranties in this Article IX shall be continuing
representations  and  warranties  that  shall  be  deemed  to be made  by  Owner
throughout  the term of the Loan evidenced by the Note and until all of the Loan
Obligations  (other  than  future  obligations  of  the  Owner  pursuant  to the
provisions of this Article IX and Section 11.5 of this Agreement) have been paid
in full.

         9.6      Notice of Certain Events.  During the term of the Loan, Owner
shall  promptly  notify  Mezzanine  Lender  in  writing  of any  and  all of the
following that may occur:

                  (a)  Owner's actual discovery of any Prohibited Activity and
Condition.

                  (b)  Owner's  receipt of or actual  knowledge  of any  written
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 Land, the  Improvements  or any other property of
Owner that is adjacent to the Land.

                  (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 Owner shall not relieve  Owner of, or
result in a waiver of, any obligation under this Agreement,  the Note, or any of
the other Loan Documents.

         9.7 Costs of  Inspection.  Borrower  and Owner shall pay  promptly  the
costs  of  any  environmental  inspections,   tests  or  audits  ("Environmental
Inspections") required by Mezzanine Lender in connection with any foreclosure or
deed in lieu of foreclosure or, if required by Mezzanine  Lender, as a condition
of  Mezzanine  Lender's  consent  to any  "Transfer"  (as  defined  in the First
Mortgage),  or required by Mezzanine Lender following a commercially  reasonable
determination by Mezzanine Lender that Prohibited  Activities and Conditions may
exist. Any such costs incurred by


                                       46


<PAGE>



Mezzanine  Lender  (including the  reasonable  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 or Owner fail to
pay  promptly  shall  become an  additional  part of the Loan  Obligations.  The
results of all  Environmental  Inspections made by Mezzanine Lender shall at all
times remain the property of Mezzanine  Lender,  and Mezzanine Lender shall have
no  obligation to disclose or otherwise  make  available to Borrower or Owner or
any other party such  results or any other  information  obtained  by  Mezzanine
Lender in connection with its Environmental Inspections. Mezzanine Lender hereby
reserves the right, and Borrower and Owner hereby expressly authorizes Mezzanine
Lender, to make available to any prospective purchaser of the Loan or transferee
of the Mezzanine Lender's interest in and to the Loan Documents or transferee of
the Mortgaged  Property under a deed in lieu of  foreclosure or any  prospective
bidder at a  foreclosure  sale of the  Mortgaged  Property,  the  results of any
Environmental Inspections made by Mezzanine Lender with respect to the Mortgaged
Property.  Borrower and Owner  consent to Mezzanine  Lender  notifying any party
(either  as part of a notice  of sale or  otherwise)  of the  results  of any of
Mezzanine  Lender's  Environmental  Inspections.  Borrower and Owner acknowledge
that Mezzanine  Lender cannot control or otherwise  assure the  truthfulness  or
accuracy of the  results of any of its  Environmental  Inspections  and that the
release of such  results to  prospective  bidders at a  foreclosure  sale of the
Mortgaged  Property may have a material and adverse effect upon the amount which
a party may bid at such sale.  Borrower  and Owner agree that  Mezzanine  Lender
shall have no liability  whatsoever as a result of delivering the results of any
of its  Environmental  Inspections  to any  prospective  bidder or  purchaser or
transferee of the Loan or in connection with Mezzanine  Lender's interest in the
Mortgaged Property,  and Borrower and Owner hereby release and forever discharge
Mezzanine Lender from any and all claims,  damages, or causes of action, arising
out of,  connected  with or  incidental to the results of the delivery of any of
Mezzanine  Lender's  Environmental  Inspections.  If  any  investigation,   site
monitoring, containment, clean-up, restoration or other remedial work ("Remedial
Work") is necessary to bring Owner into compliance with any Hazardous  Materials
Law or order of any  Governmental  Authority  that has or acquires  jurisdiction
over the Land, the Improvements or the use, operation or improvement of the Land
under any  Hazardous  Materials  Law,  Owner  shall,  by the  earlier of (a) the
applicable  deadline required by Hazardous  Materials Law or (b) sixty (60) days
after notice from Mezzanine 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 Law. If Owner fails to begin on a timely basis or diligently prosecute
any  required  Remedial  Work,  Mezzanine  Lender may, at its option,  cause the
Remedial Work to be completed,  in which case Borrower and Owner shall reimburse
Mezzanine  Lender on demand for the actual  cost of doing so. Any  reimbursement
due from  Borrower and Owner to  Mezzanine  Lender shall become part of the Loan
Obligations.  Owner shall  control any and all  dealings  with any  Governmental
Authority  unless or until  Mezzanine  Lender  causes  the  Remedial  Work to be
completed as provided herein.

         9.8 Cooperation with Governmental  Authorities.  Borrower and Mortgagor
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 affecting the Land and/or the Improvements.



                                       47


<PAGE>

         9.9      Indemnity.
                  ---------

                  (a) During the term of the Loan, Borrower and Owner shall hold
harmless,  defend and indemnify (i)  Mezzanine  Lender,  (ii) any prior owner or
holder of the Note,  (iii) any Person who is or will have been  involved  in the
servicing  of  the  Note,  (iv)  the  officers,  directors,   partners,  agents,
shareholders, employees and trustees of any of the foregoing, and (v) the heirs,
legal  representatives,   successors  and  assigns  of  each  of  the  foregoing
(together, the "Indemnitees") from and against all proceedings, claims, damages,
losses,  expenses,  penalties  and  costs  (whether  initiated  or sought by any
Governmental Authority or private parties), including reasonable 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  (unless any of the following  result from the gross negligence or
wilful misconduct of the Mezzanine Lender):

                           (i)      Any breach of any representation or warranty
of Borrower or Owner in this Article IX;

                           (ii)     Any failure by Borrower or Owner to perform
any of its obligations under this Article IX;

                           (iii)    The existence or alleged existence of any
Prohibited Activity and Condition on the Land or in the Improvements;

                           (iv)     The presence or alleged presence of
Hazardous  Materials in, on, around or under the Land, the  Improvements  or any
property of Owner or  Borrower  that is  adjacent  to the Land in  violation  of
applicable Hazardous Materials Laws; or

                           (v)      The actual or alleged violation of any
Hazardous Materials Laws by Borrower,  Owner, their agents, invitees,  licensees
or  contractors  or by  Manager  or  any  Affiliate  or  their  respective  duly
authorized representatives.

                  (b)   Counsel   selected   by  Borrower  or  Owner  to  defend
Indemnitees  shall be subject to the reasonable  approval of those  Indemnitees.
Notwithstanding  anything  contained herein,  any Indemnitee may elect to defend
any  claim  or  legal  administrative  proceeding  against  said  Indemnitee  at
Borrower's  and Owner's  expense.  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 and Owner 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  (i) results in the entry of any judgment that does not include as an
unconditional term the delivery by the claimant or plaintiff to Mezzanine Lender
of a written release of those Indemnitees, satisfactory in form and substance to
Mezzanine Lender; or (ii) may materially and adversely affect any Indemnitee, as
determined by such Indemnitee in its sole discretion.


                                       48


<PAGE>



                  (d) The  liability  of  Borrower  and Owner to  indemnify  the
Indemnitees  hereunder shall not be limited or impaired by any of the following,
or by any  failure of  Borrower,  Owner or  Guarantor  to  receive  notice of or
consideration for any of the following:

                           (i)      Any amendment or modification of any of the
Loan Documents;

                           (ii)     Any extensions of time for performance
required by any of the Loan Documents;

                           (iii)    The accuracy or inaccuracy of any
representations and warranties made by Borrower or Owner under this Agreement or
any of the other Loan Documents;

                           (iv)     The release of Borrower or Owner or any
other Person,  by Mezzanine  Lender or by operation of law, from  performance of
any obligation under any of the Loan Documents;

                           (v)      The release or substitution in whole or in
part of any security for the Loan Obligations; or

                           (vi)     Mezzanine Lender's failure to properly
perfect  any  lien  or  security   interest  given  as  security  for  the  Loan
Obligations.

                  (e)      Borrower and Owner shall, at their own cost and
expense, do all of the following:

                           (i)      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 IX;

                           (ii)     Reimburse Indemnitees for any reasonable
expenses  paid  or  incurred  in  connection  with  any  matters  against  which
Indemnitees are entitled to be indemnified under this Article IX; and

                           (iii)    Reimburse Indemnitees for any and all
reasonable 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 IX, or in monitoring and participating in any legal or
administrative proceeding.

                  (f) In any  circumstances  in which the  indemnity  under this
Article IX  applies,  Mezzanine  Lender may  employ  its own legal  counsel  and
consultants   to   prosecute,   defend  or  negotiate  any  claim  or  legal  or
administrative  proceeding and Mezzanine Lender,  with the prior written consent
of Owner (which shall not be unreasonably withheld,  delayed or conditioned) may
settle or compromise any action or legal or administrative proceeding.  Borrower
and  Owner  shall  reimburse  Mezzanine  Lender  upon  demand  for all costs and
expenses incurred by Mezzanine Lender,


                                       49


<PAGE>



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 IX shall be in addition to
any and all other  obligations and liabilities  that Borrower and Owner may have
under the applicable law or under the other Loan Documents,  and each Indemnitee
shall be entitled to  indemnification  under this  Article IX without  regard to
whether Mezzanine Lender or that Indemnitee has exercised any rights against the
Land and/or the  Improvements or any other security,  pursued any rights against
Guarantor,  or pursued any other rights  available  under the Loan  Documents or
applicable  law.  The  obligations  of  Owner  and  Borrower  to  indemnify  the
Indemnitees under this Article IX shall be joint and several. The obligations of
Borrower  and Owner to  indemnify  the  Indemnitees  under this Article IX shall
survive any  repayment  or discharge of the Loan  Obligations,  any  foreclosure
proceeding  and/or sale  relating to  Mezzanine  Lender's  rights under the Loan
Documents.

                                    ARTICLE X
                         EVENTS OF DEFAULT AND REMEDIES

         10.1     Events of Default.  The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:

                  (a) The failure of Borrower or Owner,  as  applicable,  to pay
any  installment of principal,  interest,  or other payments  required under the
Note or any other Loan  Document,  within  five (5) days after the same  becomes
due;

                  (b) Any failure by Owner to provide and maintain in full force
and effect the insurance  coverage required by Section 6.5(a) - (j),  inclusive,
of this Agreement;

                  (c) Borrower's violation of any covenant set forth in Article
VII hereof;

                  (d) Owner's violation of any covenant set forth in Article
VIII hereof, with the exception of Section 8.2 of this Agreement;

                  (e)  Borrower's  or Owner's  failure to deliver or cause to be
delivered the financial  statements and information set forth in Section 5.7 and
Section 6.7 above within the times  required or any  violation of Section 8.2 of
this Agreement,  and such failure is not cured within thirty (30) days following
Mezzanine Lender's written notice to Borrower or Owner, as the case may be;

                  (f) The failure of Borrower  or Owner  properly  and timely to
perform or observe any covenant or condition set forth in this Agreement  (other
than those  specified in this Section  10.1),  or the  Commitment  Letter or any
other Loan Document which failure is not cured within any  applicable  period as
set  forth  herein  or in such  other  Loan  Document,  or if no cure  period is
specified  therefor,  is not cured  within a period of  thirty  (30) days  after
Mezzanine  Lender's  notice to  Borrower  or Owner,  as the case may be, 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 such period of
time as Mezzanine  Lender  deems  reasonably  necessary,  as long as Borrower or
Owner, as the case


                                       50


<PAGE>



may be, is diligently and in good faith  prosecuting said cure to completion and
further provided however, that such cure period shall not extend beyond the date
upon which  such  Default  causes an Event of  Default to occur  under the First
Mortgage Loan Documents.  However, no such notice or grace period shall apply in
the case of any such failure which could, in Mezzanine Lender's judgment, absent
immediate  exercise  by  Mezzanine  Lender  of a  right  or  remedy  under  this
Agreement,  materially  adversely affect Mezzanine Lender, or impair the Note or
any other security given under any of the Loan Documents;

                  (g)      [Intentionally Deleted]

                  (h) Any exercise by any existing or further holder (other than
the  Mezzanine  Lender) of any debt  instrument  secured by a mortgage,  deed of
trust, deed to secure debt or security agreement covering the Mortgaged Property
of a right to declare all amounts due under that debt instrument immediately due
and payable;

                  (i) The Mortgaged Property becomes part of a bankrupt debtor's
(other than the Borrower,  Owner,  or the Manager,  if an Affiliate of Borrower)
estate  pursuant to any chapter of the Federal  Bankruptcy Code or the Mortgaged
Property otherwise becomes subject to any  reorganization,  receivership  (other
than a  receivership  proceeding  instituted by Mezzanine  Lender) or insolvency
proceeding or any similar proceeding  pursuant to any federal,  state or foreign
law affecting  debtor and creditor  rights,  and , in the case of an involuntary
bankruptcy,  the  Mortgaged  Property  is not  removed  from  such  bankruptcy's
debtor's  estate within ninety (90) days from the date of the filing thereof or,
if a trustee,  receiver  or  liquidator  of all or any  substantial  part of the
Mortgaged Property has been appointed, such appointment is not vacated or stayed
within ninety (90) days after the date of such appointment;

                  (j) The filing by Borrower,  Owner,  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;

                  (k) The  entry  by a court  of  competent  jurisdiction  of an
order,  judgment, or decree approving a petition filed against Borrower,  Owner,
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 ninety (90) 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 of all
or any  substantial  part  of  its  properties  or of  any or all of the  rents,
revenues, issues, earnings,


                                       51


<PAGE>



profits or income thereof which  appointment shall remain unvacated and unstayed
for an aggregate of ninety (90) days (whether or not consecutive);

                  (l) Unless  otherwise  permitted  hereunder or under any other
Loan Documents,  the sale, transfer,  lease,  assignment,  or other disposition,
voluntarily or involuntarily,  of the Mortgaged  Property,  or any part thereof,
except for  Permitted  Encumbrances  as described  in Section 8.2 above,  or any
further   encumbrance   of  the   Mortgaged   Property   (except  for  Permitted
Encumbrances), unless the prior written consent of Mezzanine Lender is obtained;

                  (m) Any certificate,  statement,  representation,  warranty or
audit  heretofore  or hereafter  furnished  by or on behalf of Borrower,  Owner,
Guarantor or Manager or any of their respective  officers or directors  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 Mezzanine  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, Owner, Guarantor
or Manager  known to them,  or (iii) on the date of execution of this  Agreement
there  shall  have  been  any  materially  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  Mezzanine
Lender in writing at or prior to the time of such  execution and, in the case of
any  of  (i),   (ii),  or  (iii)  above,   is  contained  in  the  Loan  Closing
Certification;

                  (n) The  commencement  of a forfeiture  action or  proceeding,
whether civil or criminal,  which, in Mezzanine  Lender's  reasonable  judgment,
could result in a forfeiture of the Mortgaged  Property or otherwise  materially
impair the lien created by the Loan Documents or Mezzanine  Lender's interest in
the Mortgaged Property;

                  (o)  The occurrence of a default (after expiration of
applicable  notice and cure  periods)  under or with respect to any of the First
Mortgage Loan Documents;

                  (p)  Fraud or  intentional  misrepresentation  or  intentional
omission  by  Borrower,  Owner  or  Guarantor  of all or any  part  of the  Loan
Obligations,  or any of their  respective  officers,  directors or trustees,  in
connection  with (i) the  application  for or  creation  of the  Loan,  (ii) any
financial  statement,   financial  report,  certification  or  other  report  or
information required under the Loan Agreement to be provided to Mezzanine Lender
during the term of the Loan, or (iii) any request for Mezzanine Lender's consent
to any proposed action,  including a request for disbursement of funds under any
of the Loan Documents.

