-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sez6mLj0yV0yqqHH69Itnt5Lbnm4bB1mYZZ6e44pRgWo3UvqDy1MpyBfxM37f1M+ bcRBkBNB2oGVQz2D0SqAJA== 0000950128-98-001037.txt : 19980929 0000950128-98-001037.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950128-98-001037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALANCED CARE CORP CENTRAL INDEX KEY: 0001024096 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 251761898 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13845 FILM NUMBER: 98716343 BUSINESS ADDRESS: STREET 1: 5021 LOUISE DR STREET 2: SUITE 200 CITY: MECHANICSBURG STATE: PA ZIP: 17055 BUSINESS PHONE: 7177966100 MAIL ADDRESS: STREET 1: 5021 LOUISE DR SUITE 200 STREET 2: 5021 LOUISE DR SUITE 200 CITY: MECHANICSBURG STATE: PA ZIP: 17055 10-K 1 BALANCED CARE CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-13845 BALANCED CARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 25-1761898 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION)
5021 LOUISE DRIVE, SUITE 200 MECHANICSBURG, PENNSYLVANIA 17055 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK, $ .001 PAR VALUE AMERICAN STOCK EXCHANGE (TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes CHECK MARK No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 18, 1998 was approximately $79,688,869, based on the last reported sales price of $6.25 as reported by the American Stock Exchange. Shares of common stock known by the registrant to be beneficially owned by executive officers or directors of the registrant are not included in the computation; however, shares of common stock reported to be beneficially owned by holders of 5% or more of the common stock are included in the computation. The registrant has made no determination whether any of such persons are "affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number of shares of Common Stock outstanding on September 18, 1998 was 16,697,407 shares. Documents incorporated by reference: Selected portions of the 1998 Annual Report to Stockholders -- Part I, Part II and Part IV of this Report. Selected portions of the 1998 Proxy Statement -- Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1--BUSINESS THE COMPANY Balanced Care Corporation (the "Company") was formed in April 1995 to develop senior care continuums which meet the needs of upper middle, middle and moderate income populations in non-urban, secondary markets. The Company considers upper middle, middle and moderate income populations to consist of those individuals whose income and assets enable them to afford senior living and care services at average daily rates of $85, $75 and $65, respectively. The Company intends to utilize assisted living facilities in selected markets as the primary entry point and service platform to develop a care continuum (the "Balanced Care Continuum") consisting of various health care and hospitality services, including, where appropriate, physical, occupational and speech therapy, home health care services on an intermittent basis, dementia and Alzheimer's services and skilled/subacute care delivered in a skilled nursing setting, enabling residents to age in place. The Company believes that non-urban, secondary markets are underserved, highly fragmented and less prone to intense competition from larger providers. The Company believes that these factors will enable it to establish a leading position as a provider of a market differentiated, consumer preferred continuum of senior care services in such markets. To achieve its goals, the Company intends to: (i) provide a range of high quality, individualized senior care services and programs, (ii) develop the Balanced Care Continuum, (iii) focus on non-urban, secondary markets, (iv) continue developing the Company's signature series assisted living facilities, (v) pursue growth through selective acquisitions, (vi) achieve the benefits of regional density by clustering, and (vii) expand referral networks and strategic alliances. Since its inception, the Company has grown primarily through acquisitions and development. During the fiscal year ended June 30, 1998 ("Fiscal 1998"), the Company completed acquisitions of Heavenly Health Care, Inc. d/b/a Joe Clark Residential Care Homes in August 1997, Feltrop's Personal Care Home and Butler Senior Care in October 1997, Triangle Retirement Services, Inc. d/b/a Northridge Retirement Center in December 1997, Gethsemane Affiliates in January 1998 and Potomac Point in June 1998. The Company completed the divestiture of Long-Term Care Pharmaceutical, Inc. (the "Pharmacy") in October 1997 (the "Pharmacy Divesture"). As of June 30, 1998, the Company has also designed, developed and opened 12 of its Outlook Pointe(R) signature series assisted living facilities, 11 of which are managed by the Company and one of which is leased by the Company. As of June 30, 1998, the Company operated a total of 37 assisted living facilities, 13 skilled nursing facilities and four independent living facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Virginia, Ohio and Wisconsin, as well as a home health agency in Missouri and eight rehabilitation therapy operations located in Pennsylvania and Arkansas. Assuming completion of the planned divestiture of the Company's assisted living facilities in Wisconsin, at June 30, 1998, the Company owned nine, leased 27 and managed 11 senior living and health care facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Ohio and Virginia with a capacity for 1,729 assisted living residents, 1,294 skilled nursing patients and 120 independent living residents. The Balanced Care Continuum is being developed to deliver consumer-focused health care and hospitality services that balance seniors' desire for independence with their evolving health care needs. The Company's philosophy includes the belief that wellness and preventative therapy will strengthen residents, improve their health and forestall the deterioration that generally accompanies aging, thus extending their lives and lengths of stay in assisted living facilities. The Company's wellness-oriented program, Balanced Gold(R), has been developed to predict and proactively address resident care needs, including stabilizing and improving residents' cognitive, emotional and physical well being. The Balanced Gold(R) program is included in the Company's core services package at each of its Outlook Pointe(R) signature series assisted living facilities, and the Company intends to implement all or part of the program at its other assisted living facilities as appropriate. Preventative, restorative and rehabilitative services are also expected to be made available to residents through outpatient medical rehabilitation, home health care, programs for residents with Alzheimer's and other services provided by the Company or by an alliance partner or other third party. By offering services and programs that are intended to enable residents to stay healthier longer and prolong their stay at assisted living facilities, the Company believes that its services and programs will address the preferences and needs of seniors, while at the same time 2 3 forestalling the need for residents to move to a more costly long-term care setting, such as a skilled nursing facility. As resident needs mandate migration into a skilled nursing or subacute program, the Company believes that its skilled nursing facilities will provide a transition for the resident with a focus on demonstrated outcomes and cost effective care. The Company believes that its approach to senior care will enable it to be a leading provider of a continuum of senior care services in targeted non-urban, secondary markets. THE SENIOR CARE INDUSTRY The senior care industry is characterized by a wide range of living accommodations and health care services. For those who are able to live in a home setting, home health care and other limited services can be provided. Community housing or retirement centers, which are commonly referred to as independent living facilities, are also available to persons who need limited assistance, such as with meal preparation, housekeeping and laundry. Assisted living facilities are typically for those persons whose physical or cognitive frailties have reached a state where other living accommodations can no longer provide the level of care required but who do not yet need the continuous medical attention provided in a skilled nursing facility. Generally, assisted living facilities provide a combination of housing and 24-hour personal support services designed to assist seniors with activities of daily living ("ADLs"), which include bathing, eating, personal hygiene, grooming, ambulating and dressing. Certain assisted living facilities also offer higher levels of personal assistance for residents with Alzheimer's disease or other forms of dementia. Skilled nursing facilities provide care for those who need a minimum of three hours of nursing per day. The senior care industry, including assisted living, is highly fragmented and characterized by numerous providers whose services, experience and capital resources vary widely. The Company believes that few operators of assisted living facilities, particularly those in secondary markets, focus on providing a range of senior living and health care services that have been designed to enable residents to stay in a preferred setting longer. Most of the markets targeted by the Company for development have existing assisted living and/or skilled nursing providers. The Company believes that the assisted living industry is evolving as the preferred alternative to meet the growing demand for a cost effective setting for those seniors who cannot live independently due to physical or cognitive frailties, but who do not require the more intensive medical attention provided by a skilled nursing facility. According to the United States Bureau of the Census, approximately 45% of persons aged 85 years and older, approximately 24% of persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need assistance with ADLs. In 1996, according to industry estimates, the assisted and independent living industries generated approximately $12 to $14 billion in revenues. The Company believes that a number of factors will contribute to the continued growth of the assisted living industry, including: Consumer Preference The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents as well as their families, who are often the decision makers for seniors. Assisted living is generally a more attractive, service oriented and lower cost alternative to other types of senior care facilities, offering seniors greater independence and allowing them to age in place in a residential setting. Cost Effectiveness Assisted living facilities provide a cost effective alternative to other types of facilities that may provide more care than a senior needs. The average annual cost for a patient in a skilled nursing facility approaches $40,000 and, in the case of a private pay patient, can exceed $75,000 per year in certain markets. In contrast, the average annual cost for a resident of an assisted living facility is generally 30% to 50% lower than skilled nursing facilities located in the same region. Additionally, the Company also believes that the cost of assisted living services compares favorably with home health care, particularly when costs associated with housing, meals and personal care assistance are taken into consideration. 3 4 Changing Income and Family Dynamics The Company believes that the increasing income of seniors, as well as changing family dynamics, will increase the demand for assisted living and health care services. According to the United States Bureau of the Census, the median income of the elderly population has been increasing. Accordingly, the Company believes that the number of seniors who are able to afford high-quality senior residential services such as those offered by the Company will also increase. Additionally, the number of two-income households has increased over the last decade and the geographical separation of senior family members from their adult children has risen. As a result, many families that traditionally would have provided the care and services offered by the Company to senior family members are less able to do so. The Company believes that assisted living facilities represent an attractive and independent environment for senior family members. Demographics The target market for the Company's services are persons generally 75 years and older, one of the fastest growing segments of the United States population. According to the United States Bureau of the Census, the portion of the United States population aged 75 and older is expected to increase by approximately 29%, from approximately 13.0 million in 1990 to approximately 16.8 million by the year 2000, and the number of persons aged 85 and older, as a segment of the United States population, is expected to increase by approximately 43%, from approximately 3.0 million in 1990 to over 4.3 million by the year 2000. Furthermore, the number of persons afflicted with Alzheimer's disease is also expected to increase in the coming years. According to data published by the American Psychiatric Association, Alzheimer's disease affects approximately 5% to 8% of individuals over the age 65, 15% to 20% of individuals over the age of 75 and 25% to 50% of individuals over the age of 85. Supply/Demand Imbalance The Company believes that non-urban secondary markets are often underserved with respect to assisted living facilities. Based on bed need analyses performed by the Company in connection with the prospective development of its assisted living facilities, the need for the Company's services in its target markets is typically three times the number of beds sought to be developed. When combined with its market differentiated services package, the Company believes that it is well positioned to be the preferred provider of senior care services in its targeted markets. While the senior population is growing significantly, the supply of skilled nursing beds per thousand persons aged 85 years and older is declining. This imbalance may be attributed to a number of factors in addition to the aging of the population. Many states, in an effort to maintain controls of Medicaid expenditures on long-term care, have implemented more restrictive certificate-of-need regulations or similar legislation that restricts the supply of licensed skilled nursing facility beds. Additionally, acuity-based reimbursement systems have encouraged skilled nursing facilities to focus on higher acuity patients. The Company also believes that high construction costs and limits on government reimbursement for the full cost of construction and start-up expenses will also contain the growth and supply of traditional skilled nursing beds. These factors, taken in combination, result in relatively fewer skilled nursing beds available for the increasing number of seniors who require assistance with ADLs but do not require 24-hour per day medical attention. CARE AND SERVICES PROGRAMS The Company offers a continuum of services to seniors that includes assisted living, medical rehabilitation, home health care, dementia and Alzheimer's services, skilled nursing, subacute care and independent living services. Assisted Living Services Admission; Resident Care Plan. The Company intends that its assisted living facilities be the principal entry point into the Balanced Care Continuum. As a result, the assisted living admission process is crucial to the proper placement of residents and in the development of tailored resident care plans. Upon admission to one of the Company's assisted living facilities, a physician assesses the resident's health status and determines his or her 4 