                  (q) The  failure of Owner to  correct  or to cause  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:

                           (i)      a termination of any Reimbursement Contract
or any Permit; or

                           (ii)     a ban on new admissions generally or on
admission of patients otherwise qualifying for Medicare or Medicaid coverage.


                                       52


<PAGE>



                  (r) A final  judgment  shall be  rendered by a court of law or
equity (i) against  Borrower or Owner in excess of  $50,000.00,  or (ii) against
Guarantor  or  Manager  in  excess of  $200,000.00,  and the same  shall  remain
undischarged  for a period of thirty (30) days,  unless such  judgment in either
case is: (A) fully covered by collectible  insurance and such insurer has within
such period  acknowledged  such  coverage in writing,  or (B) 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,  Owner,  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
Mezzanine Lender;

                  (s) the failure of Owner to comply with the provisions of
Section 13 of the First Mortgage;

                  (t) The failure by Borrower or Owner,  if  requested,  to: (a)
furnish  any   documentation  or  information,   (b)  execute  and  deliver  any
documentation,  (c) correct or amend any documents previously  executed,  or (d)
perform  any  acts,  in each  case of (a),  (b),  (c) or  (d),  as  provided  in
Paragraphs 1, 2, and 3 of the Agreement to Amend or Comply of even date herewith
executed by Borrower and Owner for the benefit of Mezzanine Lender;

                  (u)  Guarantor  no longer  holds 51% or more of the  shares of
voting stock of the Manager,  unless the Manager has been  replaced by an entity
other than an Affiliate of Borrower, with Mezzanine Lender's prior consent; or

                  (v)  Any management or operating agreement for the Property is
terminated without prior written consent of Mezzanine Lender.

         Notwithstanding  anything in this Section,  all  requirements of notice
shall be deemed  eliminated if Mezzanine  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.

         10.2     Remedies.  Upon the occurrence of any one or more of the
foregoing Events of Default, Mezzanine Lender may, at its option:

                  (a)  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 prior notice of any
kind, all of which are hereby expressly waived; and/or

                  (b) 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; and/or

                  (c) Exercise any and all rights and remedies afforded by the
laws of the United States,  the states in which any of the Mortgaged Property is
located or any other appropriate


                                       53


<PAGE>



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; and/or

                  (d) Exercise the rights and remedies of setoff and/or banker's
lien against the interest of Borrower  and/or Owner in and to every  account and
other  property of Borrower or Owner  which is in the  possession  of  Mezzanine
Lender or any Person who then owns a participating  interest in the Loan, to the
extent of the full amount of the Loan; and/or

                  (e)      Replace the Manager by terminating the Management
Agreement in accordance with the terms of the Subordination Agreement; and/or

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


                                   ARTICLE XI
                                  MISCELLANEOUS

         11.1     Full Recourse to Borrower.  The Loan and the Borrower's
obligations  thereunder and under the Loan Documents  shall be fully recourse to
Borrower.

         11.2 Waiver. No remedy conferred upon, or reserved to, Mezzanine 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  Mezzanine  Lender shall not affect any  subsequent  right of Mezzanine
Lender to exercise the same. No course of dealing between Borrower and Mezzanine
Lender or between Owner and Mezzanine Lender or any delay on Mezzanine  Lender's
part in  exercising  any rights  shall  operate as a waiver of any of  Mezzanine
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 any other
then  existing  Default  or shall  impair  any  rights,  remedies  or  powers of
Mezzanine Lender.  Any and all of Mezzanine  Lender's rights with respect to the
Mortgaged Property shall continue  unimpaired,  and Borrower shall be and remain
obligated  in  accordance  with the terms  hereof,  notwithstanding  any  delay,
extension of time, renewal,  compromise or other indulgence granted by Mezzanine
Lender in the event of any  Default  or Event of  Default  with  respect  to the
Mortgaged Property or otherwise hereunder.

         11.3 Costs and Expenses.  Borrower and Owner will bear all taxes,  fees
and expenses (including actual and commercially  reasonable  attorneys' fees and
expenses of counsel for Mezzanine 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
Mezzanine  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 Mezzanine
Lender is made a party to any suit or  proceeding  by  virtue of the Loan,  this
Agreement or any Mortgaged Property and as a result of any of the foregoing,


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<PAGE>



Mezzanine 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 Mortgaged Property,  Borrower,
Owner,  Guarantor or Manager,  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 Mezzanine  Lender by any of the Loan  Documents,  then in any
such events,  all of the reasonable  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  and Owner to  Mezzanine
Lender payable on demand of Mezzanine  Lender.  Without  limiting the foregoing,
Borrower and Owner have 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 or Owner fail, Borrower and
Owner agree to  reimburse  Mezzanine  Lender for the amounts  paid by  Mezzanine
Lender,  together  with  penalties  or interest,  if any,  incurred by Mezzanine
Lender as a result of underpayment or nonpayment.  Such amounts shall constitute
a portion of the Loan  Obligations,  shall be secured by the Loan  Documents and
shall bear  interest  at the rate of interest  on the Note until  repaid  unless
Borrower or Owner fail to repay  Mezzanine  Lender within thirty (30) days after
the date of written  notice of such  payments in which event such amounts  shall
bear  interest  at the  Default  Rate (as  defined  in the  Note)  from the date
advanced until repaid.

         11.4 Performance of Mezzanine Lender. At its option, upon Borrower's or
Owner's failure to do so, Mezzanine Lender may make any payment or do any act on
Borrower's or Owner's behalf that  Borrower,  Owner or others are required to do
to remain in compliance  with this Agreement or any of the other Loan Documents,
and Borrower and Owner agrees to reimburse  Mezzanine Lender, on demand, for any
payment made or expense  incurred by Mezzanine  Lender pursuant to the foregoing
authorization,  including,  without limitation,  reasonable attorneys' fees, and
until so repaid any sums advanced by Mezzanine Lender shall constitute a portion
of the Loan  Obligations,  shall be secured by the Loan Documents and shall bear
interest  at the Default  Rate (as  defined in the Note) from the date  advanced
until repaid.

         11.5  Indemnification.  Borrower and Owner 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, expenses, judgments, awards, amounts paid in settlement, punitive
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 Mezzanine Lender by reason of (a) ownership of the Note and the
other Loan  Documents,  (b) the  Mortgaged  Property or any interest  therein or
receipt  of any  Rents,  (c) any  amendment  to, or  restructuring  of, the Loan
Obligations and/or any of the Loan Documents, (d) any and all lawful action that
may be taken by  Mezzanine  Lender in  connection  with the  enforcement  of the
provisions of the Note or any of the other Loan  Documents,  whether or not suit
is filed in connection  with same, or in connection  with  Borrower,  Guarantor,
Owner, Manager and/or any partner, joint venturer, member or shareholder thereof
becoming a party to a voluntary or


                                       55


<PAGE>



involuntary federal or state bankruptcy,  insolvency or similar proceeding,  (e)
any  accident,  injury to or death of persons  or loss of or damage to  property
occurring in, on or about the Land, the  Improvements  or any part thereof or on
the adjoining  sidewalks,  curbs,  adjacent  property or adjacent parking areas,
streets or ways, (f) any use,  nonuse or condition in, on or about the Land, the
Improvements or any part thereof or on the adjoining sidewalks,  curbs, adjacent
property or adjacent parking areas, streets or ways, (g) any failure on the part
of  Borrower,  Guarantor,  Owner or Manager to perform or comply with any of the
terms of this  Agreement or any of the other Loan  Documents,  (h) any claims by
any broker,  Person or entity  claiming to have  participated  in arranging  the
making of the Loan  evidenced  by the Note,  (i) any  failure of the Land and/or
Improvements  to be in compliance  with any applicable  laws, (j) performance of
any labor or services or the  furnishing of any materials or other property with
respect to the Land, the  Improvements  or any part thereof,  (k) 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 Loan
Documents,  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, (l)
any  misrepresentation  made to Mezzanine  Lender in this Agreement or in any of
the other Loan Documents, (m) any tax on the making and/or recording of the Note
or any of the other Loan Documents; (n) the violation of any requirements of the
Employee  Retirement  Income Security Act of 1974, as amended,  (o) any fines or
penalties  assessed or any corrective  costs incurred by Mezzanine Lender if the
Facility  or any part of the Land and/or  Improvements  is  determined  to be in
violation of any covenants,  restrictions  of record,  or any  applicable  laws,
ordinances,  rules  or  regulations,  or  (p)  the  enforcement  by  any  of the
Indemnified  Parties of the provisions of this Section 11.5. Any amounts payable
to Mezzanine  Lender by reason of the  application  of this Section 11.5,  shall
become  immediately due and payable,  and shall constitute a portion of the Loan
Obligations, shall be secured by the Loan Documents and shall accrue interest at
the Default  Rate(as  defined in the Note).  The  obligations and liabilities of
Borrower  and Owner under this Section 11.5 shall be joint and several and shall
survive  any  termination,  satisfaction,  assignment,  entry of a  judgment  of
foreclosure or exercise of a power of sale relating to Mezzanine Lender's rights
under  the  Loan  Documents.  For  purposes  of  this  Section  11.5,  the  term
"Indemnified  Parties" means Mezzanine 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 Loan  Documents 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 Mortgaged  Property,  whether during
the term of the Loan Documents 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 Mezzanine Lender's assets and
business).  Notwithstanding  anything  herein to the contrary,  the  Indemnified
Parties  shall  not be  indemnified  against  matters  caused by their own gross
negligence or wilful misconduct.


                                       56


<PAGE>



         11.6 Preferences.  Mezzanine Lender shall have no obligation to marshal
any  assets in favor of  Borrower,  Owner or any other  party or  against  or in
payment of any or all of the  obligations  of Borrower or Owner pursuant to this
Agreement,  the Note or any of the other Loan Documents.  Mezzanine Lender shall
have the continuing and exclusive  right to apply or reverse and reapply any and
all  payments by Borrower  or Owner to any  portion of the  obligations  of such
parties  hereunder.  To the extent Borrower or Owner makes a payment or payments
to Mezzanine Lender for Borrower's or Owner's benefit,  which payment or receipt
of proceeds or any part  thereof are  subsequently  invalidated,  declared to be
fraudulent  or  preferential,  set aside or  required to be repaid to a trustee,
receiver or any other  party under any  bankruptcy  law,  state or federal  law,
common law or equitable  cause,  then, to the extent of such payment or proceeds
received,  the  obligations  hereunder or part thereof  intended to be satisfied
shall be revived and  continue in full force and effect,  as if such  payment or
proceeds had not been received by Mezzanine Lender.

         11.7     Remedies of Borrower.  [Intentionally Deleted]
                  --------------------

         11.8  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.

         11.9     Offsets, Counterclaims and Defenses.  [Intentionally Deleted]
                  -----------------------------------

         11.10 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 Mezzanine  Lender,
notwithstanding  any investigation made by or on behalf of Mezzanine Lender, and
shall  survive the  execution  and delivery to Mezzanine  Lender of the Note and
this Agreement.

         11.11  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 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 or Owner:

                           Capital Senior Living P-C, Inc.
                           14160 Dallas Parkway, Suite 300
                           Dallas, Texas 75240
                           Attention: David R. Brickman, Esq.



                                       57


<PAGE>




                  with a copy to:

                           Winston W. Walp, II, Esq.
                           Jenkens & Gilchrist, P.C.
                           1445 Ross Avenue, Suite 3200
                           Dallas, Texas 75202

                  If to Mezzanine Lender:

                           Newman Financial Services, Inc.
                           1801 California Street, Suite 3700
                           Denver, CO 80202
                           Attn:  Servicing Department

                  with a copy to:

                           Kelly M.  Wrenn,  Esquire  Ballard  Spahr  Andrews  &
                           Ingersoll,  LLP 601 13th Street, NW, Suite 1000 South
                           Washington, D.C. 20005-3807

                  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.

         11.12 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, Owner or Mezzanine Lender
shall be entitled to rely upon this  Agreement or be entitled to the benefits of
this Agreement.

         11.13  Assignments and  Participation.  Borrower and Owner  acknowledge
that  Mezzanine  Lender  may on or  after  the  Closing  Date  sell  and  assign
participation interests in and to the Loan, or pledge,  hypothecate or encumber,
or sell and assign all or any portion of the Loan,  to or with such  domestic or
foreign banks, insurance companies, pension funds, trusts or other institutional
lenders or other Persons,  parties or investors (including,  without limitations
grantor trusts, owner trusts, special purpose corporations, REMICs, FASITs, real
estate investment trusts or other similar or comparable  investment vehicles) as
may be selected by Mezzanine  Lender in its sole and absolute  discretion and on
terms and conditions  satisfactory to Mezzanine  Lender in its sole and absolute
discretion. Mezzanine Lender will endeavor to give Borrower reasonable notice of
such assignment.  Borrower,  Owner and all other Persons associated or connected
with the Loan or the  Mortgaged  Property  shall  cooperate in all respects with
Mezzanine Lender in connection with the sale of  participation  interests in, or
the pledge,  hypothecation  or encumbrance or sale of all or any portion of, the
Loan, and upon Mezzanine  Lender's notice to Borrower and Owner thereof,  shall,
in  connection  therewith,  execute and deliver  such  estoppels,  certificates,
instruments  and  documents  as may be  requested  by  Mezzanine  Lender  in its
commercially reasonable discretion. Borrower and


                                       58


<PAGE>



Owner grant to  Mezzanine  Lender the right to  distribute  financial  and other
information  concerning Borrower,  Owner, the Mortgaged Property,  and all other
pertinent information with respect to the Loan to any Person who has purchased a
participation  interest in the Loan,  or who has  purchased the Loan, or who has
made a loan to Lender  secured by the Loan or who has  expressed  an interest in
purchasing  a  participation  interest in the Loan,  or expressed an interest in
purchasing  the Loan or the making of a loan to Mezzanine  Lender secured by the
Loan.

         11.14 Effect of  Assignment.  From and after the effective  date of any
assignment of all or any portion of the Loan to any Person (an  "Assignee")  and
Mezzanine  Lender's notice thereof to Borrower and Owner (a) such Assignee shall
be a party  hereto and to each of the other Loan  Documents to the extent of the
applicable  percentage or percentages  assigned to such Assignee and,  except as
otherwise  specified  herein,  shall  succeed to the rights and  obligations  of
Mezzanine  Lender  hereunder  in  respect  of  such  applicable   percentage  or
percentages and (b) Mezzanine Lender shall relinquish its rights and be released
from its  obligations  hereunder  and under the Loan  Documents to the extent of
such applicable  percentage or percentages.  The liabilities of Mezzanine Lender
and each of the other  Assignees  shall be separate  and not joint and  several.
Neither  Mezzanine  Lender  nor  any  Assignee  shall  be  responsible  for  the
obligations of any other Assignee.

         11.15  Privity of Contract.  This  Agreement  is being  entered into by
Mezzanine Lender individually and as agent for all present and future Assignees,
and privity of contract is hereby created among Mezzanine Lender and all present
and future  Assignees,  on the one hand,  and Borrower  and Owner,  on the other
hand.

         11.16  Dissemination of Information.  If Mezzanine Lender determines at
any time to sell, transfer or assign the Note, the Loan Agreement and any of the
other Loan Documents and any or all servicing rights with respect thereto, or to
grant   participating   interests   therein  or  issue   mortgage   pass-through
certificates or other securities  evidencing a beneficial interest in a rated or
unrated public offering or private  placement,  Mezzanine  Lender may forward to
each purchaser,  transferee, assignee, servicer, participant or investor in such
securities  (collectively,  the  "Investor")  or any Rating  Agency  rating such
securities and each prospective  Investor,  all documents and information  which
Mezzanine  Lender  now  has or  may  hereafter  acquire  relating  to the  Loan,
Borrower,  Guarantor and the Mortgaged Property, which shall have been furnished
by or on  behalf  of  Borrower,  Guarantor,  or any  party  to  any of the  Loan
Documents,  or otherwise  furnished in  connection  with the Loan,  as Mezzanine
Lender  in  its  commercially  reasonable  discretion  determines  necessary  or
desirable.

         11.17 Supersedes Prior Agreements; Counterparts. This Agreement and the
instruments  referred to herein  supersede and incorporate all  representations,
promises and statements, oral or written, made by Mezzanine 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 Mezzanine Lender,  Owner
and  Borrower,  respectively.  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.

         11.18    Loan Agreement Governs - Construction of Documents.  The Loan
is governed by the terms and provisions set forth in this Loan Agreement and the
other Loan Documents and in


                                       59


<PAGE>



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 that 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. The parties hereto  acknowledge  that they were  represented by counsel in
connection  with the negotiation and drafting of the Loan Documents and that the
Loan Documents shall not be subject to the principle of construing their meaning
against the party which drafted same.

         11.19  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 TEXAS AND THE PARTIES
HERETO  SUBMIT  (AND  WAIVE ALL  RIGHTS TO  OBJECT)  TO  NON-EXCLUSIVE  PERSONAL
JURISDICTION  IN THE  STATE  OF  TEXAS,  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
TEXAS OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.

         11.20 WAIVER OF JURY TRIAL.  BORROWER,  MORTGAGOR AND MEZZANINE  LENDER
HEREBY  WAIVES  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 MEZZANINE  LENDER,
MORTGAGOR  AND/OR  BORROWER WITH RESPECT TO THE LOAN  DOCUMENTS OR IN CONNECTION
WITH THIS  AGREEMENT OR THE EXERCISE OF SUCH PARTY'S  RIGHTS AND REMEDIES  UNDER
THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES


                                       60


<PAGE>



HERETO,  IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING
AND WHETHER  SOUNDING IN CONTRACT,  TORT OR  OTHERWISE.  BORROWER AND  MORTGAGOR
AGREE THAT  LENDER MAY FILE A COPY OF THIS  AGREEMENT  WITH ANY COURT AS WRITTEN
EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF EACH SUCH PARTIES
IRREVOCABLY  TO WAIVE ITS 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)  BY  AND  AMONG
BORROWER,  MORTGAGOR AND MEZZANINE  LENDER,  OR ANY COMBINATION  THEREOF,  SHALL
INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT
A JURY.


                                       61


<PAGE>



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

WITNESS:                                    OWNER:

                                            CAPITAL SENIOR LIVING ILM-C, INC., a
                                            Delaware corporation


                                            By:                           (SEAL)
---------------------------                    ---------------------------
                                               Lawrence A. Cohen
                                               Chief Executive Officer
---------------------------
[Print Name]



WITNESS:                                    BORROWER:

                                            CAPITAL SENIOR LIVING P-C, INC., a
                                            Delaware corporation

                                            By:                           (SEAL)
---------------------------                    ---------------------------
                                               Lawrence A. Cohen
                                               Chief Executive Officer
---------------------------
[Print Name]





                                       62


<PAGE>





WITNESS:                                        LENDER:

                                                NEWMAN FINANCIAL SERVICES, INC.,
                                                a Delaware corporation

                                                By:                       (SEAL)
--------------------------                         -----------------------

                                                Name:
--------------------------                             -------------------
[Print Name]
                                                Title:
                                                       -------------------




                                       63


<PAGE>



                                LIST OF EXHIBITS


Exhibit A -       Legal Description

Exhibit B -       Pool C Facilities

Exhibit C -       Description of Triad Facilities

Exhibit D -       Borrower's Chief Executive Office

Exhibit E -       Owner's Chief Executive Office

Exhibit F -       Ownership Interests in Borrower

Exhibit G -       Ownership Interest in Owner

Exhibit H -       Borrower's Compliance Certificate

Exhibit I -       Owner's Compliance Certificate

Exhibit J -       Permitted Liens

Exhibit K -       Exceptions to Environmental Representations and Warranties


                                       64


<PAGE>



                                   EXHIBIT "A"

                               DESCRIPTION OF LAND

         The following described real property located in Forsyth County,  North
Carolina:




                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]



                                       A-1

<PAGE>



         The  following  described  real  property  located  in  Ingham  County,
Michigan:




                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]


                                       A-2

<PAGE>



         The following  described  real property  located in Wake County,  North
Carolina:





                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]


                                       A-3

<PAGE>



         The  following  described  real  property  located  in  Peoria  County,
Illinois:





                                       A-4

<PAGE>



                                                    EXHIBIT "B"

<TABLE>
<CAPTION>

                                         DESCRIPTION OF POOL C FACILITIES
                                   AND APPLICABLE PORTION OF FIRST MORTGAGE LOAN

       Property Name & Location                     Address                    Description of            First Mortgage
                                                                                  Facility                 Loan Amount
       ------------------------                     -------                    --------------            --------------
<S>                                    <C>                                <C>                              <C>
Independence Village of Peoria         1201 West Northmoor Road           157-unit independent              $9,800,000
Peoria, Illinois                       Peoria, IL 61614                   living facility

Independence Village                   2530 Marfitt Road                  155-unit independent              $8,600,000
of East Lansing                        East Lansing, MI 48823             living facility
East Lansing, Michigan

Independence Village of Raleigh        3113 Charles B. Root               164-unit independent             $11,500,000
Raleigh, North Carolina                Raleigh, NC 27607                  living facility

Independence Village                   2945 Reynolda Road                 156-unit independent              $8,450,000
of Winston-Salem                       Winston-Salem, NC 27105            living facility
Winston-Salem, North Carolina

</TABLE>



                                       B-1

<PAGE>



                                                    EXHIBIT "C"

<TABLE>
<CAPTION>

                                          DESCRIPTION OF TRIAD FACILITIES


    Property Name & Location                 Address                                 Description of Facility
    ------------------------                 -------                                 -----------------------

<S>                               <C>                                                <C>
The Wellington at Oklahoma        2100 NW 125th Street                               A 120-unit independent
Oklahoma City, Oklahoma           Oklahoma City Oklahoma                             living facility.

The Waterford At Fairfield        Intersection of Wessel Drive and Corydale Drive    A 120-unit independent
Fairfield, Ohio                   Fairfield, Ohio                                    living facility.

The Waterford at Plano            NWC Premier Drive and Ruisseau Drive               A 92-unit independent
Plano, Texas                      Plano, Texas                                       living and 45-unit assisted
                                                                                     living facility.

</TABLE>




                                       C-1

<PAGE>



                                   EXHIBIT "D"

                       BORROWER'S CHIEF EXECUTIVE OFFICES

                              14160 Dallas Parkway
                                    Suite 300
                               Dallas, Texas 75240




                                       D-1

<PAGE>



                                   EXHIBIT "E"

                         OWNER'S CHIEF EXECUTIVE OFFICES

                              14160 Dallas Parkway
                                    Suite 300
                               Dallas, Texas 75240




                                       E-1

<PAGE>



                                   EXHIBIT "F"


Capital Senior Living Properties, Inc.                                      100%



                                       F-1

<PAGE>



                                   EXHIBIT "G"

                          OWNERSHIP INTERESTS IN OWNER

Capital Senior Living P-C, Inc.                                             100%




                                       G-1

<PAGE>



                                   EXHIBIT "H"

                        BORROWER'S COMPLIANCE CERTIFICATE

Newman Financial Services, Inc.
1801 California Street, Suite 3700
Denver, Colorado 80202
Attn:  Servicing Department


          Re:  Mezzanine Loan  Agreement  dated as of August ___, 2000 (together
               with  amendments,  if any,  the "Loan  Agreement"),  by and among
               Newman Financial  Services,  Inc., as Mezzanine  Lender,  Capital
               Senior Living P-C,  Inc., as Borrower,  and Capital Senior Living
               ILM-C, as Owner

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

          1.   No Default  or Event of Default  has  occurred  or exists  except
               _____________.

          2.   All  representations  and warranties made by Borrower in the Loan
               Agreement and in other Loan Documents are true and correct in all
               material  respects  as though  given on the date  hereof,  except
               ________________________.

          3.   All information provided herein is true and correct.

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

                  Dated this ______ day of _____________________, _______.


                                           By:
                                                  ------------------------------

                                           Name:
                                                  ------------------------------

                                           Title:
                                                  ------------------------------


                                       H-1

<PAGE>



                                   EXHIBIT "I"

                         OWNER'S COMPLIANCE CERTIFICATE

Newman Financial Services, Inc.
1801 California Street, Suite 3700
Denver, Colorado 80202
Attn:  Servicing Department


          Re:  Mezzanine Loan  Agreement  dated as of August ___, 2000 (together
               with  amendments,  if any,  the "Loan  Agreement"),  by and among
               Newman Financial  Services,  Inc., as Mezzanine  Lender,  Capital
               Senior  Living P-C,  Inc.,  as Owner,  and Capital  Senior Living
               ILM-C, as Owner

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

          1.   No Default  or Event of Default  has  occurred  or exists  except
               _____________.

          2.   All  representations  and  warranties  made by  Owner in the Loan
               Agreement and in other Loan Documents are true and correct in all
               material  respects  as though  given on the date  hereof,  except
               ________________________.

          3.   All information provided herein is true and correct.

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

                  Dated this ______ day of _____________________, _______.



                                             By:
                                                  ------------------------------

                                             Name:
                                                  ------------------------------

                                             Title:
                                                  ------------------------------


                                       I-1

<PAGE>



                                   EXHIBIT "J"

                                 PERMITTED LIENS

     The  following  described  encumbrances  associated  with the real property
located in Forsyth County, North Carolina:















                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]




                                       J-1

<PAGE>


     The  following  described  encumbrances  associated  with the real property
located in Ingham County, Michigan:

















                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]


                                       J-2

<PAGE>



         The following described encumbrances  associated with the real property
located in Wake County, North Carolina:






                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]


                                       J-3

<PAGE>


     The  following  described  encumbrances  associated  with the real property
located in Peoria

County, Illinois:


























                    [DESCRIPTION CONTINUES ON FOLLOWING PAGE]



                                       J-4

<PAGE>


                                   EXHIBIT "K"

                           EXCEPTIONS TO ENVIRONMENTAL
                         REPRESENTATIONS AND WARRANTIES

Those  matters  disclosed  in the  environmental  reports  prepared  by Property
Solutions,  Incorporated  for the benefit of First Mortgage Lender in connection
with the closing of First Mortgage Loan.