5 care needs. A lifestyle assessment is also conducted in consultation with the resident, as well as his or her family and medical consultants, to determine the resident's care and services preferences. From this assessment, each resident's individualized care plan is developed to ensure that all staff members rendering services meet the resident's specific needs and preferences whenever possible. Each resident's care plan is reviewed periodically to determine when a change in services is needed. The Company seeks to provide assisted living services that allow a resident to maintain a dignified, independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility as possible for their well being. Care and Services. The Company offers a range of assisted living care and services which are available 24 hours per day at each of its assisted living facilities. The core services package offered by the Company includes personal care, support and certain supplemental services. Personal care services include assistance with ADLs, such as ambulating, bathing, dressing, eating, grooming, personal hygiene, monitoring or assistance with medications and confusion management. Support services include meal preparation, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services and transportation services. Supplemental services, which are offered at an extra charge, include extra transportation services, beauty and barber services, extra laundry services and non-routine care services. The Balanced Gold(R) program is included in the Company's core services package at each of its signature series assisted living facilities, and the Company intends to implement all or part of the program at its other assisted living facilities as appropriate. To the extent permitted by state regulatory requirements, the Company's facilities have been designed to accommodate special programs including those for residents with Alzheimer's and other forms of dementia, as well as medical rehabilitation and home health care services. Medical rehabilitation services are provided by certified physical, occupational and speech therapists and psychologists, with physician oversight. Home health care services are provided through the Company's licensed home health agency in Missouri or by a third party. Balanced Gold(R) The Company's Balanced Gold(R) program is a wellness-oriented program which assists residents in remaining independent and involved with their families, other residents and the local community. The Balanced Gold(R) program is included in the Company's core services package at each of its Outlook Pointe(R) signature series assisted living facilities, and the Company intends to implement all or part of the program at its other assisted living facilities as appropriate. Balanced Gold(R) is designed to address a variety of factors that may affect adversely the health of assisted living residents, including balance and gait difficulties, incontinence, cognitive impairment, stress due to pain and chronic conditions and grieving due to multiple losses in the resident's life. The Balanced Gold(R) program includes tai chi exercise to improve balance and gait problems; individually designed exercise programs, including incontinence and pelvic exercises and diet guidelines; "Wisdom Keeper" programs to challenge and stimulate mental capabilities; "Relaxation and Vitality" programs of deep breathing, stretching exercises and sitting and walking meditation; "Golden Living" programs to assist with grief and loss; gardening to encourage nurturing and independence; and walking programs to promote health and fitness. Company staff, in consultation with the resident, as well as his or her family and medical consultants, determine which of the Balanced Gold(R) activities are appropriate and best suited to the resident's needs, interests and capabilities. Alzheimer's "Keepsakes" Program. The Company has developed, with the assistance of its Health Care Advisory Board, an approach to Alzheimer's and other forms of dementia that includes specialized assessments and clinical approaches for early and accurate detection, placement and intervention. To meet the needs of residents with Alzheimer's disease and other related forms of dementia, the Company has developed its "Keepsakes" program to maintain familiarity, reduce confusion, and still provide a pleasant and appropriate living environment for these residents. The Company's approach to Alzheimer's also calls for support groups to be organized in conjunction with the local chapter of the Alzheimer's Association to provide a safe and supportive community through which caregivers can share their thoughts and concerns. The Company's signature series assisted living facilities are designed to enable these specialized services to be provided at all newly developed facilities, and to the extent permitted by state regulatory requirements, the Company intends to implement this program at its other assisted living facilities. The Company currently operates an Alzheimer's "Keepsakes" program at three of its assisted living facilities and at one dedicated unit in its skilled nursing facilities. The Company plans to develop its Alzheimer's 5 6 "Keepsakes" program at each of its existing assisted living facilities and in all facilities being developed. These units feature areas specifically designed to provide attention, care and services needed to help residents with Alzheimer's maintain a higher quality of life. The Alzheimer's team members are specially trained to understand behavior, maximize function, promote safety and encourage resident independence. Medication Management. Each assisted living facility contracts with a pharmacy to provide prescription drugs to those residents who desire to utilize the pharmacy. Residents are free to use a pharmacy of their choice. Additionally, subject to state regulatory requirements, at the resident's request, and based on the facility's assessment of the resident's needs, the assisted living facility may manage a resident's medications by storing prescription drugs within the facility, delivering the drugs to the resident and reminding the resident when the medications need to be taken. Assisted Living Charges. Monthly assisted living resident charges are based, in part, on the type of assisted living suite selected and are set at rates designed to be within the means of seniors in the secondary markets served by the Company. In addition to its core services package, at certain facilities, including all newly developed Outlook Pointe(R) facilities, the Company offers three additional levels of services to residents whose frailties or medical condition are more acute. These additional levels of services are currently offered at prices equal to 16%, 23% and 30% above the price of the Company's core assisted living services package. As of June 30, 1998, approximately 17%, 10% and 19% of the Company's assisted living residents at those facilities received services at the first, second and third levels of additional services, respectively. Substantially all of the Company's current revenues from the provision of assisted living services are attributable to private payors. MEDICAL REHABILITATION SERVICES The Company's philosophy for addressing seniors' living and care needs includes the belief that preventative therapy will strengthen residents, improve their overall health and forestall the deterioration that generally accompanies aging, thus extending their lives and lengths of stay in assisted living facilities. The Company has developed specialized medical rehabilitation programs to address the needs of seniors, including programs to specifically address balance and gait difficulties, incontinence, lymphodema, pain and osteoarthritis, as well as specific preventative therapy programs for seniors. For residents in the Company's signature series assisted living facilities, each rehabilitation program is followed up with specialized regimens offered as part of the Balanced Gold(R) program. Should a resident's condition warrant additional rehabilitation, on-staff and contracted therapists are available. The Company currently provides medical rehabilitation services, including physical and occupational therapy, on an outpatient basis to residents at eight of its assisted living facilities as well as to patients in a surrounding community. These outpatient services are provided through the Company's licensed rehabilitation agencies in Pennsylvania and Arkansas or certain of its skilled nursing facilities. Rehabilitation services are provided at the Company's other facilities through contract services, outpatient rehabilitation facilities or home health agencies. The Company intends to establish or acquire additional licensed rehabilitation agencies in those states where it is developing assisted living facilities. These agencies will enable the Company to provide medical rehabilitation services to its assisted living residents and the surrounding communities. Additionally, the Company may enter into strategic joint venture relationships with rehabilitation providers to provide medical rehabilitation in certain markets. Substantially all of the Company's current revenues from provision of medical rehabilitation services are attributable to federal government reimbursement programs. HOME HEALTH CARE SERVICES The Company provides home health care services through its licensed home health agency in Missouri to residents of its assisted and independent living facilities and patients from the surrounding areas. The services the Company provides include: (i) general and specialty nursing services to individuals with acute illness, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs; (ii) therapy services 6 7 consisting of, among other things, physical, occupational and speech therapies; (iii) personal care services and assistance with ADLs; (iv) hospice care for persons in the final phases of incurable disease; (v) respiratory, monitoring, medical equipment and supplies; and (vi) a comprehensive range of home infusion and enteral therapies. The Company intends to develop, acquire or manage home health care service businesses in order to provide home health care services at other facilities and to seniors living in surrounding areas. Assisted living residents receiving home health care services may require skilled nursing services as their medical conditions warrant. Substantially all of the Company's current revenues from provision of home health care services are attributable to federal government reimbursement programs. SKILLED NURSING SERVICES The Company currently provides skilled nursing services at three facilities in Pennsylvania (169 licensed beds) and ten facilities (1,125 licensed beds) in southwest Missouri. The Company's skilled nursing facilities provide traditional long-term care through 24-hour per day skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides. The Company also offers physical rehabilitation at its skilled nursing facilities, including physical, occupational and speech therapies. Board certified physicians direct the skilled nursing services offered at these facilities. For Fiscal 1998, approximately 80% of the Company's patient services revenues were attributable to federal and state government reimbursement programs. INDEPENDENT LIVING SERVICES The Company operates four independent living facilities in Missouri located adjacent to skilled nursing facilities operated by the Company. Services provided at such facilities include: meal preparation, housekeeping, laundry and transportation. These facilities are licensed as assisted living facilities and may be converted from independent living facilities at the option of the Company. All of the Company's current revenues from the provision of independent living services are attributable to private payors. THE OUTLOOK POINTE(R) SIGNATURE SERIES ASSISTED LIVING FACILITY MODELS The architectural and interior design concepts of the Outlook Pointe(R)signature series assisted living facility models incorporate the Company's operating philosophy of protecting resident privacy, enabling freedom of choice, encouraging independence and fostering individuality in a home-like setting. The buildings are residential in appearance, designed as "neighborhoods" within a "community," and offer a home-like environment, while being constructed to institutional health care facility standards. The building designs incorporate the Company's mission and dedication to providing a new outlook for seniors, encouraging choice, wellness, and vitality. The Company believes that the Outlook Pointe(R) signature series facilities achieve its mission and goals to meet the needs and expectations of its residents and their families, providing a safe environment and care in a home-like setting where the Company is responsive to each individual's special needs and the universal desire for independence, dignity and purpose. The Company believes that its residential environment also accomplishes several other objectives, including: (i) lessening the trauma of change for residents and their families; (ii) achieving operational efficiencies; (iii) facilitating resident mobility and ease of access by caregivers; and (iv) differentiating the Company from other assisted living and long-term care operators. The models are freestanding buildings that range in size from 48 units to 106 units and are designed to accommodate the full range of assisted living services offered by the Company, including the Company's Balanced Gold(R) and Alzheimer's "Keepsakes" programs. The buildings are usually one to two stories and of incombustible construction, and are designed to accommodate future expansion. The interior layout is designed to promote efficient delivery of resident care as well as resident independence. The design of the facilities allows specialized grouping of residents, including residents receiving care in the Alzheimer's "Keepsakes" program, and a central core for resident interaction. In addition, the buildings are designed with fully-equipped therapy 7 8 gyms and treatment rooms for provision of medical rehabilitation services. The buildings range in size from 27,000 square feet to 68,000 square feet and are adaptable to construction on sites ranging from two to five acres. Approximately 33% of a building is devoted to common areas and contains resident amenities including a parlor, living room, dining room, club room, library, activity room, beauty/barber shop, spa, laundry, wellness (therapy) center and neighborhood lounges with pantries. The support areas include administrative offices, resident services offices, a kitchen, common laundry and housekeeping/maintenance areas. Resident units, including studio, privacy, companion and one bedroom suites, are functionally grouped as "neighborhoods" within a "community" and are configured internally to provide private bath, living area and sleeping area with emergency call systems and cable television service. Porches, terraces, gardens and activity areas are designed to fulfill outdoor interests of residents. The Company has three basic building plan design prototypes which provide it with flexibility in adapting the model to a particular site and to accommodate the various income and care levels demanded in a particular market. Daily rates currently range from $71.00 to $105.00 at the Prototype A facilities, from $65.00 to $85.00 at the Prototype B facilities, and from $58.00 to $66.00 at the Prototype C facilities. OPERATING FACILITIES The following table sets forth certain information as of June 30, 1998 with respect to the senior living and care facilities (other than its Wisconsin assisted living facilities which the Company plans to sell) operated by the Company.