                                       K-1

<PAGE>


                                                       (Mezzanine Loan - Pool C)


                                 PROMISSORY NOTE

$10,300,000.00                                                   August 15, 2000


         FOR VALUE RECEIVED,  the undersigned CAPITAL SENIOR LIVING P-C, INC., a
Delaware  corporation,  having an address at 14160  Dallas  Parkway,  Suite 300,
Dallas,  Texas 75240 (the  "Borrower"),  hereby  promises to pay to the order of
NEWMAN FINANCIAL  SERVICES,  INC., having an address at 1801 California  Street,
Suite 3700,  Denver,  CO 80202 (the  "Lender"),  its  successors  and assigns as
holder of this Note or, if this Note has then been  endorsed "to bearer," to the
bearer of this Note (the Lender,  its said successors and assigns,  and any such
bearer,  being hereinafter  sometimes referred to collectively as the "Holder"),
at the  Lender's  said address or at such other place or to such other person as
may be designated in writing to Borrower by the Lender, the principal sum of Ten
Million Three Hundred Thousand and No/100 Dollars ($10,300,000.00) (the "Loan"),
together with interest on the unpaid balance thereof at the rate hereinafter set
forth.

         ON THE TERMS AND SUBJECT TO THE CONDITIONS  which are  hereinafter  set
forth:

         Section 1.        Interest Rate and Payment Dates.
                           -------------------------------

         1.1 Initial  Rate and Initial  Payment.  Interest  shall  accrue on the
outstanding  balance of the principal amount outstanding  hereunder from time to
time from and after the date hereof at the rate of 12.11878% per annum until the
first  Rate  Adjustment  Date  (as  defined  below).  On  each  successive  Rate
Adjustment  Date,  the rate of  interest  at  which  interest  accrues  shall be
adjusted to the then applicable Note Rate (as defined in Section 1.4).  Interest
for the period  beginning  on the date of this Note and ending on and  including
the last day of the month in which  this Note is dated  shall be  payable on the
date hereof. Thereafter, interest shall be paid in arrears and shall be computed
on the basis of a 360-day  year and actual  number of days elapsed for any whole
or partial month in which interest on the Loan is being  calculated and shall be
charged on the  principal  balance  outstanding  from time to time.  In no event
shall  Holder  compute  the  interest  in a manner  that would  cause  Holder to
contract for,  charge or receive  interest that would exceed the Maximum  Lawful
Rate (as  defined in Section  1.9) or the Maximum  Lawful  Amount (as defined in
Section 1.9).

         1.2 Rate  Adjustment  Date and Payment  Adjustment  Dates.  The rate of
interest on the outstanding  principal balance hereof from time to time shall be
adjusted on the following dates (each being a "Rate Adjustment Date"): the first
Rate  Adjustment  Date  shall be on  September  1,  2000,  and  subsequent  Rate
Adjustment Dates shall fall on the first day of each calendar month  thereafter.
The first  payment  adjustment  date shall be October  1, 2000,  and  subsequent
payment  adjustment  dates  shall fall on the first day of each  calendar  month
thereafter during the term of the Loan.

         1.3      Default Interest Rate.  If Borrower fails to make any payment
of principal, interest or fees on the date on which such payment becomes due and
payable (including applicable grace periods)


                                        1


<PAGE>



whether at maturity or by  acceleration or on any other date, such payment shall
accrue interest from the date on which such payment was due (and not the date of
the payment  default) until paid at the fluctuating  rate ("Default Rate") which
is the lesser of (a) five percent (5%) per annum above the then  applicable Note
Rate and (b) the maximum rate  permitted by  applicable  law, but in either case
never more than the Maximum  Lawful Rate or at a rate that would cause the total
interest  contracted  for,  charged or  received by Lender to exceed the Maximum
Lawful Amount.

         1.4 Note  Rate.  The  "Note  Rate"  shall  mean the  average  of London
Interbank  Offered Rates ("LIBOR") for a term of one month determined  solely by
Holder as of each Rate  Adjustment  Date plus five  hundred  fifty  (550)  basis
points per annum,  determined in the following  manner:  on each Rate Adjustment
Date,  Holder will obtain the one month LIBOR (in U.S. Dollar deposits) from the
appropriate  Bloomberg  display  page  available  as of the  close  of  business
announced on the last business day of the month  immediately  preceding the Rate
Adjustment Date; in the event Bloomberg ceases  publication or ceases to publish
the one month LIBOR,  Holder shall select a comparable  publication to determine
the one month LIBOR and provide prompt notice thereof to Borrower;  LIBOR may or
may not be the lowest rate based upon the market for U.S. Dollar deposits in the
London Interbank  Eurodollar  Market at which Holder prices loans on the date on
which the Note Rate is determined by Holder as set forth above.

         1.5 Note Rate  Adjustments.  This Note shall bear  interest at the rate
set forth above and, after adjustment in accordance with the terms hereof, or at
the  applicable  Note  Rate  until a new Note  Rate is  determined  on each Rate
Adjustment Date in accordance  with the provisions  hereof;  provided,  however,
that, if Holder at any time determines,  in the sole but reasonable  exercise of
its discretion  that it has  miscalculated  the amount of the monthly payment of
principal and/or interest  (whether because of a miscalculation of the Note Rate
or otherwise),  Holder shall give notice to Borrower of the corrected  amount of
such monthly payment (and the corrected  amount of the Note Rate, if applicable)
and (a) if the corrected  amount of such monthly payment  represents an increase
thereof, Borrower shall, within ten (10) calendar days following receipt of such
notice, pay to Holder any sums that Borrower would have otherwise been obligated
under this Note to pay to Holder had the amount of such monthly payment not been
miscalculated or (b) if the corrected amount of such monthly payment  represents
a decrease thereof and an Event of Default (as defined in Section 8.1) under any
of the  terms  and  provisions  of the Note or the Loan  Agreement  of even date
herewith  by and between  Borrower  and Lender  (the "Loan  Agreement")  has not
occurred and is not continuing,  Borrower  shall,  within ten (10) calendar days
following  receipt of such notice, be paid the sums that Borrower would not have
otherwise been obligated to pay to Holder had the amount of such monthly payment
not been miscalculated.

         1.6 LIBOR Unascertainable.  If on any date on which the Note Rate would
otherwise  be  set,   Holder  shall  have   determined   in  good  faith  (which
determination  shall be  conclusive  and  binding on  Borrower in the absence of
manifest  error)  that  (a)  adequate  and  reasonable  means do not  exist  for
ascertaining  the one month  LIBOR,  or (b) a  contingency  has  occurred  which
materially and adversely affects the London Interbank Eurodollar Market, and, as
a result, adversely affects how the Holder prices loans on the date on which the
Note Rate is  determined  by Holder as set forth  above,  then,  and in any such
event, Holder may notify Borrower of such determination. Upon such date as shall
be  specified  in such  notice  (which  shall not be earlier  than the date such
notice is given) the obligation of Holder to charge  interest to Borrower at the
Note Rate shall be suspended and the one


                                        2


<PAGE>



month  LIBOR  shall  automatically  be  converted  to the  "Index" of the weekly
average  yield on United  States  Treasury  Securities  adjusted  to a  constant
maturity of one year, as made available by the Federal Reserve Board  forty-five
(45) days prior to the Rate  Adjustment  Date (the "Index").  Computation of the
Note Rate based on the Index shall continue until Holder notifies  Borrower that
the  circumstances  which  prompted the  foregoing  notice to Borrower no longer
exist.

         1.7      U.S. Treasury Securities  [Intentionally Deleted].
                  ------------------------

         1.8  Reimbursement  for  Increased  Costs.  If any law or  guideline or
interpretation or application thereof by any governmental authority charged with
the  interpretation or administration  thereof or compliance with any request or
directive of any governmental authority (whether or not having the force of law)
now existing or hereafter  adopted (a) subjects Holder to any tax or changes the
basis of taxation with respect to this Note, the Loan or payments by Borrower of
principal,  interest or other amounts due from Borrower  hereunder or thereunder
(except for taxes on the overall net income or overall gross  receipts of Holder
imposed as a result of a present or former  connection  between the jurisdiction
of the governmental  authority  imposing such tax on Holder,  provided that this
exclusion  shall not apply to a  connection  arising  solely from Holder  having
executed,  delivered,  performed its  obligations  under,  or received a payment
under,  or  enforced,  any of the Loan  Documents  (as defined in Section  8.1.1
below)),  or (b) imposes upon Holder any other condition or expense with respect
to this Note, the Loan or its making,  maintenance or funding of any part of the
Loan or any  security  therefor,  and the result of any of the  foregoing  is to
increase  the cost to,  reduce the income  receivable  by, or impose any expense
(including, without limitation, loss of margin) upon, Holder with respect to the
Note,  or the  making,  maintenance  or funding  of any part of the Loan,  by an
amount which  Holder  reasonably  deems to be material,  Holder may from time to
time notify Borrower of the amount determined in good faith (using any averaging
and  attribution  methods) by Holder  (which  determination  shall be conclusive
absent manifest  error) to be necessary to compensate  Holder for such increase,
reduction or imposition  and, if Borrower is by law  prohibited  from paying any
such amount which is material,  Holder may elect to declare the unpaid principal
balance hereof and all interest  accrued  thereon  immediately  due and payable.
Such amount  shall be due and  payable by  Borrower  to Holder  thirty (30) days
after such notice is given.

         1.9      Additional Interest Rate Provisions.
                  -----------------------------------

                           (a)      Maximum Lawful Interest: The term "Maximum
Lawful Rate" means the maximum rate of interest,  and the term  "Maximum  Lawful
Amount"  means  the  maximum  amount of  interest,  that are  permissible  under
applicable  state or federal law for the type of loan evidenced by this Note. If
applicable  state or federal  law does not permit a higher  interest  rate,  the
"weekly  ceiling" (as defined in Chapter 303 of the Texas Finance Code) shall be
the  interest  rate ceiling  applicable  to this Note and shall be the basis for
determining  the Maximum Lawful Rate in effect from time to time during the term
of this Note. If applicable  state or federal law allows a higher  interest rate
or federal law preempts  the state law  limiting the rate of interest,  then the
foregoing  interest  rate ceiling  shall not be  applicable to this Note. If the
interest  rate  ceiling is  increased  by statute or other  governmental  action
subsequent to the date of this Note, then the new interest rate ceiling shall be
applicable  to this Note  from the  effective  date  thereof,  unless  otherwise
prohibited by applicable law.


                                        3


<PAGE>



                           (b)      Spreading of Interest:  Because of the
possibility of irregular periodic balances of principal,  premature payment, and
the  fluctuating  nature of the Note Rate,  the total  interest that will accrue
under this Note  cannot be  determined  in  advance.  Lender  does not intend to
contract  for,  charge or receive  more than the Maximum  Lawful Rate or Maximum
Lawful Amount  permitted by applicable state or federal law, and to prevent such
an occurrence  Lender and Borrower agree that all amounts of interest,  whenever
contracted for, charged or received by Lender, with respect to the loan of money
evidenced by this Note,  shall be spread,  prorated or  allocated  over the full
period of time this Note is  unpaid,  including  the  period of any  renewal  or
extension  of this Note.  If demand  for  payment of this Note is made by Lender
prior to the full stated  term,  the total  amount of interest  contracted  for,
charged or  received  to the time of such  demand  shall be spread,  prorated or
allocated  along with any interest  thereafter  accruing over the full period of
time that this Note thereafter  remains unpaid for the purpose of determining if
such interest exceeds the Maximum Lawful Amount.

                           (c)      Excess Interest:  At maturity (including
maturity due to Lender's  acceleration  of the Note) or on earlier final payment
of this Note,  Lender shall  compute the total amount of interest  that has been
contracted for,  charged or received by Lender or payable by Borrower under this
Note and compare such amount to the Maximum  Lawful  Amount that could have been
contracted for, charged or received by Lender. If such computation reflects that
the total amount of interest that has been contracted  for,  charged or received
by Lender or payable by Borrower exceeds the Maximum Lawful Amount,  then Lender
shall apply such excess to the reduction of the principal balance and not to the
payment of interest;  or if such excess  interest  exceeds the unpaid  principal
balance,  such excess shall be refunded to Borrower.  This provision  concerning
the crediting or refund of excess  interest  shall  control and take  precedence
over  all  other  agreements  between  Borrower  and  Lender  so that  under  no
circumstances  shall the total interest  contracted for,  charged or received by
Lender exceed the Maximum Lawful Amount.

         Section 2. Interest  Payments Only.  Commencing on October 1, 2000, and
continuing  on the first  day of each  calendar  month  thereafter  through  and
including  the Maturity  Date  (defined  below),  interest  only payments on the
unpaid  principal  balance  of this  Note,  calculated  in  arrears  at the then
effective Note Rate shall be due and payable.

         Section 3.  Application  of  Payments.  Payments  made by  Borrower  on
account  hereof  shall be  applied,  first,  toward  any Late Fees  (hereinafter
defined) and other fees,  expenses,  costs and charges due under any of the Loan
Documents,  second,  toward  payment of any  interest  due at the Default  Rate,
third,  toward payment of any interest due at the then  applicable Note Rate set
forth  in  Section  1.4  above,   and  fourth,   toward  payment  of  principal.
Notwithstanding the foregoing, if any advances made by Holder under the terms of
any instruments  securing this Note have not been repaid, any payments made may,
at the option of Holder, be applied,  first, to repay such advances and interest
thereon,  with the  balance,  if any,  applied  as set  forth  in the  preceding
sentence. Neither Holder's acceptance of an amount which is less than the amount
then due and payable nor Holder's  application of such payment in the manner set
forth in this Section 3 shall  constitute  or be deemed to  constitute  either a
waiver of the unpaid amounts or an accord and satisfaction.

         Section 4.        Maturity Date. Unless sooner paid, and except to the
extent that payment thereof is sooner accelerated in accordance with Section 2.4
of the Loan Agreement, the entire unpaid


                                        4


<PAGE>



balance  of the  principal  amount  hereof  and  all  interest  accrued  thereon
(including interest at the Default Rate), to and including the Maturity Date (as
defined  below),  and all Late Fees (as  defined  below)  shall  become  due and
payable on August 15, 2002.