OWNED (O)/ RESIDENT CAPACITY LEASED (L)/ BY CARE LEVEL (1) MANAGED --------------------- FACILITY LOCATION (M) ALF SNF ILF ----------------- ----------- ----- ----- --- Currently Operated: PENNSYLVANIA Allison Park Outlook Pointe(R) at Allison Park(2) L 79 -- -- State College Outlook Pointe(R) at State College(3) L 54 -- -- Altoona Outlook Pointe(R) at Altoona(4)(5) M 54 -- -- Harrisburg Outlook Pointe(R) at Harrisburg (5)(13) M 57 -- -- Reading Outlook Pointe(R) at Reading(5)(14) M 56 -- -- Bloomsburg Bloomsburg Manor(6) L 69 -- -- Darlington Balanced Care at Darlington(7) O 92 -- -- Kingston Kingston Manor(6) L 78 -- -- Kingston Health Care Center(6) L -- 65 -- Peckville Mid Valley Manor(6) L 71 -- -- Blakely Pine Health Care Center(6) L -- 38 -- Old Forge Old Forge Manor(6) L 49 -- -- Wyoming West View Manor(6) L 50 -- -- Butler Silver Haven Summit(8) O 36 -- -- Sarver Sterling Care of Sarver(8) O 40 -- --
8 9
OWNED (O)/ RESIDENT CAPACITY LEASED (L)/ BY CARE LEVEL (1) MANAGED --------------------- FACILITY LOCATION (M) ALF SNF ILF ----------------- ----------- ----- ----- --- Saxonburg Sterling Care of Saxonburg(8) O 123 -- -- Bloomsburg Gethsemane Retirement Community and Rehabilitation Center (9) O -- 66 -- Millville Gethsemane Assisted Living Community(9) O 51 -- -- ----- ----- --- SUBTOTAL: 959 169 0 ----- ----- --- ARKANSAS Sherwood Outlook Pointe(R) at Sherwood(5)(10) M 57 -- -- Mountain Home Outlook Pointe(R) at Mountain Home(4)(5) M 57 -- -- Maumelle Outlook Pointe(R) at Maumelle(4)(5) M 57 -- -- Pocohontas Outlook Pointe(R) at Pocohontas(4)(5) M 57 -- -- Blytheville Outlook Pointe(R) at Blytheville(5)(11) M 59 -- -- ----- ----- --- SUBTOTAL: 287 0 0 ----- ----- --- VIRGINIA Harrisonburg(16) M 57 -- -- Outlook Pointe(R) at Harrisonburg Roanoke(16) M 64 -- -- Outlook Pointe(R) at Roanoke Stafford(17) -- -- Potomoc Point Residential and Geriatric Care Facility L 40 ----- ----- --- SUBTOTAL: 161 0 0 ----- ----- --- OHIO Ravenna Outlook Pointe(R) at Ravenna(5)(15) M 57 -- -- NORTH CAROLINA Raleigh Northridge Retirement Center(12) O 117 -- -- ----- ----- --- MISSOURI Dixon Balanced Care, Dixon(18) L -- 60 -- Hermitage Balanced Care, Hermitage(18) L -- 120 -- Lebanon Balanced Care, Lebanon North(18) L -- 180 -- Balanced Care, Lebanon South(18) L 12 106 -- The Terraces at Lebanon South(18) L -- -- 31 Nixa Balanced Care, Nixa(18) L -- 82 -- The Terraces at Nixa(18) L -- -- 30 Republic Balanced Care, Republic(18) O -- 127 --
9 10
OWNED (O)/ RESIDENT CAPACITY LEASED (L)/ BY CARE LEVEL (1) MANAGED --------------------- FACILITY LOCATION (M) ALF SNF ILF ----------------- ----------- ----- ----- --- MISSOURI -- (CONTINUED) Springfield Balanced Care, Springfield East(18) L -- 120 -- The Terraces at Springfield East(18) L -- -- 31 Balanced Care, Springfield West I(18) L -- 90 -- Balanced Care, Springfield West II(18) L -- 180 -- The Terraces at Springfield(19) L 34 -- -- Nevada Balanced Care, Nevada(18) O -- 60 -- The Terraces at Nevada(19) L -- -- 28 The Terraces of Balanced Care(20) L 27 -- -- The Terraces of Balanced Care(20) L 25 -- -- Butler The Terraces of Balanced Care(20) L 25 -- -- Lamar The Terraces of Balanced Care(21) L 25 -- -- ----- ----- --- SUBTOTAL: 148 1,125 120 ----- ----- --- TOTAL 1,729 1,294 120 ===== ===== ===
- --------------- (1) "ALF" means assisted living facility, "SNF" means skilled nursing facility and "ILF" means independent living facility. The Company's ILFs in Missouri are licensed as ALFs and may be converted to ALFs as the needs of its residents so require. (2) Acquired March 1996. (3) Opened May 1997. (4) Opened October 1997. (5) In the third quarter of fiscal 1998, the Company sold certain of the assets and assigned its leasehold interest in this facility to an Operator/Lessee (as defined herein). The Company manages the facility for the Operator/Lessee and has an option to acquire the stock of the Operator/Lessee. See "Business--Development." (6) Acquired January 1997. (7) Acquired October 1997. (8) Acquired October 1997. A 29-bed expansion at Sterling Care of Saxonburg was completed and opened in early December 1997. (9) Acquired January 1998. (10) Opened September 1997. (11) Opened November 1997. (12) Acquired December 1997. (13) Opened December 1997. (14) Opened January 1998. (15) Opened February 1998. (16) Opened May 1998. (17) Acquired June 1998. (18) Acquired August 1996. (19) Acquired January 1997. (20) Acquired May 1997. (21) Acquired August 1997. 10 11 The Company anticipates that the names of the following facilities in Pennsylvania will be changed upon receipt of required regulatory approvals: Kingston Manor to Outlook Pointe Commons(SM) at Kingston; Westview Manor to Outlook Pointe Commons(SM) at Wyoming; Mid Valley Manor to Outlook Pointe Commons(SM) at Mid Valley; Bloomsburg Manor to Outlook Pointe Commons(SM) at Bloomsburg; Old Forge Manor to Outlook Pointe Commons(SM) at Old Forge; Gethsemane Assisted Living to Outlook Pointe Commons(SM) at Eyers Grove; Balanced Care at Darlington to Outlook Pointe Commons(SM) at South Beaver; Sterling Care of Saxonburg to Outlook Pointe Commons(SM) at Saxonburg; Sterling Care of Sarver to Outlook Pointe Commons(SM) at Sarver; Silver Haven Summit to Outlook Pointe Keepsakes(SM) at Butler; Kingston Healthcare Center to Balanced Care, Kingston; Blakely Pine Healthcare Center to Balanced Care, Mid Valley; and Gethsemane Retirement Community and Rehabilitation Center to Balanced Care, Bloomsburg. In addition, the Company anticipates that Northridge Retirement Village will be changed to Outlook Pointe(R) at Northridge. The above table excludes the Company's seven Wisconsin assisted living facilities which the Company intends to sell. The facilities consist of seven owned assisted living facilities located in Beloit, Mauston, Monroe, Pardeville, Portage, Tomah and Waupun, Wisconsin. In June 1997, management determined that the market in which its Wisconsin assisted living facilities are located does not provide adequate opportunity to achieve the operational efficiencies necessary for the Company to operate profitably. As a result, the Company committed to a plan for the disposal of its Wisconsin assisted living facilities. In July 1998, the Company entered into a letter of intent to sell the Wisconsin assisted living facilities to a midwestern-based company for $2,900,000, the closing of which is subject to the negotiation of a definitive asset purchase agreement. The transaction is expected to close by October 31, 1998. The Company also decided in June 1997 to sell the Pharmacy in order to focus on its assisted living and skilled nursing operations and approached national pharmacy providers about acquiring the Pharmacy. In October 1997, the Company completed the Pharmacy Divestiture for net proceeds of approximately $4,700,000, which provided some of the working capital needed to sustain the Company's growth. DEVELOPMENT An integral element of the Company's growth is the design, development and opening of the Outlook Pointe(R) signature series assisted living facilities to be owned by independent Operators/Lessees and managed by the Company. The Company believes that the signature series assisted living facilities meet the needs of the upper middle, middle and moderate income populations in its target markets and are designed to provide the broad range of services contemplated by its Balanced Care Continuum strategy over a range of pricing options. The Company currently plans to develop more than 40 Outlook Pointe(R) signature series assisted living facilities by June 30, 1999 and to continue its internal development program beyond fiscal 1999. In evaluating a potential market, the Company utilizes an in-house developed bed need model and a market analysis which considers such factors as bed need, population, mobility factors, income and age demographics, target site visibility, probability of obtaining zoning approvals, estimated level of market demand, the opportunity for the Company to offer a range of services comprising the senior living and health care continuum and the ability to maximize management resources in a specific market by clustering its development and operating activities. The primary phases of the Company's development process include: (i) the pre-contract phase, representing the period prior to obtaining a development agreement with the owner; (ii) the pre-construction phase, (iii) the construction phase; and (iv) the initial occupancy phase. The primary milestones in the Company's development process are: (i) site selection and signing of a land purchase option agreement; (ii) obtaining permits and approvals necessary to commence construction; (iii) execution of a development agreement; (iv) completion of construction and obtaining a certificate of occupancy; and (v) operational set-up and training prior to opening. Once a market has been identified, site selection and signing of a land purchase option agreement typically takes approximately 30 to 90 days and obtaining permits and approvals takes approximately 60 to 90 days. 11 12 Architectural design is done in-house by a Company architect, while hands-on construction functions are contracted to outside contractors. Construction of an assisted living facility normally takes six to twelve months, depending on geographic location, weather conditions and the size of the facility. Pre-opening operational activities begin approximately six months prior to the opening of the facility. After a facility receives a certificate of occupancy, residents usually begin to move in immediately. The Company generally expects occupancy of newly developed assisted living facilities to reach a targeted occupancy of 92% within 10 to 21 months after opening, depending on the size of the facility. The Company believes that it differentiates itself from many of its competitors by its senior management's expertise in the development of rehabilitation hospitals and other health care facilities and operations as well as its in-house market research and development capabilities. The development group is currently comprised of 15 professionals who have experience in real estate and health care facility development, including analysts who target potential markets through the use of an in-house developed bed need model and developers who conduct market analysis to identify market bed needs, select appropriate building sites, and coordinate all local and state governmental license and permit approvals. The design and construction group is responsible for adapting prototypical facility design to the selected site, making adjustments to the prototype plans to comply with local building codes and awarding and monitoring contracts with third party architects and general contractors. In addition, the Company's design and construction group conducts field inspections and construction draw approvals during the construction life of the project. The development group and the design and construction group collectively have over 150 years of construction management experience. The Company's financial analysts generate five year projections for each anticipated project. These projections are based on all costs associated with a particular prototype facility chosen for that locale. All projects are subject to predetermined hurdle rates for return on investment and minimum margins for net operating income and pretax income. The senior management team and Board of Directors approve all development projects. The costs to develop and construct an Outlook Pointe(R) signature series assisted living facility is generally projected to range between $44,000 and $85,000 per bed. To date, the Company has developed assisted living facilities primarily for health care REITs. The Company's recent and future development projects involve or are expected to involve entering into development agreements with third party owners, which are, or are expected to be, REITs. An independent third-party company (the "Operator/Lessee") leases or is expected to lease the assisted living facility from the REIT when construction has been completed and provide funding for working capital during the initial occupancy period. The Company manages, or expects to manage, the assisted living facility pursuant to management agreements with the Operator/Lessee, which generally provide for terms of two to nine years. Each management agreement provides, or is generally expected to provide, for annual fees approximating 6% of net revenue of the facility. In exchange for an option payment the Company will have the option to purchase the stock or assets of the Operator/Lessee for an exercise price based on formulas set forth in an option agreement. The following table sets forth certain information as of June 30, 1998 regarding the Outlook Pointe(R) signature series assisted living facilities for which the zoning, permitting or construction process has commenced and which the Company is developing for other independent Operators/Lessees. For each of the locations, the Company or the prospective third-party owner has, at a minimum, an option to purchase the real estate on which the facility is being developed. The Company expects to manage each facility for an Operator/Lessee. In addition to facilities listed below, the Company is also engaged in preliminary development activities with respect to other possible sites for future facilities. 12 13
ESTIMATED CONSTRUCTION ESTIMATED ASSISTED LIVING RESIDENT START DATE COMPLETION DATE FACILITY LOCATION CAPACITY (QUARTER END) (QUARTER END) ----------------- -------- ------------- --------------- PENNSYLVANIA Scranton 63 Commenced Sept. 1998 Lewisburg 70 Commenced Sept. 1998 Hampden 104 Commenced Dec. 1998 Midvalley 40 Commenced Sept. 1998 Lewistown 69 Commenced Sept. 1998 Dillsburg 66 Commenced Dec. 1998 Berwick 69 Commenced Dec. 1998 York 66 Commenced Mar. 1999 Chippewa 66 Commenced Mar. 1999 Lakemont Farms 106 Commenced June 1999 Shippensburg 66 Commenced Dec. 1998 Bridgeport 66 Sept. 1998 June 1999 Loyalsock 66 Sept. 1998 June 1999 Lebanon 66 Sept. 1998 Sept. 1999 Hanover 62 Commenced Dec. 1999 Bangor 72 Dec. 1998 Sept. 1999 Selingsgrove 72 Dec. 1998 Sept. 1999 Johnstown 66 Dec. 1998 Sept. 1999 ----- Subtotal: 1,255 OHIO Lima 66 Commenced Sept. 1998 Mansfield 66 Commenced Sept. 1998 Xenia 104 Commenced Dec. 1998 Medina 80 Commenced Dec. 1998 Hilliard 106 Commenced June 1999 Centerville 106 Commenced June 1999 Akron 106 Commenced Sept. 1999 Steubenville 80 Dec. 1998 Dec. 1999 Westerville 106 Sept. 1998 Sept. 1999 Sagamore Hills 106 Sept. 1998 Dec. 1999 ----- Subtotal: 926 TENNESSEE Jackson 66 Commenced Dec. 1998 Murfreesboro 66 Commenced Dec. 1998 Bristol 66 Commenced Mar. 1999 Hendersonville 66 Commenced June 1999 Johnson City 66 Commenced June 1999 Kingsport 66 Commenced June 1999 Knoxville 106 Commenced Sept. 1999 Greeneville 66 Dec. 1998 Sept. 1999 Clarksville 66 Sept. 1998 Sept. 1999 Morristown 66 Dec. 1998 Sept. 1999 OakRidge 66 Dec. 1998 Sept. 1999 Bartlett 66 Dec. 1998 Sept. 1999 Maryville 66 Dec. 1998 Sept. 1999 ----- Subtotal: 898
13 14
ESTIMATED CONSTRUCTION ESTIMATED ASSISTED LIVING RESIDENT START DATE COMPLETION DATE FACILITY LOCATION CAPACITY (QUARTER END) (QUARTER END) ----------------- -------- ------------- --------------- FLORIDA Pensacola 60 Commenced Mar. 1999 Tallahassee 106 Commenced June 1999 Titusville 66 Sept. 1998 Sept. 1999 Elfers 66 Sept. 1998 Sept. 1999 Rockledge 116 Dec. 1998 Dec. 1999 Leesburg 66 Dec. 1998 Dec. 1999 ----- Subtotal: 480 VIRGINIA Danville 66 Commenced Sept. 1998 Chesterfield 80 Commenced June 1999 Blacksburg 66 Dec. 1998 Sept. 1999 ----- Subtotal: 212 KENTUCKY Frankfort 66 Dec. 1998 Sept. 1999 Danville 66 Dec. 1998 Sept. 1999 Florence 66 Dec. 1999 Dec. 1999 ----- Subtotal: 198 WEST VIRGINIA Martinsburg 66 Commenced Dec. 1998 Teay's Valley 66 Commenced Sept. 1999 Vienna 66 Sept. 1998 July 1999 ----- Subtotal: 198 INDIANA Anderson 80 Commenced Dec. 1998 Evansville 106 Commenced June 1999 ----- Subtotal: 186 MICHIGAN Warren 116 Dec. 1998 Dec. 1999 LOUISIANA Baton Rouge 80 Dec. 1998 Dec. 1999 MISSISSIPPI Ridgeland 80 Dec. 1998 Sept. 1999 MARYLAND Hagerstown 66 Commenced Mar. 1999 NORTH CAROLINA Greensboro 50 Commenced Sept. 1998 ----- TOTAL: 4,745 =====
ACQUISITIONS AND STRATEGIC ALLIANCES Since its inception, the Company's growth has been substantially attributable to the acquisition of 18 assisted living facilities with a capacity for 1,043 residents, 13 skilled nursing facilities with a capacity for 1,294 patients, and four independent living facilities with a capacity for 120 residents, as well as a home health care agency (excluding the Company's seven Wisconsin assisted living facilities and the Pharmacy). The Company intends to continue to pursue selective acquisitions to enter new markets, to enable the Company to develop and provide one or more components of the Balanced Care Continuum in its markets, to create clusters of assisted 14 15 living facilities in selected markets, to benefit from operating efficiencies and to develop a leading market position. The Company believes that clustering facilities geographically will create opportunities for operating efficiencies such as leveraging existing corporate office and regional operations and marketing staff, lowering workers' compensation and other employee benefit costs and lowering food and supplies costs. In addition, the Company will consider entering into joint ventures or other alliances with skilled nursing, medical rehabilitation, home health care and other senior health care providers as a cost effective means of providing a full range of care to residents of the Company's facilities and a senior care continuum that eases an individual's transition from one setting to another. In evaluating a potential acquisition, the Company considers, among other factors: (i) location, construction quality, condition and design of the facility; (ii) current and projected facility cash flow; (iii) the ability to increase revenue, occupancy and cash flows by providing a full range of services; (iv) cost of facility repositioning (including renovations, if any); (v) the reputation of the facility in the local market; and (vi) the extent to which the acquisition will complement the Company's development plans and strategy. The Company's senior management and its acquisition team have extensive experience in the acquisition of assisted living and other health care facilities, including market assessment, identification of targets, due diligence, negotiating, pricing, structuring, closing and integrating acquisitions. Additionally, the Company's senior management team has extensive acquisition experience as well as contacts with a large number of assisted living, medical rehabilitation, home health care and skilled nursing and subacute facility owners and operators. The Company believes that the current fragmentation of the assisted living industry will continue to create potential acquisition candidates for the Company and that the competitive nature of the market will increase selling activity as smaller, less capitalized providers face increasing competition from larger competitors who can offer a broader range of services at more attractive prices. The Company believes that through the reputation of its management and the quality of the assisted living facilities it operates and is currently developing, it will become an attractive acquirer for assisted living facilities. The Company may pursue both strategic and single portfolio acquisitions that meet its quality standards and present the opportunity to increase its profitability. OPERATIONS CENTRALIZED CORPORATE MANAGEMENT The Company's corporate and other administrative functions are centralized so that the facility-based management and staff can focus on resident care. The Company's corporate office, located in Mechanicsburg, Pennsylvania, is generally responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations; (ii) performing accounting and finance functions; (iii) developing and implementing employee training programs and materials; (iv) coordinating human resources; (v) food services functions; (vi) coordinating marketing functions; and (vii) providing strategic direction. In addition, financing, development, construction and acquisition activities, including feasibility and market studies, facility design, development and construction management are conducted by the Company's corporate development and acquisition teams. The Company manages the operations of each of its facilities through standardized management reporting and centralized control of capital expenditures and the purchase of larger and more frequently used supplies. Facility expenditures are monitored by regional operations teams headed by one of the Company's Regional Vice Presidents who are responsible for the financial performance of the facilities in their region. The operational activities of the Company's assisted living facilities are directed by the Company's Senior Vice President -- Outlook Pointe(R) Division, its Vice President -- Missouri Division, its Vice President -- Keystone Division and its Vice President -- Rehab Therapy Division, who are responsible, with the regional Vice Presidents, for the opening and operation of these facilities. COMMUNITY-BASED MANAGEMENT An assisted living Community Director or skilled nursing Facility Administrator manages the operations at each assisted living or skilled nursing facility, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including assisted living, 15 16 food service, maintenance, activities, security, housekeeping, and, where applicable, nursing. Directors and Administrators are compensated based on attaining certain quality service goals and on the financial goals of the facility. In most cases, each facility also has department managers that direct nursing or care services, dining services, activities, transportation, environmental, housekeeping and marketing functions. In its assisted living communities, the Company has adopted the concept of a multi-task work environment whereby each employee's responsibilities span a number of traditional job descriptions. For example, an employee may, during the course of a day, provide housekeeping, food delivery service, activities, and assistance with ADLs to residents. On-site care managers and residents' assistants provide most of the actual resident care in conjunction with a small support team consisting of a nurse, a housekeeper, a maintenance helper, an administrative coordinator and a small dining service team. The Company actively recruits personnel to maintain adequate staffing levels at its existing facilities, as well as additional staff for new or acquired facilities, prior to opening. The Company has adopted comprehensive recruiting and screening programs for management for positions that utilize personnel profiling, corporate office interviews, and background checks. The Company offers system-wide training and orientation for its resident care employees, department level managers, and executive staff at the facility level through Company-sponsored programs. QUALITY ASSURANCE AND TRAINING The Company's quality assurance program is designed to achieve, maintain and enhance high performance in the area of resident and family satisfaction, employee development, fiscal responsibility and corporate integrity, along with continuous internal quality improvement. Corporate office staff oversee the implementation of the quality assurance program at each of the Company's facilities. Resident and family participation is encouraged and feedback is sought through surveys, focus groups, resident councils and discussions with family members. The Company provides intensive training programs to ensure that its quality standards are achieved by its employees at each facility, and strives to meet employees' needs and provide a respectful and cooperative environment. Employees are responsible for handling finances with efficiency and integrity and adhere to an ethical code of conduct. Internal standards for all areas of service have been established which the Company believes meet or exceed those of regulatory agencies. Monitoring and improving internal performance in regard to these standards is facilitated by cross-functional performance improvement teams. Additionally, inspections of each facility are conducted regularly by corporate staff who review all aspects of operations, care and services provided. INTEGRATION OF ACQUIRED FACILITIES The Company has developed a plan and organization structure to begin a complete integration of each acquired facility immediately following its acquisition. An interdisciplinary integration team begins conversion of financial and information systems at closing, with operations, marketing and human resource policies and procedures converted during the first six months of operation. MARKETING The Company's marketing program has been developed by the corporate marketing staff under the direction of the Company's Vice President of Sales and Marketing and is modified in accordance with the needs of each region in which the Company operates. Marketing focuses on creating awareness of the Company and its services among prospective residents, their families, professional referral sources and other key decision makers. Marketing efforts are implemented on a regional and local level under the supervision of the corporate marketing staff. Corporate office personnel develop the overall marketing strategies for each facility, produce all marketing materials, maintain marketing databases, oversee direct mailings, place all media advertising and assist facility personnel in the initial development and continuing refinement of marketing plans. The Company conducts pre-construction surveys of age- and income-qualified prospective residents and their families living within a certain radius of the proposed assisted living construction site to ensure