         Section 5. Prepayment. Any full or partial prepayment of the Loan shall
be permitted upon not less than thirty (30) and not greater than sixty (60) days
prior written notice to Holder  specifying the date on which prepayment is to be
made.  Any  prepayment  shall be  credited,  first,  toward  any  Late  Fees due
hereunder and other fees, expenses,  costs and charges due under any of the Loan
Documents,  second,  toward  payment  of any  accrued  and unpaid  interest  due
hereunder at the Default Rate,  third,  toward payment of any accrued and unpaid
interest  due  hereunder  at the Note Rate,  and fourth,  toward  payment of the
outstanding  principal  balance hereof.  Notwithstanding  the foregoing,  if any
advances  made by Holder under the terms of any  instruments  securing this Note
have not been  repaid,  any  payments  made may,  at the  option of  Holder,  be
applied,  first, to repay such advances, and interest thereon, with the balance,
if any, applied as set forth in the preceding sentence.

         Section 6.        Method of Payment.
                           -----------------

         Each payment of the Loan Obligations (as defined in the Loan Agreement)
shall be paid  directly  to  Holder in lawful  tender  of the  United  States of
America. Each such payment shall be paid by 1:00 p.m. Denver,  Colorado, time on
the date such  payment  is due,  except if such date is not a  Business  Day (as
defined  in the Loan  Agreement)  such  payment  shall  then be due on the first
Business Day after such date,  but interest  shall  continue to accrue until the
date payment is received. Any payment received after 1:00 p.m. Denver, Colorado,
time shall be deemed to have been received on the immediately following Business
Day for all purposes,  including without limitation, the accrual of interest and
principal.

         Section 7.        Security.
                           --------

         The debt  evidenced  by this  Note is to be  secured  by,  among  other
things, a Payment and Performance  Guaranty Agreement of even date herewith (the
"Guaranty  Agreement"),  given by Capital Senior Living Corporation,  a Delaware
corporation ("Guarantor"), for the benefit of Lender.

         Section 8.        Default.
                           -------

         8.1  Events  of  Default.   Anything  in  this  Note  to  the  contrary
notwithstanding, on the occurrence of any of the following events (each of which
is referred to herein as an "Event of Default"),  Holder may, in the exercise of
its sole and absolute discretion, accelerate the debt evidenced by this Note, in
which event the entire  outstanding  principal balance and all interest and fees
accrued thereon shall  immediately be and become due and payable without further
notice:

                           (a)      Borrower  fails in making any payment to the
Holder of any or all sums due hereunder  within five (5) days after such payment
becomes due or on the Maturity Date; or

                           (b)      there exists an uncured "Event of Default"
as set forth and  defined in any of the Loan  Documents  (defined in Section 8.2
below).


                                        5


<PAGE>



         8.2 No Impairment of Rights. Nothing in this Section shall be deemed in
any way to alter or impair any right  which the Holder has under this Note,  the
Mezzanine  Loan  Agreement  between  Borrower  and Lender of even date  herewith
("Loan  Agreement") or any other  document or instrument  evidencing or securing
the  Loan  (collectively,  the  "Loan  Documents")  or at law or in  equity,  to
accelerate  such debt on the  occurrence of any other Event of Default  provided
herein or therein, whether or not relating to this Note.

         8.3  Late  Fees.  Without  limiting  the  generality  of the  foregoing
provisions of this Section,  if any payment of interest or principal is not made
within five (5) calendar days after the date on which such payment  becomes due,
Borrower shall thereupon  automatically  become obligated  immediately to pay to
the  Holder  a late  payment  charge,  for each  month  during  which a  payment
delinquency  exists,  equal to the lesser of five  percent (5%) of the amount of
such payment or the maximum amount  permitted by applicable law ("Late Fees") to
defray  the  expenses  incurred  by  Holder  in  handling  and  processing  such
delinquent  payment  and to  compensate  Holder  for  the  loss  of use of  such
delinquent payment.

         Section 9.        Costs of Enforcement.
                           --------------------

         Borrower  shall  pay to  Holder  on  demand  the  amount of any and all
expenses  incurred by Holder (a) in enforcing its rights  hereunder or under the
Loan  Documents,  (b) as the result of the  occurrence of an Event of Default by
Borrower  in  performing  its  obligations  under this Note,  including  but not
limited to the expense of collecting any amount owed  hereunder,  and of any and
all  commercially  reasonable  attorneys'  fees incurred by Holder in connection
with  such  Event  of  Default,  whether  suit be  brought  or  not,  and (c) in
protecting  the  security  for the  Loan  and all  obligations  under  the  Loan
Documents. Such expenses shall be added to the principal amount hereof, shall be
secured by the Loan Documents and shall accrue interest at the Default Rate.

         Section 10.       Borrower's Waiver of Certain Rights.
                           -----------------------------------

         Borrower  and any  endorser,  guarantor  or surety  hereby  waives  the
exercise of any and all exemption rights which it holds at law or in equity with
respect to the debt  evidenced by this Note,  and of any and all rights which it
holds at law or in equity to require any valuation, appraisal or marshalling, or
to have or receive  any  presentment,  protest,  demand and notice of  dishonor,
protest, demand and nonpayment as a condition to the Holder's exercise of any of
its rights under this Note or the Loan Documents.


                                        6


<PAGE>



         Section 11.       Extensions.
                           ----------

         The  Maturity  Date  and/or  any  other  date by which any  payment  is
required to be made hereunder may be extended by the Holder from time to time in
the  exercise of its sole  discretion,  without in any way altering or impairing
Borrower's or Guarantor's liability hereunder.


                                        7


<PAGE>



         Section 12.       General.
                           -------

         12.1     Applicable Law.
                  --------------

                           (a)    This Note shall be given effect and construed
by  application  of the  laws of the  State  of  Texas  (without  regard  to the
principles  thereof  governing  conflicts of laws), and any action or proceeding
arising  hereunder,  and each of Holder and  Borrower  submits  (and  waives all
rights to object) to non-exclusive  personal jurisdiction in the State of Texas,
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  Texas or any  successor  federal  court  having
original jurisdiction.

                           (b)    Chapter 346 of the Texas Finance Code relating
to certain revolving credit loan accounts is not applicable to this Note.

         12.2 Headings.  The headings of the Sections,  subsections,  paragraphs
and  subparagraphs  hereof are provided  herein for and only for  convenience of
reference, and shall not be considered in construing their contents.

         12.3  Construction.  As used  herein,  (a) the  term  "person"  means a
natural  person,  a trustee,  a  corporation,  a limited  liability  company,  a
partnership and any other form of legal entity,  and (b) all references made (i)
in the neuter, masculine or feminine gender shall be deemed to have been made in
all such genders,  (ii) in the singular or plural number shall be deemed to have
been made, respectively,  in the plural or singular number as well, and (iii) to
any  Section,  subsection,  paragraph  or  subparagraph  shall,  unless  therein
expressly  indicated  to the  contrary,  be  deemed  to have  been  made to such
Section, subsection, paragraph or subparagraph of this Note.

         12.4 Severability.  No determination by any court, governmental body or
otherwise that any provision of this Note or any amendment  hereof is invalid or
unenforceable in any instance shall affect the validity or enforceability of (a)
any  other  such  provision  or  (b)  such  provision  in any  circumstance  not
controlled  by such  determination.  Each  such  provision  shall be  valid  and
enforceable to the fullest  extent  allowed by, and shall be construed  wherever
possible as being consistent with, applicable law.

         12.5 No  Waiver.  The  Holder  shall not be deemed to have  waived  the
exercise  of any  right  which it holds  hereunder  unless  such  waiver is made
expressly and in writing.  No delay or omission by the Holder in exercising  any
such right (and no allowance by the Holder to Borrower of an opportunity to cure
a default in performing its obligations  hereunder)  shall be deemed a waiver of
its future  exercise.  No such  waiver  made as to any  instance  involving  the
exercise  of any such  right  shall be  deemed a  waiver  as to any  other  such
instance, or any other such right.  Further,  acceptance by Holder of all or any
portion of any sum payable  under,  or partial  performance  of any covenant of,
this Note, the Mortgage or any of the other Loan Documents,  whether before, on,
or after the due date of such payment or  performance,  shall not be a waiver of
Holder's right either to require prompt and


                                        8


<PAGE>



full payment and  performance  when due of all other sums payable or obligations
due  thereunder or hereunder or to exercise any of Holder's  rights and remedies
hereunder or thereunder.

         12.6   Waiver of Jury Trial; Service of Process; Court Costs.  BORROWER
HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR  PROCEEDING  TO WHICH  BORROWER AND
THE HOLDER MAY BE PARTIES  ARISING  OUT OF, IN  CONNECTION  WITH,  OR IN ANY WAY
PERTAINING  TO, THIS NOTE AND/OR ANY OF THE OTHER LOAN  DOCUMENTS.  IT IS AGREED
AND  UNDERSTOOD  THAT THIS WAIVER  CONSTITUTES  A WAIVER OF TRIAL BY JURY OF ALL
CLAIMS  AGAINST ALL PARTIES TO SUCH  ACTIONS OR  PROCEEDINGS,  INCLUDING  CLAIMS
AGAINST  PARTIES  WHO ARE NOT PARTIES TO THIS NOTE.  THIS  WAIVER IS  KNOWINGLY,
WILLINGLY AND VOLUNTARILY MADE BY BORROWER,  UPON  CONSULTATION  WITH COUNSEL OF
BORROWER'S  CHOICE,  AND BORROWER HEREBY REPRESENTS THAT NO  REPRESENTATIONS  OF
FACT OR OPINION HAVE BEEN MADE BY ANY  INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL
BY JURY  OR TO IN ANY  WAY  MODIFY  OR  NULLIFY  ITS  EFFECT.  BORROWER  FURTHER
REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE
AND IN THE MAKING OF THIS WAIVER BY  INDEPENDENT  LEGAL COUNSEL  SELECTED OF ITS
OWN FREE WILL,  AND THAT IT HAS HAD THE  OPPORTUNITY TO DISCUSS THIS WAIVER WITH
COUNSEL.  BORROWER AGREES THAT SERVICE UPON ITS REGISTERED AGENT IN THE STATE OF
TEXAS SHALL BE VALID  REGARDLESS OF BORROWER'S  WHEREABOUTS  AT THE TIME OF SUCH
SERVICE AND  REGARDLESS  OF WHETHER  BORROWER  RECEIVES A COPY OF SUCH  SERVICE,
PROVIDED THAT THE HOLDER SHALL HAVE MAILED A COPY TO BORROWER IN ACCORDANCE WITH
THE  NOTICE  PROVISIONS  HEREIN.  BORROWER  AGREES  TO PAY ALL  COURT  COSTS AND
REASONABLE  ATTORNEY'S  FEES INCURRED BY HOLDER IN CONNECTION WITH ENFORCING ANY
PROVISION OF THIS NOTE.  NOTWITHSTANDING  THE  FOREGOING,  HOLDER  AGREES TO USE
REASONABLE  EFFORTS TO PROVIDE BORROWER WITH NOTICE OF THE FILING OF ANY LAWSUIT
BY HOLDER AGAINST BORROWER.

         12.7 Offset. Upon the occurrence of an Event of Default, the Holder may
set-off against any principal and interest owing hereunder, any and all credits,
money,  stocks,  bonds or other security or property of any nature whatsoever on
deposit with, or held by, or in the possession of, the Holder,  to the credit of
or for the  account of  Borrower,  without  notice to or consent of  Borrower or
Guarantor.

         12.8  Non-Exclusivity  of Rights and  Remedies.  None of the rights and
remedies herein conferred upon or reserved to Holder is intended to be exclusive
of any other  right or  remedy  contained  herein  or in any of the  other  Loan
Documents  and each and every  such  right and remedy  shall be  cumulative  and
concurrent, and may be enforced separately, successively or together, and may be
exercised from time to time as often as may be deemed  necessary or desirable by
Holder.

         12.9  Incorporation  by Reference.  All of the agreements,  conditions,
covenants and provisions contained in each of the Loan Documents are hereby made
a part of this Note to the same  extent and with the same force and effect as if
they were fully set forth herein.


                                        9


<PAGE>



         12.10 Joint and Several  Liability.  If Borrower  consists of more than
one person  and/or  entity,  each such  person  and/or  entity  agrees  that its
liability hereunder is joint and several.

         12.11 Business Purpose.  Borrower represents and warrants that the Loan
evidenced by this Note is being obtained  solely for the purpose of acquiring or
carrying on a  business,  professional  or  commercial  activity  and is not for
personal, agricultural, family or household purposes.

         12.12  Interest  Limitation.  Borrower  agrees  that for the purpose of
determining  Maximum  Lawful  Interest  described in Section  1.9(a) above,  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.

         12.13 Modification.  This Note may be modified,  amended, discharged or
waived  only by an  agreement  in  writing  signed  by the  party  against  whom
enforcement of such modification, amendment, discharge or waiver is sought.

         12.14    Time of the Essence.  Time is strictly of the essence of this
Note.

         12.15  Negotiable  Instrument.  Borrower agrees that this Note shall be
deemed a negotiable instrument, even though this Note may not otherwise qualify,
under applicable law, absent this paragraph, as a negotiable instrument.

         12.16  Interest  Rate After  Judgment.  If judgment is entered  against
Borrower on this Note,  the amount of the  judgment  entered  (which may include
principal,  interest,  fees,  Late Fees and costs)  shall bear  interest  at the
Default Rate, to be determined on the date of the entry of the judgment.

         12.17  Relationship.  Borrower and Holder intend that the  relationship
between them shall be solely that of creditor and debtor.  Nothing  contained in
this Note or in any of the other Loan Documents  shall be deemed or construed to
create  a  partnership,  tenancy-in-common,  joint  tenancy,  joint  venture  or
co-ownership by or between Borrower and Holder.

         12.18  Waiver  of  Automatic  Stay.  TO  THE  EXTENT   PERMITTED  UNDER
APPLICABLE  LAW,  BORROWER  HEREBY  AGREES THAT,  IN  CONSIDERATION  OF LENDER'S
AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION  THAT THE FOLLOWING  COVENANT IS A
MATERIAL  INDUCEMENT  FOR LENDER TO MAKE THE LOAN,  IN THE EVENT  THAT  BORROWER
SHALL (A) FILE WITH ANY  BANKRUPTCY  COURT OF COMPETENT  JURISDICTION  OR BE THE
SUBJECT OF ANY  PETITION  UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED
STATES CODE, AS AMENDED (THE "BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE;  (B)
BE THE  SUBJECT  OF ANY ORDER FOR RELIEF  ISSUED  UNDER THE  BANKRUPTCY  CODE OR
SIMILAR LAW OR STATUTE;  (C) FILE OR BE THE SUBJECT OF ANY PETITION  SEEKING ANY
REORGANIZATION,    ARRANGEMENT,    COMPOSITION,    READJUSTMENT,    LIQUIDATION,
DISSOLUTION,  OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT
OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE
SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT


                                       10


<PAGE>



OF ANY TRUSTEE, RECEIVER,  CONSERVATOR,  OR LIQUIDATOR; OR (E) BE THE SUBJECT OF
AN ORDER,  JUDGMENT  OR DECREE  ENTERED BY ANY COURT OF  COMPETENT  JURISDICTION
APPROVING  A  PETITION  FILED  AGAINST  ANY  BORROWER  FOR  ANY  REORGANIZATION,
ARRANGEMENT,  COMPOSITION,  READJUSTMENT,  LIQUIDATION,  DISSOLUTION, OR SIMILAR
RELIEF  UNDER ANY  PRESENT  OR FUTURE  FEDERAL OR STATE ACT OR LAW  RELATING  TO
BANKRUPTCY,  INSOLVENCY OR RELIEF FOR DEBTORS,  THEN, TO THE EXTENT PERMITTED BY
APPLICABLE LAW AND SUBJECT TO COURT APPROVAL, HOLDER SHALL THEREUPON BE ENTITLED
AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO
STIPULATE  TO RELIEF  FROM ANY  AUTOMATIC  STAY OR OTHER  INJUNCTION  IMPOSED BY
SECTION  362 OF THE  BANKRUPTCY  CODE,  OR SIMILAR  LAW OR  STATUTE  (INCLUDING,
WITHOUT  LIMITATION,  RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121
OF THE BANKRUPTCY  CODE) OR OTHERWISE,  ON OR AGAINST THE EXERCISE OF THE RIGHTS
AND REMEDIES  OTHERWISE  AVAILABLE TO HOLDER AS PROVIDED IN THE LOAN  DOCUMENTS,
AND AS OTHERWISE  PROVIDED BY LAW, AND BORROWER  HEREBY  IRREVOCABLY  WAIVES ITS
RIGHTS TO OBJECT TO SUCH RELIEF.

              [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]


                                       11


<PAGE>


         IN WITNESS  WHEREOF,  Borrower  has  executed  and sealed  this Note or
caused  it to be  executed  and  sealed  on its  behalf  by its duly  authorized
representative,  the day and year first above written, and the obligations under
this Note shall be binding upon Borrower's successors and assigns.

WITNESS:                             BORROWER:

                                     CAPITAL SENIOR LIVING P-C, INC., a Delaware
                                     corporation

                                     By:                                  (SEAL)
------------------------------          ----------------------------------
[Print name]                            Lawrence A. Cohen
                                        Chief Executive Officer


                                       12


<PAGE>

                                                       (Mezzanine Loan - Pool C)


                   PAYMENT AND PERFORMANCE GUARANTY AGREEMENT

         THIS PAYMENT AND PERFORMANCE  GUARANTY  AGREEMENT (this  "Guaranty") is
made as of the ____ day of August, 2000, by CAPITAL SENIOR LIVING CORPORATION, a
Delaware  corporation  ("Guarantor"),   for  the  benefit  of  NEWMAN  FINANCIAL
SERVICES,  INC., a Delaware corporation  (including its successors,  transferees
and assigns, "Lender").

                                    RECITALS

         A. CAPITAL  SENIOR LIVING P- C INC., a Delaware  corporation  (together
with its successors and assigns "Borrower"), has borrowed the sum of TEN MILLION
THREE HUNDRED  THOUSAND AND NO/100  DOLLARS  ($10,300,000.00)  (the "Loan") from
Lender,  evidenced by  Borrower's  Promissory  Note of even date  herewith  (the
"Note") and that certain Mezzanine Loan Agreement by and among Lender,  Borrower
and Capital Senior Living ILM-C, Inc., a Delaware corporation  ("Owner") of even
date herewith  (the "Loan  Agreement"),  and secured by, among other  things,  a
pledge of one  hundred  percent of the  capital  stock of Owner which owns those
four (4) senior housing facilities  described on Exhibit "A" attached hereto and
incorporated  herein  (each  individually  a  "Facility"  and  collectively  the
"Facilities").

         B. The Note, the Loan Agreement and the other documents,  certificates,
instruments and agreements  executed by Borrower and/or Owner in connection with
the  Loan or to  otherwise  evidence  or  secure  the  Loan,  and all  renewals,
supplements,  or amendments thereto or a part thereof, are collectively referred
to as the "Loan Documents".

         C. As a condition of making the Loan, Guarantor has agreed to guaranty,
absolutely and unconditionally,  payment of the Guaranty Obligations (as defined
below), subject to the terms and conditions set forth in this Guaranty.

                                    AGREEMENT

         NOW THEREFORE,  in  consideration  of the above and as an inducement to
Lender to make the Loan  evidenced  by the Note and the Loan  Agreement,  and as
security for the payment of the Loan and all interest  from time to time accrued
and unpaid thereon, and all expenses,  fees, charges and other amounts from time
to time due and owing to Lender  under the Note,  and the other Loan  Documents,
and for the performance of all covenants,  agreements and other obligations from
time to time  owing to,  or for the  benefit  of,  Lender  pursuant  to the Loan
Documents,  including, without limitation, the payment and performance of all of
Borrower's and Owner's obligations  pursuant to Article IX of the Loan Agreement
(collectively  referred  to herein as the  "Guaranty  Obligations"),  Guarantor,
intending to be legally bound, hereby covenants, agrees, represents and warrants
as follows:


                                        1


<PAGE>



         1. Guaranty. Guarantor hereby absolutely and unconditionally guarantees
to the Lender the full,  regular and  punctual  payment and  performance  of the
Guaranty  Obligations  within  seven  (7) days of the  receipt  of the  Lender's
written  demand  therefor  after the passage of actual  notice and cure  periods
provided  in  the  Loan  Documents.  Without  limiting  the  generality  of  the
foregoing, "Guaranty Obligations" is used herein in its most comprehensive sense
to  include  all  debts,  obligations  and  indebtedness  described  in the Loan
Documents,  whether now or hereafter made,  incurred,  or created,  voluntary or
involuntary, due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined.  In addition,  Guarantor guarantees the full payment
of, and agrees to  reimburse  Lender for,  all costs of  collection  incurred by
Lender in enforcing the Guaranty Obligations and pursuing any remedies set forth
in the Loan Documents and/or the Guaranty,  including, without limitation, court
costs and commercially  reasonable  attorneys' fees (including,  but not limited
to, fees in any bankruptcy or appellate proceeding).

         2. Payments.  All payments to be made by Guarantor to Lender  hereunder
shall be made in lawful money of the United  States of America,  in  immediately
available funds, at 1801 California  Street,  Suite 3700,  Denver,  CO 80202, or
such other location designated by Lender in writing, and shall be accompanied by
a notice from Guarantor stating that such payments are made under this Guaranty.
All payments  available to Lender for application in payment or reduction of the
Guaranty Obligations may be applied by Lender in such manner and in such amount,
and at such time or times and in such order and  priority as provided for in the
Note.

         3.  Subsequent  Acts by Lender.  Lender may, in its sole discretion and
without notice to Guarantor,  take any action which might  otherwise be deemed a
legal or equitable  release or discharge of  Guarantor's  obligations  hereunder
without either  impairing or affecting the liability of Guarantor for payment of
the Guaranty  Obligations,  which actions might include,  by way of illustration
and not limitation:

                  (a) at any time or from time to time,  the time for Borrower's
and/or  Owner's  performance  of or  compliance  with any  provision of the Loan
Documents may be extended or such  performance  or  compliance  may be waived by
Lender;

                  (b) the acceptance of partial payment of the Guaranty
Obligations;

                  (c) any of the acts permitted in the Loan Documents may be
performed;

                  (d) the Loan Documents may from time to time be amended and/or
renewed  by  Borrower  and/or  Owner and  Lender  for the  purpose of adding any
provisions thereto or changing in any manner the rights of Lender or of Borrower
and/or Owner thereunder;

                  (e) the maturity date of the Note may be changed or renewed in
whole or in part;

                  (f) the maturity of the Note may be  accelerated in accordance
with the terms of the Loan Documents or any future  agreement  between  Borrower
and/or Owner and Lender or the holder of such Note;


                                        2


<PAGE>



                  (g)  any  collateral  security  for  all  or any  part  of the
Guaranty  Obligations  may be exchanged,  released,  compromised,  consolidated,
surrendered  or  otherwise  dealt with,  and  Lender's  interest  therein may be
released and may or may not be perfected;

                  (h)  the settlement, release, compounding, compromise,
cancellation, rearrangement or consolidation of any of the Guaranty Obligations;

                  (i)  the collection of or other liquidation of any claims
Lender may have in respect to the Guaranty Obligations;

                  (j)  the granting of indulgences, forbearance, compromises,
extensions or adjustments in respect to any covenant or agreement under the Loan
Documents; and/or

                  (k) the release from liability of any other  Guarantor  and/or
any additional parties who may guarantee payment of the Guaranty  Obligations or
any portion thereof.

         4.       Certain Rights, Subordination, Etc.
                  ----------------------------------

                  (a) Lender may  pursue  its  rights  and  remedies  under this
Guaranty and shall be entitled to payment  hereunder  notwithstanding  any other
guaranty of all or any part of the Guaranty Obligations, and notwithstanding any
action taken by Lender to enforce any of its rights or remedies under such other
guaranty,  or any payment  received  thereunder  (but in no event  shall  Lender
collect more than the aggregate amount of the Guaranty Obligations).

                  (b) Any  obligation  or  debt  of  Borrower  or  Owner  now or
hereafter held by Guarantor is hereby  subordinated to the Guaranty  Obligations
and Guarantor shall not enforce or collect any such  indebtedness  from Borrower
or Owner, as the case may be.  Nevertheless,  upon request by Lender,  Guarantor
shall collect, enforce and receive such indebtedness of Borrower to Guarantor or
of  Owner to  Guarantor,  as the case may be.  Any sums  collected  at  Lender's
request or collected in  contravention of the prohibition set forth herein shall
be held by  Guarantor  as trustee for Lender and shall be paid over to Lender on
account of the Guaranty Obligations; provided, however, that such payments shall
not impair or affect in any manner the  liability of  Guarantor  under the other
provisions of this Guaranty.

                  (c)  Guarantor  agrees that if any "Event of  Default"  exists
under the Loan Documents  ("Event of Default") and is continuing,  (i) Guarantor
shall not accept payment from any other guarantor of any Guaranty Obligations by
way of  contribution  or similar rights on account of any payment made hereunder
by  Guarantor  to  Lender,  all of  which  rights  are  hereby  subordinated  to
Guarantor's  obligations  hereunder to Lender,  (ii) Guarantor will not take any
action to  exercise  or enforce  any rights to such  contribution,  and (iii) if
Guarantor should receive payment,  satisfaction or security for any indebtedness
of Borrower  or Owner to Lender,  the same shall be  delivered  to Lender in the
form  received,  endorsed or signed as may be  appropriate  for  application  on
account of or as security for the  indebtedness of Borrower to Lender and, until
so delivered, shall be held in trust for Lender as security for the indebtedness
of Borrower to Lender.


                                        3


<PAGE>



                  (d) In the event of any Event of Default  with  respect to the
Guaranty  Obligations,  Guarantor agrees to pay or perform on written demand the
Guaranty  Obligations.  Lender  shall not be under a duty to protect,  secure or
insure or be required to liquidate any security or lien provided for in the Loan
Documents or other such collateral held by Lender prior to making such demand.

                  (e)  Notwithstanding any payment or payments made by Guarantor
under this Guaranty, Guarantor expressly, irrevocably and unconditionally waives
and releases  any and all  "claims"  (as that term is defined in the  Bankruptcy
Reform  Act of 1978,  as  amended,  11  U.S.C.  Sections  101 et  seq.,  and the
regulations  adopted  and  promulgated  pursuant  thereto   (collectively,   the
"Bankruptcy  Code")) it may now or hereafter have against Borrower or Owner, and
shall not be entitled  to, and hereby  expressly  waives,  any and all rights of
subrogation,  reimbursement,  indemnity,  exoneration and  contribution  against
Borrower or Owner, which Guarantor may now or hereafter have against Borrower or
Owner  without  regard to  whether  any such  right or claim  arises  expressly;
provided,  that such waiver and release  shall not be  effective  as to any such
claim or entitlement or such  subrogation and other rights that accrue after the
indefeasible payment,  performance or other satisfaction in full of the Guaranty
Obligations.

         5.       Representations and Warranties.  Guarantor represents and
warrants to Lender that:

                  (a) Existence,  Power and  Qualification.  Guarantor is a duly
organized and validly existing  corporation,  has the corporate 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.

                  (b) Power and Authority.  Guarantor has full  corporate  power
and  authority to incur the  Guaranty  Obligations  provided for herein,  all of
which have been authorized by all proper and necessary action.

                  (c)  Financial  Condition.  The  financial  statements  of the
Guarantor  heretofore  furnished  to Lender are  complete and correct and fairly
present the financial  condition of the Guarantor as of the date thereof.  Since
the date of said financial  statements there has been no material adverse change
in the financial  condition or operations,  or the business taken as a whole, of
Guarantor from that set forth therein.