that the Company understands the needs and demands of a particular marketplace. Focus groups are organized during the pre-opening phase to collect data 16 17 from key community representatives about seniors' needs and to inform them of the Company's approach to senior care. Before opening a new assisted living facility, the Company contacts referral sources and conducts marketing programs that generate public awareness beginning with the start of construction and intensify several months prior to opening of the facility. An on-site Marketing Coordinator and Community Director are at the facility approximately four and six months, respectively, prior to the opening of the facility and are supported by the Company's corporate marketing department. The Company generally expects occupancy of newly developed assisted living facilities to reach targeted occupancy of 92% within 10 to 21 months after opening, depending on the size of the facility. Once a facility opens, the Company believes that satisfied residents and their families are its most important referral sources. The Company's emphasis on high quality services and resident satisfaction create a strong referral base in the surrounding community. In addition, the Company focuses on developing the reputation of the facilities for quality care and its Balanced Gold(R) program among potential referral sources. In markets where the Company offers multiple components of the Balanced Care Continuum, such as assisted living, outpatient rehabilitation services, skilled nursing, subacute care, home care and hospice services, a network approach to sales and marketing is utilized. A community-based sales force that understands the health care environment of each market, including competitor positioning, referral patterns and the maturity of managed care, facilitates cross selling of the Company's services. Direct sales efforts increase referrals for all services through the account management of professional referral sources such as physicians, hospitals, and managed care plans. MANAGEMENT INFORMATION SYSTEMS The Company's Information Systems department, under the direction of the Company's Vice President of Corporate Services, develops, implements and maintains management and financial systems which enable the Company to closely monitor operating costs and quickly distribute financial and operating information to appropriate levels of management in a cost efficient manner. The Company uses flexible input methods and communications to allow for distributed data collection and analysis. Management believes that its current data systems are adequate for current operations and provide the flexibility to accommodate the planned growth of its operations without disruption or significant modification to existing systems through fiscal year 1999. The Company plans to begin upgrading the existing financial system during fiscal year 1999 to accommodate future growth. While cost estimates have not been finalized, the system upgrade will involve expansion of the Company's systems staff and a substantial financial commitment. The Company uses high quality hardware and operating systems from current and proven technologies to ensure reliability and optimum system performance. In an effort to evaluate these systems for year 2000 issues, the Company has formed an oversight committee. This committee has performed an inventory and risk assessment of the Company's internal operating systems, as well as an inventory of third party relationships and their impact on the Company. Based upon the committee's review, the Company has determined that third party relationships provide the highest risk related to year 2000 issues. The third party relationships deemed most critical are the Company's banking relationships and its relationships with third party intermediaries for nursing home reimbursement. The Company is in the process of developing contingency plans to address these critical relationships. The oversight committee will also oversee the testing of any internal information technology systems which do not contain embedded software. The testing of these systems and the time frame for completion are in the planning stages. For those non-critical systems which cannot be readily tested, the Company will inquire of third party vendors as to the status of year 2000 compliance within these systems. Based upon the Company's progress to date in addressing year 2000 issues, management does not expect these issues to have a material impact on financial position, results of operations or cash flows in future periods, including the cost of remediation. 17 18 COMPETITION The Company is one of the 50 largest providers of assisted living services in the United States in terms of resident capacity, according to the Largest Providers Annual Survey 1998, published by KPMG Peat Marwick LLP. The health care industry is highly competitive and the Company believes that competition in its current and targeted markets will continue to increase. There are currently few regulatory and other barriers to entry in the assisted living industry. The Company faces competition for residents from numerous local, regional and national providers of facility-based assisted living and long-term care, including skilled nursing facilities, as well as medical rehabilitation and home health care providers. Many of the Company's present and potential competitors are significantly larger or have greater financial resources than those of the Company. The Company believes the primary competitive factors in the senior care industry are: (i) reputation for, and commitment to, high quality care; (ii) quality of support services offered (such as home health care and food services); (iii) price of services; (iv) physical appearance and amenities associated with the facilities; and (v) location. Because seniors tend to choose senior living facilities near their homes, the Company's principal competitors are other senior living and long-term care facilities in the same geographic areas as the Company's facilities. The Company also competes with other health care businesses with respect to attracting and retaining nurses, technicians, aides, and other high quality professional and non-professional employees and managers. Additionally, in implementing its growth strategy the Company will face competition for the development and acquisition of assisted living, skilled nursing and related senior care facilities. Management believes that the Company's competitive position in its targeted markets is enhanced by the disciplined practices applied to market selection. The Company utilizes an in-house developed model for market analysis to determine the net bed need expected for each community. This analysis considers such factors as population, income and age demographics and the number of competitor beds in the market to arrive at the demonstrated net bed need, excluding the facility proposed by the Company. A net bed need of at least three times the size proposed is necessary in order for the Company to proceed to enter that market. Also considered are the opportunity for the Company to offer a range of services comprising the senior living and health care continuum, the sophistication of competitor facilities, and the ability to maximize management resources in a specific market by clustering its development and operating activities. GOVERNMENT REGULATION The health care industry is subject to extensive federal, state and local regulation. The various layers of governmental regulation affect the Company's business by controlling its growth, requiring licensure or certification of its facilities, regulating the use of its facilities and controlling reimbursement to the Company for services provided. Licensing, certification and other applicable governmental regulations vary from jurisdiction to jurisdiction and are revised periodically. It is not possible to predict the content or impact of future legislation and regulations affecting the health care industry. Laws and regulations governing skilled nursing facilities are particularly extensive and establish minimum standards in a variety of areas, including physical plant specifications; personnel training and education; the level of nursing, physician, rehabilitation, social, dietary and recreational services to be provided; and safety and evacuation plans. The Omnibus Reconciliation Act of 1987 ("OBRA") significantly redefined the scope and nature of federal regulations governing skilled nursing facilities certified to participate in the Medicare and Medicaid programs, with an emphasis on resident rights and quality of care. Skilled nursing facilities are also generally subject to and must comply with state and/or local building and fire codes. In addition, some states, including Missouri, have certificate of need laws applicable to skilled nursing facilities. Certificate of need laws require that a state agency determine that a sufficient need exists for a facility before it may be opened. These laws may also regulate permitted capital expenditures and expansion of services and beds. Skilled nursing facilities, like other health care providers, are periodically inspected by governmental agencies with authority over licensing and certification for participation in the Medicare and Medicaid programs. New survey and certification requirements under OBRA for participation in the Medicare and Medicaid programs became effective in 1995, significantly changing the process of surveying long term care facilities. These requirements established a graduated system of penalties and remedies to match the severity of the deficiency. 18 19 Facility deficiencies may result in the imposition of fines and penalties, a need to undertake corrective actions, a temporary moratorium on admissions pending correction of deficiencies, and could result in decertification from the Medicare and Medicaid programs or loss of licensure and closure of the facility. To date, these regulations have not had a material adverse effect on the Company's operations. In July 1998, the Clinton Administration unveiled a series of administrative and proposed legislative reform measures designed to assure the delivery of quality care in nursing facilities. Included among these reforms is a requirement that survey inspections, currently conducted by state agencies to assess compliance with Medicare conditions of participation, occur more frequently and less predictably and that sanctions be imposed more rapidly. The Clinton Administration has further stated that if the state agencies are unable to enforce the quality measures effectively, the Health Care Financing Administration would contract with other organizations for survey and certification services. The federal government, through the Health Care Financing Administration, has proposed revisions to the conditions for participation in the Medicare program applicable to home health care providers. These revised conditions, as proposed, focus on matters such as patient rights, outcomes of care, patient assessment, care planning, and quality assessment. The Company is not able to predict at this time what the content of the final revised conditions will be or the impact the final conditions may have on the Company's home health care services. In response to concerns voiced by Congress and home health providers, the Health Care Financing Administration recently suspended compliance with this rule until at least February 15, 1999, pending the issuance of a new final rule. The Company's assisted living facilities are subject to regulation by various state and local agencies. There are currently no federal laws or regulations specifically governing assisted living facilities. State requirements relating to the licensing and operation of assisted living facilities vary from state to state; however, most states regulate many aspects of a facility's operations, including physical plant requirements; resident rights; personnel training and education; requisite levels of resident independence; administration of medications; safety and evacuation plans; and the level and nature of services to be provided, including dietary and housekeeping. In most states, assisted living facilities must also comply with state and local building and fire codes and certain other licenses or certifications, such as a food service license, may be required. In addition, in several states, including Arkansas, Missouri, Kentucky and New Jersey, certificate of need laws apply to assisted living facilities. North Carolina imposed a 12-month moratorium, effective August 28, 1997, on the addition of adult care home beds in the state, subject to certain exceptions. The exceptions include, among others, an exception for certain development or expansion plans submitted to the state prior to the date of the moratorium. The Company's development project in Greensboro, North Carolina is not subject to the moratorium since it meets the requirements of this exception. Although the moratorium has expired, it is anticipated that the moratorium will be reenacted retroactively to the date of expiration through August 26, 1999. Assisted living facilities are subject to periodic survey by governmental agencies with licensing authority. In certain circumstances, failure to satisfy survey standards could result in a loss of licensure and closure of a facility. Because assisted living facilities historically have not been considered as traditional health care entities and government and private insurers have not reimbursed providers for assisted living services, these facilities have not been subject to the degree of regulation which governs nursing homes and other health care providers. As assisted living emerges as a cost-effective alternative to nursing facility care, it is anticipated that assisted living facilities could become subject to more extensive regulation, particularly in the areas of licensure and reimbursement. The content of such regulations, the extent of any increased regulation and the impact of any such regulation on the Company cannot be predicted at this time and there can be no assurance that such regulations will not adversely affect the Company's business. As a Medicare and Medicaid provider with respect to its skilled nursing facilities and rehabilitation and home health care operations, the Company is subject to a variety of laws regulating relationships among health care facilities, providers and physicians. Among these laws is the federal "Stark Act" legislation which prohibits, with some exceptions, a physician from referring patients for certain designated health care services, including home health care and certain rehabilitation services, to entities in which the physician or a member of his or her family has a financial interest. In early 1998, proposed regulations relating to the Stark Act were issued. The Company is not able to predict at this time what the content of the final regulations will be or the impact the final regulations may have on the Company's business and operations. The Company, as a Medicare and Medicaid 19 20 provider, is also subject to federal anti-kickback laws which prohibit the payment or receipt of any remuneration in return for, or to induce, the referral of patients for items or services that are paid for, in whole or in part, by Medicare or Medicaid. Violation of these provisions could result in civil or criminal penalties, as well as exclusion from participation in the Medicare and Medicaid programs. There are currently a number of federal initiatives being undertaken to increase enforcement of the federal anti-kickback law and other antifraud and abuse provisions. The federal government, through the Office of Inspector General, recently released a model compliance plan for home health agencies. The model plan identifies a number of risk areas where home health agencies need to pay particular attention to their practices and further requires the home health agency to exercise oversight over parties with which it does business. The Company has established a corporate compliance code of conduct relating to, among other things, resident and patient care, and fraud and abuse/legal policy and procedures. Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5, 1997, contains a number of antifraud provisions designed to further fight abuse and enhance program integrity. Certain states have also enacted anti-kickback laws patterned on the federal law. The Company believes that its operations are in substantial compliance with the laws applicable to Medicare and Medicaid providers, including antifraud and abuse provisions; however, there can be no assurance that the administrative or judicial interpretation of such laws or the regulations promulgated thereunder will not in the future have a material adverse impact on the Company's operations or that the Company will not be subject to an investigation which would require a significant investment of time and manpower by the Company. Assisted living facilities may be eligible to participate as Medicaid providers and receive reimbursement through Medicaid waiver programs and managed care plans. If the Company elects to become a Medicaid provider with respect to its assisted living facilities, such entities would become subject to all of the requirements applicable to Medicaid providers, including the antifraud and abuse legislation. The Company derives a significant portion of its revenues from federal and state reimbursement programs. All of the skilled nursing facilities operated by the Company are certified to receive benefits under Medicare and Medicaid, and the Company's home health care agency is certified under Medicare. The reimbursement methodology for a variety of health care providers is changing significantly as a result of provisions contained in the Budget Act, which provisions could materially impact the Company's operations and financial condition. The Budget Act provides for the establishment of a prospective payment system ("PPS") for skilled nursing services (rather than the retrospective cost-based methodology in place prior to July 1, 1998). The PPS for skilled nursing facilities is being phased in over three cost reporting periods, commencing on or after July 1, 1998. During the transition period, the payment rate is based on a percentage blend of a facility-specific rate and a federal per diem rate. Once the PPS is fully implemented, skilled nursing facilities will be paid a federal per diem rate for covered services, which include routine and ancillary services and most capital-related costs. In conjunction with PPS, consolidated billing for Medicare Part A Services will be required for skilled nursing facilities. Under consolidated billing for Medicare Part A Services, facilities must bill Medicare for all of the services residents receive, including all therapy services. The Company's skilled nursing facilities began utilizing this new rate methodology on July 1, 1998. The Company estimates the new Medicare reimbursement rates will reduce Medicare revenues at the skilled nursing facilities by approximately $8,000,000 from fiscal 1998 levels. To maximize operating results under the new regulations the Company has embarked upon a program to reduce costs and manage acuity levels. These steps included: (i) a renegotiation of therapy service contracts; (ii) a reduction of nursing costs through managing hours worked to patient acuity; (iii) evaluation of the need for high-cost programs; and (iv) consolidating and eliminating certain non-patient related services. These operational changes are expected to reduce operating costs by approximately $6,500,000 in fiscal 1999 from fiscal 1998 levels. The net result of these changes is an expected decline of $1,500,000 in operating and pre-tax income in fiscal 1999 compared to fiscal 1998. These are estimates based on the volume of Medicare business and the acuity of patients experienced during fiscal 1998. Actual results in fiscal 1999 could vary depending upon, among other things, the number and acuity of Medicare patients admitted, and the Company's experience with programmatic management and cost control. The Company continues to evaluate the impact of the Budget Act upon future operating results. The Budget Act additionally establishes a PPS for home health care services pursuant to which all services which are currently paid on a reasonable cost basis will be paid on a prospective basis. The PPS for home health care services is to begin October 1, 1999, with a transition period not to exceed four years. Until such time as 20 21 there is full implementation of the PPS for home health care services, the Budget Act imposes a number of interim modifications on reimbursement, including a reduction in per visit cost limits. The interim payment system implemented by the Health Care Financing Administration is effective retroactive to October 1997 and has resulted in required repayments to the federal government by a number of home health agencies. Reimbursement of these provider overpayments and the imposition of per visit cost limits have created significant financial hardship for providers, with a number of home health providers having ceased operations. In an effort to offset the hardship caused by the repayment obligation, the Health Care Financing Administration has authorized repayments over a 12-month period, rather than requiring a lump sum payment. The Budget Act also modifies reimbursement rates for rehabilitation agencies and outpatient therapy providers. It is not possible to predict at this time the impact that any or all these changes in reimbursement methodology may have on the business, results of operations or financial condition of the Company, though the reform measures are intended to reduce the amounts paid by the government for these services. Medicaid programs currently exist in all of the states in which the Company has skilled nursing facilities and also apply in some of the states where the Company has assisted living facilities. While these programs differ in certain aspects from state to state, they are all subject to requirements imposed by the federal government, which provides approximately 50% of the funds available under these programs. In the states in which the Company operates skilled nursing facilities, payments are based upon specific cost reimbursement formulas established by that state, which are generally based on historical costs with adjustment for inflation. For Fiscal 1998, the Company derived approximately 43% of its gross patient revenues from Medicare and approximately 37% of its gross patient revenues from Medicaid. For the year ended June 30, 1997, the Company derived approximately 38% of its gross patient revenues from Medicare and approximately 38% of its gross patient revenues from Medicaid. The Company had no revenues from Medicare or Medicaid for the year ended June 30, 1996. Both governmental and private-payor sources have instituted cost containment measures designed to limit payments made to long-term health which adversely affect reimbursements to the Company. Furthermore, although federal regulations do not recognize state budget deficiencies as a legitimate ground to curtail funding of their Medicaid cost reimbursement programs, states have nevertheless curtailed such funding in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to present levels. Government reimbursement programs are also subject to statutory and regulatory changes, administrative rulings and interpretations, determinations by reimbursement intermediaries, and governmental funding restrictions, all of which may materially increase or decrease the rate of program payments to health care providers operated by the Company. In addition, there can be no assurance that facilities or other providers owned, leased or managed by the Company, now or in the future, will initially meet or continue to meet the requirements for participation in such programs. The Company believes the structure and composition of government regulation of health care will continue to change and, as a result, it regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist which also may require modifications to existing and planned properties to create access by disabled persons. While the Company believes that its properties are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further, legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. 