                  (d) Litigation.  There are no legal or arbitral proceedings or
any proceedings by or before any governmental or regulatory  authority or agency
now  pending  or,  to the  best of  Guarantor's  knowledge,  threatened  against
Guarantor,  in which an adverse  decision could  materially and adversely affect
the financial condition of Guarantor.

                  (e) No Breach.  The execution  and delivery of this  Guaranty,
the consummation of the transactions herein contemplated and compliance with the
terms and provisions hereof will not (i) conflict with or result in a breach of,
or require any consent (not heretofore  obtained prior to the  representation is
made) under, any applicable law, administrative proceeding or regulation, or any
order,  writ,  injunction  or decree of any court or  governmental  authority or
agency, or any agreement or instrument to which Guarantor is a party or by which
Guarantor is bound or to which Guarantor


                                        4


<PAGE>



is subject,  (ii) constitute a default under any such agreement or instrument or
under Guarantor's  articles of incorporation,  by-laws or any other agreement or
instrument binding upon Guarantor, or (iii) result in the creation or imposition
of any lien upon any of the  revenues  or assets of  Guarantor  pursuant  to the
terms of any such agreement or instrument.

                  (f)  Approvals.  To the  best  of  Guarantor's  knowledge,  no
authorizations,  approvals, or consents of (other than those heretofore obtained
and in full force and effect),  and no filings or registrations with (other than
those  heretofore  obtained and in full force and effect),  any  governmental or
regulatory  authority or agency are  necessary  for the  execution,  delivery or
performance by Guarantor of this Guaranty or for the validity or  enforceability
thereof.

                  (g) Taxes, etc.  Guarantor has filed all United States federal
and state tax returns and all other tax returns that are required to be filed by
Guarantor and has paid all taxes due pursuant to such returns or pursuant to any
assessment received by Guarantor, except such taxes, the payment of which is not
yet due, or which if due, is not yet  delinquent  or is being  contested in good
faith or which has not been finally determined.

                  (h) Benefit. The making of the Loan by Lender to Borrower will
directly benefit Guarantor.

         6.       Financial Covenants and Other Information.  Guarantor shall
provide  Lender  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 the
fiscal year of the Guarantor,  audited consolidated  financial statements of the
operations of the  Guarantor,  prepared in accordance  with  generally  accepted
accounting  principles  consistently applied ("GAAP") by a nationally recognized
accounting firm or independent  certified  public  accounting firm acceptable to
the Lender,  which  statements  shall include a balance sheet and a statement of
income  and  expenses  for the  year  then  ended.  In  lieu of its  obligations
hereunder,  Guarantor may submit to Lender,  upon its filing thereof,  a copy of
its  Form  10-K  as  filed  with  the  United  States  Securities  and  Exchange
Commission.

                  (b) Within  forty-five  (45) days after the end of each fiscal
quarter  (except the last  fiscal  quarter of each  fiscal  year) of  Guarantor,
unaudited interim financial statements of the operations of Guarantor, certified
as true and correct in all material respects by a financial officer of Guarantor
prepared in accordance with GAAP, which statements shall include a balance sheet
and a statement of income and  expenses  for the quarter then ended.  In lieu of
its  obligations  hereunder,  Guarantor  may submit to Lender a copy of its Form
10-Q as filed by  Guarantor  with the  United  States  Securities  and  Exchange
Commission

                  (c) 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 Guarantor,  together with
all supporting documentation and required schedules.


                                        5


<PAGE>



                  (d) Within  forty-five  (45) days after the end of each fiscal
quarter of Guarantor,  a certificate of the chief financial officer of Guarantor
confirming compliance with the covenants and requirements set forth above.

         The  Lender   reserves  the  right  to  require  such  other  financial
information of Guarantor in such form and at such other times (including monthly
or  more  frequently)  as  Lender  shall  deem  necessary,  in its  commercially
reasonable  discretion,  and Guarantor agrees promptly to provide or to cause to
be provided,  such  information to Lender.  All financial  statements must be in
form and  detail as Lender  may from time to time  request  in its  commercially
reasonable  discretion,   unless  such  Financial  Statements  are  prepared  in
accordance with GAAP.

         7.  Guaranty  is  a  Continuing  Obligation.  The  obligations  of  the
Guarantor  under this Guaranty shall be continuing,  absolute,  irrevocable  and
unconditional under all circumstances, and shall remain in full force and effect
or be reinstated, until all of the Guaranty Obligations shall have been paid and
performed  in  full,  irrespective  of  the  bankruptcy,   insolvency,   merger,
reorganization,  termination,  discontinuation or dissolution of the Borrower or
Owner or any  assignment  for the benefit of  creditors  by the  Borrower or the
Owner.  The  Guarantor  acknowledges  and agrees  that  Guarantor's  obligations
hereunder  shall apply to and continue with respect to any of the obligations of
the Borrower under the Loan Documents which are subsequently  recovered from the
Lender for the reasons set forth  below.  In the event that any payment by or on
the  behalf  of the  Borrower  to  Lender is held to  constitute  a  preference,
fraudulent  transfer or other voidable payment under any bankruptcy,  insolvency
or similar law, or if for any other reason the Lender is required to refund such
payment  or pay the  amount  thereof  to any  other  party,  including,  without
limitation,  as a  result  of the  appointment  of a  receiver,  intervenor,  or
conservator  of, or trustee or similar officer for, the Borrower or the Owner or
of any  substantial  part of their  property or  otherwise,  such payment by the
Borrower or any other party to the Lender shall not  constitute a release of the
Guarantor from any liability  hereunder,  and this Guaranty shall continue to be
effective or shall be reinstated  (notwithstanding any prior release,  surrender
or discharge by the Lender of this  Guaranty or of the  Guarantor),  as the case
may be, with respect to, and this  Guaranty  shall apply to, any and all amounts
so refunded by the Lender or paid by the Lender to another party (which  amounts
shall constitute part of the Guaranty Obligations), and any interest paid by the
Lender and any  attorneys'  fees,  costs and  expenses  paid or  incurred by the
Lender in connection  with any such event. It is the intent of the Guarantor and
the Lender that the obligations  and liabilities of the Guarantor  hereunder are
absolute and  unconditional  under any and all  circumstances and that until the
Guaranty  Obligations are fully and finally paid and performed,  and not subject
to refund or  disgorgement,  the  obligations  and  liabilities of the Guarantor
hereunder  shall not be discharged or released,  in whole or in part, by any act
or occurrence that might,  but for the provisions of this Guaranty,  be deemed a
legal or  equitable  discharge  or release of a  guarantor.  The Lender shall be
entitled to continue to hold this Guaranty in its possession for a period of one
year  from  the  later of (a) the date  the  Guaranty  Obligations  are paid and
performed  in  full,  or  (b)  if not  paid  in  accordance  with  the  Guaranty
Obligations,  the  expiration  or  termination  of the  Loan,  and  for so  long
thereafter  as may be  necessary  to enforce  any  obligation  of the  Guarantor
hereunder and/or to exercise any right or remedy of the Lender hereunder.

         8.       Waiver and Release.  Guarantor shall have no right of
subrogation   in  or  under  the   Guaranty   Obligations,   and  no  rights  of
reimbursement, indemnity or contribution from the Borrower


                                        6


<PAGE>



or Owner or any other rights by law, equity, statute or contract that would give
rise to a creditor- debtor  relationship  between  Guarantor and the Borrower or
Guarantor and the Owner.  Guarantor shall have no security interests,  liens, or
other similar interests and collection rights related thereto, in any way in any
of the collateral which is conveyed under the Loan Documents as security for the
Guaranty  Obligations,  until after such time as the  Guaranty  Obligations  are
satisfied in full.  Guarantor hereby  explicitly  waives and releases any of the
above-described rights of subrogation,  reimbursement,  indemnity,  contribution
(until such time as the Guaranty  Obligations  are  satisfied in full),  and any
right to require  the  marshaling  of  Borrower's  or Owner's  assets  under any
circumstances.

         9. Continuing  Validity.  Guarantor further agrees that the validity of
this  Guaranty and the  obligations  of Guarantor  hereunder  shall in no way be
terminated, affected or impaired (a) by reason of the assertion by Lender of any
rights or remedies which it may have under or with respect to either the Note or
the other Loan Documents, against any person obligated thereunder or against the
Owner,(b) by reason of any failure to file or record any of such  instruments or
to take or perfect any security intended to be provided  thereby,  (c) by reason
of the commencement of a case under the Bankruptcy Code by or against any person
obligated  under  the Note or the  other  Loan  Documents,  or the  death of any
Guarantor,  or (d) by reason of any payment made on the Guaranty  Obligations or
any other  indebtedness  arising  under the Note or the  other  Loan  Documents,
whether made by Borrower or Guarantor or any other person,  which is required to
be refunded  pursuant to any bankruptcy or insolvency  law; it being  understood
that no payment so refunded  shall be  considered as a payment of any portion of
the Guaranty Obligations, nor shall it have the effect of reducing the liability
of  Guarantor  hereunder.  It is further  understood,  that if Borrower or Owner
shall have taken advantage of, or be subject to the protection of, any provision
in the  Bankruptcy  Code, the effect of which is to prevent or delay Lender from
taking any remedial action against Borrower or Owner,  including the exercise of
any option Lender has to declare the Guaranty Obligations due and payable on the
happening  of any  default or event by which  under the terms of the Note or the
other Loan  Documents,  the Guaranty  Obligations  shall become due and payable,
Lender may, as against Guarantor, nevertheless, declare the Guaranty Obligations
due and  payable  and  enforce  any or all of its  rights and  remedies  against
Guarantor provided for herein.

         10.      Notice.  All notices given under this Guaranty shall be in
writing and shall be either hand  delivered or mailed,  by certified  U.S. mail,
return receipt  requested,  first class postage prepaid,  to the other party, at
its address set forth below or at such other address as such party may designate
by notice to the other party:

                  (a)      If to Guarantor:

                           Capital Senior Living Corporation
                           14160 Dallas Parkway, Suite 300
                           Dallas, Texas  75240
                           Attention:  David R. Brickman, Esq.



                                        7


<PAGE>



                           with a copy to:

                           Winston W. Walp II, Esq.
                           Jenkens & Gilchrist, P.C.
                           1445 Ross Avenue, Suite 3200
                           Dallas,  Texas 75202

                  (b)      If to Lender:

                           Newman Financial Services, Inc.
                           1801 California Street, Suite 3700
                           Denver, Colorado  80202
                           Attention: Servicing Department

                           with a copy to:

                           Ballard Spahr Andrews & Ingersoll, LLP
                           601 13th Street, NW, Suite 1000 South
                           Washington, DC  20005-3807
                           Attention: Kelly M. Wrenn, Esq.

         11. No Waiver by Lender;  Remedies. No failure on the part of Lender or
the  holder  of the Note to  exercise,  and no delay in  exercising,  any  right
hereunder or thereunder shall operate as a waiver thereof;  nor shall any single
or partial  exercise of any right hereunder or thereunder  preclude any other or
further  exercise  thereof or the exercise of any other right.  Guarantor hereby
agrees  that all rights and  remedies  that Lender is afforded by reason of this
Guaranty   are  separate  and   cumulative   and  may  be  pursued   separately,
successively,  or concurrently, as Lender deems advisable. In addition, all such
rights and  remedies  are  non-exclusive  and shall in no way limit or prejudice
Lender's  ability to pursue any other legal or equitable rights or remedies that
may be  available.  Failure  of Lender  to insist  upon  strict  performance  or
observance of any of the terms,  provisions and covenants  hereof or to exercise
any right herein contained shall not be construed as a waiver or  relinquishment
of the right to demand strict  performance at another time. Receipt by Lender of
any payment or  performance  on the Guaranty  Obligations  shall not be deemed a
waiver of the breach of any  provision  hereof or of any of the Loan  Documents.
Without  limiting the generality of the foregoing,  Guarantor agrees that in any
action by Lender by reason of the Guaranty Obligations, Lender, at its election,
may proceed (a) against Guarantor together with Borrower,  (b) against Guarantor
and  Borrower,  individually,  or (c)  against  Guarantor  only  without  having
commenced any action against, or having obtained any judgment against, Borrower.

         12.    Certain Waivers by Guarantor.  AS A FURTHER INDUCEMENT TO LENDER
TO MAKE THE LOAN AND IN CONSIDERATION  THEREOF,  GUARANTOR FURTHER COVENANTS AND
AGREES THAT SERVICE OF ANY SUMMONS AND  COMPLAINT  OR OTHER  PROCESS IN ANY SUCH
ACTION OR PROCEEDING MAY BE MADE IN ACCORDANCE WITH SECTION 15 BELOW.  GUARANTOR
HEREBY WAIVES NOTICE OF THE ACCEPTANCE HEREOF, PRESENTMENT,  DEMAND FOR PAYMENT,
PROTEST,


                                        8


<PAGE>



NOTICE OF PROTEST,  OR ANY AND ALL NOTICE OF  NON-PAYMENT,  NON-  PERFORMANCE OR
NON-OBSERVANCE, OR OTHER PROOF, OR NOTICE OR DEMAND.

         THE GUARANTOR FURTHER WAIVES AND AGREES NOT TO ASSERT: (A) ANY RIGHT TO
REQUIRE LENDER TO PROCEED  AGAINST  BORROWER OR OWNER OR TO PROCEED  AGAINST ANY
OTHER GUARANTOR,  OR TO PROCEED AGAINST OR EXHAUST ANY SECURITY FOR THE GUARANTY
OBLIGATIONS, OR TO PURSUE ANY OTHER REMEDY AVAILABLE TO LENDER, OR TO PURSUE ANY
REMEDY IN ANY  PARTICULAR  ORDER OR MANNER,  (B) THE  BENEFIT OF ANY  STATUTE OF
LIMITATIONS AFFECTING GUARANTOR'S LIABILITY HEREUNDER OR THE ENFORCEMENT HEREOF,
(C)  NOTICE  OF THE  EXISTENCE,  CREATION  OR  INCURRING  OF  NEW OR  ADDITIONAL
INDEBTEDNESS  OF BORROWER OR OWNER TO LENDER,  (D) THE BENEFITS OF ANY STATUTORY
PROVISION  LIMITING THE LIABILITY OF A SURETY, (E) ANY DEFENSE ARISING BY REASON
OF ANY  DISABILITY  OR OTHER  DEFENSE OF  BORROWER  OR OWNER OR BY REASON OF THE
CESSATION  FROM  ANY  CAUSE  WHATSOEVER  (OTHER  THAN  PAYMENT  IN  FULL) OF THE
LIABILITY OF BORROWER OR OWNER FOR THE GUARANTY OBLIGATIONS, (F) THE BENEFITS OF
ANY  STATUTORY  PROVISION  LIMITING  THE RIGHT OF LENDER TO RECOVER A DEFICIENCY
JUDGMENT,  OR TO OTHERWISE  PROCEED  AGAINST ANY PERSON OR ENTITY  OBLIGATED FOR
PAYMENT OF THE GUARANTY OBLIGATIONS,  AFTER ANY FORECLOSURE OR TRUSTEE'S SALE OF
ANY  SECURITY  FOR  THE  GUARANTY  OBLIGATIONS,  AND (G) ANY  OTHER  DEFENSE  OR
CIRCUMSTANCE WHICH MAY CONSTITUTE A LEGAL OR EQUITABLE  DISCHARGE OF GUARANTOR'S
LIABILITY HEREUNDER,  ARISING FROM OR OUT OF THE LOAN, THE LOAN DOCUMENTS AND/OR
THE FACILITY.

         13.  Waiver  of  Automatic  Stay.  GUARANTOR  HEREBY  AGREES  THAT,  IN
CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE
FOLLOWING COVENANT IS A MATERIAL  INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE
EVENT  THAT  GUARANTOR  SHALL (A) FILE WITH ANY  BANKRUPTCY  COURT OF  COMPETENT
JURISDICTION  OR BE THE SUBJECT OF ANY PETITION  UNDER ANY SECTION OR CHAPTER OF
TITLE 11 OF THE UNITED STATES CODE, AS AMENDED  ("BANKRUPTCY  CODE"), OR SIMILAR
LAW OR  STATUTE,  (B) BE THE  SUBJECT OF ANY ORDER FOR RELIEF  ISSUED  UNDER THE
BANKRUPTCY  CODE OR SIMILAR  LAW OR  STATUTE,  (C) FILE OR BE THE SUBJECT OF ANY
PETITION SEEKING ANY  REORGANIZATION,  ARRANGEMENT,  COMPOSITION,  READJUSTMENT,
LIQUIDATION,  DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL
OR STATE ACT OR LAW  RELATING TO  BANKRUPTCY,  INSOLVENCY,  OR OTHER  RELIEF FOR
DEBTORS, (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY
TRUSTEE,  RECEIVER,  CONSERVATOR,  OR  LIQUIDATOR,  OR (E) BE THE  SUBJECT OF AN
ORDER,  JUDGEMENT  OR  DECREE  ENTERED  BY ANY COURT OF  COMPETENT  JURISDICTION
APPROVING  A  PETITION   FILED  AGAINST   GUARANTOR   FOR  ANY   REORGANIZATION,
ARRANGEMENT,  COMPOSITION,  READJUSTMENT,  LIQUIDATION,  DISSOLUTION, OR SIMILAR
RELIEF  UNDER ANY  PRESENT  OR FUTURE  FEDERAL OR STATE ACT OR LAW  RELATING  TO
BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, TO THE EXTENT


                                        9


<PAGE>



PERMITTED  BY  APPLICABLE  LAW AND  SUBJECT  TO  COURT  APPROVAL,  LENDER  SHALL
THEREUPON BE ENTITLED AND GUARANTOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT
CONTEST,  AND AGREES TO  STIPULATE  TO RELIEF FROM ANY  AUTOMATIC  STAY OR OTHER
INJUNCTION  IMPOSED BY SECTION  362 OF THE  BANKRUPTCY  CODE,  OR SIMILAR LAW OR
STATUTE  (INCLUDING,  WITHOUT  LIMITATION,  RELIEF FROM ANY EXCLUSIVE PERIOD SET
FORTH IN SECTION 1121 OF THE  BANKRUPTCY  CODE) OR OTHERWISE,  ON OR AGAINST THE
EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO LENDER AS PROVIDED IN
THIS AGREEMENT AND/OR THE LOAN DOCUMENTS,  AND AS OTHERWISE PROVIDED BY LAW, AND
GUARANTOR HEREBY IRREVOCABLY WAIVES GUARANTOR'S RIGHTS TO OBJECT TO SUCH RELIEF.

         14.  Guaranty  of  Payment.  This is a guaranty  of payment  and not of
collection  and upon any  Event of  Default  under the Loan  Documents  which is
continuing,  Lender may, at its option,  proceed promptly  against  Guarantor to
collect and recover the full amount of the  liability  hereunder  or any portion
thereof,  without  proceeding  against  Borrower,  Owner or any other person, or
foreclosing upon,  selling,  or otherwise disposing of or collecting or applying
against any of the Facilities or other collateral for the Loan.

                  (a)      Joint and Several Liability. [Intentionally Deleted]
                           ---------------------------

                  (b) Assignment.  Lender may assign this Guaranty or any rights
or powers  hereunder,  in whole or in part, in  connection  with the sale of the
Note and  assignment of any of the  Mortgages and shall notify  Guarantor of any
such assignment. The duties and obligations of Guarantor may not be delegated or
transferred by Guarantor  without the prior written  consent of Lender which may
be withheld in its absolute discretion. Each reference herein to Lender shall be
deemed to include its successors  and assigns,  to whose favor the provisions of
this Guaranty  shall also inure.  Each  reference  herein to Guarantor  shall be
deemed to include the heirs, executors,  administrators,  legal representatives,
successors  and  assigns  of  Guarantor,  all of  whom  shall  be  bound  by the
provisions of this  Guaranty.  If any party hereto shall be a  partnership  or a
limited  liability  company,  the  agreements  and  obligations  on the  part of
Guarantor herein contained shall remain in force and application notwithstanding
any changes in the  individuals  or entities  composing the  partnership  or the
limited liability company, and the term "Guarantor" shall include any altered or
successive   partnerships  and  any  altered  or  successive  limited  liability
companies  but  the  predecessor   partnerships  and  their  partners,  and  the
predecessor limited liability companies and their members,  shall not thereby be
released from any obligations or liability hereunder.

         15.  Waiver of Trial by Jury;  Service  of  Process.  GUARANTOR  HEREBY
WAIVES TRIAL BY JURY IN ANY ACTION OR  PROCEEDING TO WHICH THE GUARANTOR AND THE
LENDER  MAY BE  PARTIES  ARISING  OUT  OF,  IN  CONNECTION  WITH,  OR IN ANY WAY
PERTAINING  TO, THIS  AGREEMENT  AND/OR ANY OF THE OTHER LOAN  DOCUMENTS.  IT IS
AGREED AND UNDERSTOOD THAT THIS WAIVER  CONSTITUTES A WAIVER OF TRIAL BY JURY OF
ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS,  INCLUDING CLAIMS
AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY,
WILLINGLY AND VOLUNTARILY MADE BY THE GUARANTOR, AND THE GUARANTOR HEREBY


                                       10


<PAGE>



REPRESENTS  THAT NO  REPRESENTATIONS  OF FACT OR  OPINION  HAVE BEEN MADE BY ANY
INDIVIDUAL  TO INDUCE  THIS  WAIVER OF TRIAL BY JURY OR TO IN ANY WAY  MODIFY OR
NULLIFY ITS EFFECT. THE GUARANTOR FURTHER REPRESENTS AND WARRANTS THAT GUARANTOR
HAS BEEN  REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS
WAIVER BY INDEPENDENT  LEGAL COUNSEL  SELECTED BY GUARANTOR OF  GUARANTOR'S  OWN
FREE WILL,  AND THAT  GUARANTOR HAS HAD THE  OPPORTUNITY  TO DISCUSS THIS WAIVER
WITH COUNSEL.  GUARANTOR  AGREES THAT SERVICE UPON ITS  REGISTERED  AGENT IN THE
STATE OF TEXAS SHALL BE VALID REGARDLESS OF GUARANTOR'S  WHEREABOUTS AT THE TIME
OF SUCH  SERVICE AND  REGARDLESS  OF WHETHER  GUARANTOR  RECEIVES A COPY OF SUCH
SERVICE,  PROVIDED  THAT THE LENDER  SHALL HAVE  MAILED A COPY TO  GUARANTOR  IN
ACCORDANCE WITH THE NOTICE PROVISIONS HEREIN.  GUARANTOR AGREES TO PAY ALL COURT
COSTS AND  REASONABLE  ATTORNEY'S  FEES  INCURRED BY LENDER IN  CONNECTION  WITH
ENFORCING  ANY PROVISION OF THIS NOTE.  NOTWITHSTANDING  THE  FOREGOING,  LENDER
AGREES TO USE REASONABLE  EFFORTS TO PROVIDE GUARANTOR WITH NOTICE OF THE FILING
OF ANY LAWSUIT BY LENDER AGAINST GUARANTOR.

         16.      Power and Authority.  Guarantor (and its representative,
executing below, if any) has full corporate power,  authority and legal right to
execute this Guaranty and to perform all its obligations under this Guaranty.

         17.  Complete  Agreement;  Modification;  Waiver.  All  understandings,
representations and agreements  heretofore had with respect to this Guaranty are
merged into this Guaranty  which are  incorporated  herein which alone fully and
completely  expresses the  agreement of Guarantor and Lender.  In no event shall
any  modification  or waiver of the  provisions  of this  Guaranty be  effective
unless in writing  executed  by Lender.  Any waiver  granted by Lender  shall be
applicable only in the specific instance for which it is given.

         18.      Governing Law.  THIS GUARANTY SHALL BE GOVERNED BY, AND
CONSTRUED  IN  ACCORDANCE  WITH,  THE LAWS OF THE STATE OF TEXAS AND  APPLICABLE
FEDERAL LAW.

         19.  Counterparts;  Construction.  This Guaranty may be executed in any
number of  counterparts,  all of which when taken together shall  constitute one
and the same instrument. Words of any gender used in this Guaranty shall be held
and  construed to include the other gender,  and words in the singular  shall be
held and construed to include the plural,  and words in the plural shall be held
and  construed  to include the  singular,  unless  this  Guaranty or the context
otherwise requires.

         20. Review by Guarantor.  GUARANTOR HAS RECEIVED COPIES OF, AND HAS HAD
THE  OPPORTUNITY  TO  REVIEW,  ALL OF THE  LOAN  DOCUMENTS  REFERRED  TO IN THIS
GUARANTY.  GUARANTOR HAS DISCUSSED THIS GUARANTY WITH GUARANTOR'S LEGAL COUNSEL,
AND  GUARANTOR  UNDERSTANDS  THE NATURE  AND EXTENT AND THE LEGAL AND  PRACTICAL
CONSEQUENCES OF GUARANTOR'S LIABILITY UNDER THIS GUARANTY.


                                       11


<PAGE>



         21.  No Oral Agreement.  To the extent allowed by law, Guarantor agrees
to be bound by the terms of the following notice:

         NOTICE:           THIS GUARANTY AND THE OTHER LOAN DOCUMENTS CONSTITUTE
                           A  WRITTEN   AGREEMENT  WHICH  REPRESENTS  THE  FINAL
                           AGREEMENT   BETWEEN   THE  PARTIES  AND  MAY  NOT  BE
                           CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
                           ORAL AGREEMENTS OF THE PARTIES.

                           THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
                           PARTIES RELATING TO THE LOAN.

                         [SIGNATURES BEGIN ON NEXT PAGE]


                                       12


<PAGE>



         IN  WITNESS  WHEREOF,  this  Guaranty  has been  duly  executed  by the
undersigned as of the day and year first written above.

WITNESS:                                    GUARANTOR:

                                            CAPITAL SENIOR LIVING CORPORATION, a
                                            Texas corporation

                                            By:                           (SEAL)
--------------------------                     ---------------------------
                                               Lawrence A. Cohen
                                               Chief Executive Officer
--------------------------
Name [Please print]




DISTRICT OF COLUMBIA                        )


                  On this _____ day of August,  2000, before me, the undersigned
officer,  personally  appeared  Lawrence A. Cohen,  who, I am satisfied,  is the
individual  named in the  foregoing  instrument  as Chief  Executive  Officer of
Capital Senior Living Corporation,  the Guarantor, and, did on behalf of Capital
Senior Living Corporation  acknowledge that he signed,  sealed and delivered the
foregoing instrument as his voluntary act and deed as Chief Executive Officer of
Capital Senior Living Corporation,  on behalf of said corporation, as Guarantor,
for the purposes therein contained.


                                                  ------------------------------
                                                  Notary Public

                                                                          [SEAL]

My Commission expires:


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



                                       13


<PAGE>




                                                     EXHIBIT A
<TABLE>
<CAPTION>


                                                 Pool C Facilities

     Property Name/Location                           Address                      Description of Facility
--------------------------------------------------------------------------------------------------------------

<S>                                          <C>                                  <C>
Independence Village of Peoria               1201 West Northmoor Road             157-unit independent living
Peoria, Illinois                             Peoria, IL 61614                     facility

Independence Village of East Lansing         2530 Marfitt Road                    155-unit independent living
East Lansing, Michigan                       East Lansing, MI  48823              facility

Independence Village of Raleigh              3113 Charles B. Root Wynd            164-unit independent living
Raleigh, North Carolina                      Raleigh, NC  27607                   facility

Independence Village of Winston-             2945 Reynolda Road                   156-unit independent living
Salem                                        Winston-Salem, NC 27105              facility
Winston-Salem, North Carolina

</TABLE>


                                       14


</TEXT>
</DOCUMENT>