21 22 The Company is subject to various federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances, or failure to remediate such contamination properly, may also affect adversely the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at the disposal site, may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. LIABILITY AND INSURANCE Providing health care services involves an inherent risk of liability. Participants in the senior living and health care services industry are subject to lawsuits alleging negligence or related legal theories, many of which may involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability and professional medical malpractice insurance policies for the Company's owned, leased and managed facilities with such coverages and deductibles which management believes are prudent, adequate and in keeping with industry practice. The Company also has an umbrella excess liability protection policy in the amount of $5.0 million to $10.0 million per location. In addition, the Company maintains policies for employee practices and officers and directors liability in the amounts of $1.0 million and $10.0 million respectively. There can be no assurance that a claim in excess of the Company's insurance will not be asserted. A claim against the Company not covered by, or in excess of, the Company's insurance, could have a material adverse affect on the Company. The Company's insurance policies are reviewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. EMPLOYEES As of June 30, 1998, the Company had approximately 2,400 employees. None of the Company's employees is represented by a union. The Company considers its employee relations to be good. Although the Company believes it is able to employ sufficient skilled personnel to staff the facilities it operates or manages, a shortage of skilled personnel in any of the geographic areas in which it operates could affect adversely the Company's ability to recruit and retain qualified employees and its operating expenses. RISK FACTORS This Annual Report on Form 10-K and the 1998 Annual Report to Stockholders contain various "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent the Company's expectations or beliefs concerning various future events, include the following: statements concerning anticipated effects on earnings, cost savings and operations of the Company; net cash flow; industry trends; certain expected capital expenditures; computer software modification and replacement; the outcome of any government inquiries, litigation or other proceedings; the impact of government regulation; and future environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including the following: Limited Operating History. The Company was formed in April 1995 and has a limited operating history. The Company incurred losses of $909,000 and $4,492,000 for its fiscal years ended June 30, 1996 and 1997, respectively, and had a net income of $3,575,000 for fiscal 1998. As of June 30, 1998, the Company had an accumulated deficit of $1,836,000. The Company's newly developed assisted living facilities are expected to incur operating losses until they achieve break-even occupancy levels of approximately 78%. The Company expects to achieve targeted occupancy levels of approximately 92% approximately 10 to 21 months after opening, 22 23 depending on the size of the facility. In addition, the Company's acquired operations, even if profitable when acquired, may incur operating losses pending their integration into the Company's business. Several of the facilities that have been acquired by the Company experienced operating losses in the fiscal years ended June 30, 1997 and 1998. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are incorporated by reference from the Company's 1998 Annual Report. Accordingly, there can be no assurance that the Company will not continue to incur losses. Failure to achieve profitability could have a material adverse effect on the Company's business, results of operations and financial condition. Implementation of Strategies. To date, the Company's growth has been primarily attributable to acquisitions of assisted living and skilled nursing facilities. The Company's first Outlook Pointe(R) signature series assisted living facility opened in May 1997. The Company has opened 11 additional Outlook Pointe(R) signature series assisted living facilities through June 30, 1998. The Company intends to develop the Balanced Care Continuum through the development and selective acquisition of additional assisted living facilities and, where appropriate, skilled nursing facilities, as well as the provision of medical rehabilitation, home health care, Alzheimer's services and skilled nursing services. The Company expects that the number and types of facilities and business operations that it owns, operates or manages will increase substantially if the Company is successful in implementing its strategies. Implementation of the Company's strategies will place a significant burden on the Company's management resources and require the development, implementation and continual enhancement of sufficient operational, resident care, financial and management information systems. Successful implementation of the Company's strategies will also depend on its ability to carry out its development plans and to effect acquisitions and alliances and to attract, motivate and retain management, professional, marketing and other key personnel. There can be no assurance that its strategies can be implemented successfully or that sufficient management resources and operational, resident or patient care, financial and management information systems will be available. If the Company is unable to manage its growth or to implement its strategies effectively, its business, results of operations and financial condition could be materially and adversely affected. Need for Additional Capital. The Company will need to obtain substantial additional capital resources to fund its development and acquisition strategy as well as its working capital needs to fund the growth in its operations. The Company plans to develop more than 40 additional Outlook Pointe(R) facilities by June 30, 1999. The estimated cost to complete these facilities ranges from $350 to $400 million which substantially exceeds the financial resources currently available to the Company. In addition, the Company estimates that the planned development projects for the fiscal year ended June 30, 1999 ("Fiscal 1999") will require approximately $70 million of working capital commitments from Operators/Lessees during their initial occupancy periods, which are expected to occur during the fiscal years ended June 30, 2000 and 2001 ("Fiscal 2001"). The Company also estimates that it will require approximately $100-200 million through Fiscal 2001 if it exercises its options to purchase the stock or assets of Operators/Lessees for all projects developed under this structure, through and including Fiscal 1999 development projects. Accordingly, the Company's future growth will depend on its ability to obtain additional development, acquisition and working capital financing on acceptable terms. The Company may seek additional financing through public or private financing sources, including equity, debt or lease financing. Financings effected through the issuance of securities could result in substantial dilution to holders of Common Stock. There can be no assurance that adequate funding will be available as needed or on terms acceptable to the Company. Insufficient development, acquisition and working capital financial resources could result in the Company delaying or eliminating all or some of its development projects and acquisition plans or otherwise slowing the growth of its operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," which are incorporated by reference from the Company's 1998 Annual Report. Assisted Living Facility Construction and Occupancy Risks. To date, the Company has developed, built and opened 12 of its Outlook Pointe(R)signature series assisted living facilities. The Company plans to open approximately 63 Company-designed assisted living facilities with an aggregate capacity of approximately 5,300 residents by June 30, 2000. Achievement of these goals will depend upon a number of factors, including the Company's ability to obtain adequate financing on acceptable terms, to obtain zoning, land use, building, 23 24 occupancy, licensing and other required governmental permits on a timely basis, and to control construction costs and project completion schedules. In addition, numerous factors outside the Company's control will impact the successful implementation of its development plans, including competition for site acquisitions, shortages of, or the inability to obtain, labor or materials, changes in applicable laws or regulations or in the method of applying such laws and regulations, the failure of general contractors or subcontractors to perform under their contracts, strikes and adverse weather. There can be no assurance that the Company will not encounter delays in its development program or that it will be successful in developing and constructing planned or additional assisted living facilities or that completed facilities will achieve targeted occupancy rates or otherwise be economically successful. The Company's inability to achieve its development plans or the delay of those plans could have a material adverse effect on its business, results of operations and financial condition. Acquisition Risks; Difficulties of Integration. To date, the Company's growth has been primarily attributable to acquisitions. The Company may continue to expand its business through strategic acquisitions. Pursuit of an acquisition strategy entails the risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired businesses. The Company's success in effecting acquisitions will depend on numerous factors, including its ability to identify suitable acquisition candidates and negotiate acceptable purchase terms, the competition for acquisitions, the Company's ability to finance acquisitions, and the availability of appropriate government licenses and approvals. Successful integration of acquired businesses will depend on the Company's ability to effect any required changes in operations or personnel, and may require renovation or other capital expenditures or the funding of unforeseen liabilities. There can be no assurance that the Company will consummate future acquisitions, that operations of acquired facilities can be successfully integrated or that acquired operations will be profitable. Substantial Fixed Charges; Pledge of Assets. The Company leases most of its facilities under long-term operating leases. Lease and debt service obligations of the Company for Fiscal 1998 aggregated approximately $16 million, including the repayment of the mortgage relating to the Wisconsin facilities of approximately $5 million. Leases generally provide for rent increases and require the Company to pay taxes, utilities and insurance obligations. The Company intends to continue to finance the development of its properties primarily through operating leases and thus expects that the amount of its lease-related and debt service obligations will increase as the Company pursues its growth strategy. As a result, an increasing portion of the Company's cash flow will be devoted to lease payments and debt service, which will reduce the amount of cash flow otherwise available to support the Company's growth. Such leases and mortgages also typically contain rent coverage and other financial covenants. There can be no assurance that the Company will generate sufficient cash flow from operations to cover required lease and debt service payments or that the financial performance of the Company or of particular subsidiaries or facilities will be adequate to meet applicable financial covenants. Any payment or other default could cause a lender to foreclose upon any collateral securing the indebtedness or, in the case of an operating lease, could terminate the lease, resulting in a loss of revenue and asset value to the Company. In certain cases, indebtedness secured by real estate of a facility is also secured by a pledge of the Company's operating interest in the facility and, in certain other cases, indebtedness and facility leases are secured by a pledge of stock of certain of the Company's subsidiaries. Since most of the Company's leases and financing agreements contain cross-default and cross-collateralization provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other obligations and properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," which is incorporated by reference from the Company's 1998 Annual Report. Government Regulation. The health care industry is subject to extensive federal and state regulation and frequent regulatory change. Federal, state and local laws governing long-term care and other services provided to seniors address, among other things, adequacy of medical care, distribution of pharmaceuticals, operating policies, licensing and certificate of need requirements. Long-term care facilities are also periodically inspected to assure continued compliance with various standards and licensing requirements under state law. There are currently no federal laws or regulations specifically defining or regulating assisted living facilities. However, while many states have not yet enacted specific assisted living laws or regulations, the Company's assisted living 24 25 facilities are subject to state regulation, licensing, approvals by state and local health, welfare and social service agencies and other regulatory authorities and compliance with building codes and environmental laws. In addition, in several states, including Arkansas, Missouri, New Jersey, Kentucky and North Carolina, certificate of need laws apply to assisted living facilities. Certificate of need or similar laws require that a state agency approve certain acquisitions and determine that a need exists for certain services, the addition of beds and capital expenditure or other changes. North Carolina imposed a moratorium on the addition of adult care home beds, subject to certain exceptions where binding commitments have been made to establish or expand an adult care home facility. The moratorium has expired, but it is expected that the moratorium will be reenacted and remain effective through August 26, 1999. When the issuance or renewal of certificates of need or other similar government approvals are required, changes in existing laws or adoption of new laws could adversely affect the Company's development or acquisition strategy and/or its operations if it is unable to obtain such certificates of need approvals or renewals thereof. Also, health care providers have been subjected to increasing scrutiny under anti-trust laws as the integration and consolidation of the health care industry increases and affects competition. Regulation of the assisted living industry is evolving. The Company cannot predict the content of new regulations and their effect on its business. There can be no assurance that regulatory or other legal developments will not affect adversely the Company's business, results of operations and financial condition. Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern certain financial arrangements (including employment or service contracts) between health care providers and others who may be in a position to refer or recommend patients or services to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. A number of similar state laws exist which often have not been interpreted by courts or regulatory agencies. The Department of Health and Human Services periodically issues "special fraud alerts" which address specific areas of concern. The federal government, through the Office of Inspector General, recently released a model compliance plan for home health agencies. The model plan identifies a number of risk areas and requires the home health agency to exercise oversight over parties with which it does business. Federal "Stark" legislation prohibits, with limited exceptions, the referral of patients for certain services, including home health care services, physical therapy and occupational therapy, by a physician to entities in which they have an ownership or financial interest. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participating in the Medicare and Medicaid programs. Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5, 1997, contains a number of anti-fraud provisions designed to further fight abuse and enhance program integrity. Furthermore, some states restrict certain business or fee relationships between physicians and other providers of health care services. The Company believes that its operations are in substantial compliance with the laws applicable to Medicare and Medicaid providers, including anti-fraud and abuse provisions; however, there can be no assurance that the administrative or judicial interpretation of such laws or the regulations promulgated thereunder will not in the future have a material adverse impact on the Company's operations or that the Company will not be subject to an investigation which would require a significant investment of time and manpower by the Company. Assisted living facilities may be eligible to participate as Medicaid providers and receive reimbursement through Medicaid waiver programs and managed care plans. If the Company elects to become a Medicaid provider with respect to its assisted living facilities, such entities would become subject to all of the requirements applicable to Medicaid providers, including the anti-fraud and abuse legislation. Although the Company believes that it complies with federal and state anti-remuneration statutes at all times, there can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. The Americans with Disabilities Act of 1990 requires all places of public accommodation to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist which also may require modifications to existing and planned properties to create access to the properties by disabled persons. While the Company believes that its properties comply with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made more quickly than anticipated, additional costs will be incurred by the Company. Further legislation may impose 25 26 additional burdens or restrictions relating to access by disabled persons. The costs of complying with any new legislation could be substantial. Health Care Reform. In addition to extensive existing government health care regulation, there are many initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of health care services. It is not clear what proposals, if any, will be adopted, or what effect such proposals would have on the Company's business. Various aspects of these health care proposals, such as reductions in funding of the Medicare and Medicaid programs, potential changes in reimbursement regulations by the Health Care Financing Administration ("HCFA"), enhanced pressure to contain health care costs by Medicare, Medicaid and other payors and permitting greater state flexibility in the administration of Medicaid, could adversely affect the Company's business, results of operations and financial condition. The Company's skilled nursing facilities that participate in applicable state Medicaid programs are subject to the risk of changes in Medicaid reimbursement and payment delays resulting from budgetary shortfalls of state Medicaid programs. The Company's current concentration of skilled nursing facilities in Missouri and Pennsylvania exposes it to the risk of changes in Medicaid reimbursement programs in those states. Medicare and Medicaid certification is a critical factor contributing to the revenues and profitability of long-term care facilities. Changes in certification and participation requirements of the Medicare and Medicaid programs have restricted, and are likely to further restrict, eligibility for reimbursement under those programs. Failure to obtain and maintain Medicare and Medicaid certification at the Company's long-term care facilities could result in a significant loss of revenue. In addition, private payors, including managed care payors, increasingly are demanding that providers accept discounted fees or assume all or a portion of the financial risk for delivery of health care services, including capitated payments where the provider is responsible, for a fixed fee, for providing all services needed by certain patients. Capitated payments can result in significant losses when patients require expensive treatments not adequately covered by the capitated rate. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue. The Company cannot predict what reform proposals or reimbursement limitations will be adopted in the future or the effect any such changes will have on its operations. There can be no assurance that currently proposed legislation, future health care legislation, reforms or changes in the administration or interpretation of governmental health care programs or regulations will not have a material adverse effect on the Company's business, results of operations and financial condition. Concern about the potential effect of various proposed health care reforms has contributed to volatility of prices of securities of health care companies and could similarly affect the price of the Common Stock in the future. Geographic Concentration of Business. Currently, a substantial portion of the Company's facilities, including facilities under construction and development for independent Operators/Lessees, are located in Pennsylvania and Missouri. Operating revenues attributable to the Company's business in those states accounted for approximately 95% and 94% of the Company's total operating revenues for the years ended June 30, 1997 and 1998, respectively. As part of its strategy, the Company intends to continue to develop and acquire facilities in Pennsylvania and Missouri, as well as other states. Until the Company's operations become more geographically dispersed, the Company will be more susceptible to downturns in local and regional economies and changes in state or local regulation because such conditions and events could affect a relatively high percentage of the total number of facilities currently in operation and under development. As a result of such factors, there can be no assurance that such geographic concentration will not have a material adverse effect on the Company's business, results of operations or financial condition. Liability and Insurance. Providing health care services involves an inherent risk of liability. Participants in the senior living and health care industry are subject to lawsuits alleging negligence or related legal theories, many of which may involve large claims and significant legal costs. The Company currently maintains liability insurance intended to cover medical malpractice, wrongful death and other claims which it believes is adequate and in keeping with industry practice. However, claims in excess of the Company's insurance coverage or claims not covered by the Company's insurance (e.g., claims for punitive damages) may arise. A successful claim against the Company not covered by or in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the 26 27 Company's reputation and its ability to attract residents or expand its business. The Company's insurance policies generally must be renewed annually, and there can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all. See "Business -- Liability and Insurance." Competition. The senior living and health care industry is highly competitive and the Company believes that competition in its current and targeted markets will continue to increase. The Company faces current and prospective competition for residents and patients and for employees from numerous local, regional and national providers of facility-based assisted living and long-term care, as well as rehabilitation therapy and home-based health care providers. Many of the Company's current and potential competitors are significantly larger and have greater financial and marketing resources than the Company. There are currently few regulatory and other barriers to entry into the assisted living industry. If the development of new assisted living facilities surpasses the demand for such facilities in particular markets, such markets could become saturated. The Company also expects to compete for acquisitions of additional assisted living and long-term care facilities and other senior health care operations. Competition could limit the Company's ability to attract residents and patients and expand its business and could have a material adverse effect on the Company's business, results of operations and financial condition. Environmental Risks. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the cost of removal or remediation of certain hazardous or toxic substances that may be located on, in or under the property. These laws and regulations may impose liability regardless of whether the owner or operator was responsible for, or knew of, the presence of the hazardous or toxic substances. The liability of the owner or operator and the cost of any required remediation or removal of hazardous or toxic substances could be substantial and is generally not limited. The presence of hazardous or toxic substances in or under such properties could also subject the Company to lawsuits by or liability to adjacent property owners, residents of the facilities or employees who are injured by contamination. The presence of hazardous or toxic substances at any property held or operated by the Company in the future could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, if contamination is found, it could adversely affect the Company's ability to continue to operate, to lease or to sell the contaminated property or to use that property as collateral for future loans. Change of Control. The acquisition by one or more related persons of 50% or more of the Common Stock constitutes a default under certain leases between the Company and Meditrust and may result in the termination of such leases or the exercise of other remedies thereunder by the lessor. See "Certain Relationships and Related Transactions", which is incorporated by reference from the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders. Other financing arrangements of the Company contain similar change of control provisions which may result in the termination of such arrangements or the exercise of other remedies thereunder upon a change of control of the Company (as defined in such arrangements). Dependence on Key Personnel. The Company's success to date has been significantly dependent on the contributions of Brad E. Hollinger, the Company's Chairman of the Board, President and Chief Executive Officer and one of its founders, and the loss of his services could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's success also depends to a significant extent upon a number of other key employees of the Company. The Company is party to employment agreements with Mr. Hollinger and several other key employees. The loss of the services of one or more other key employees also could have a material adverse effect on the Company. In addition, the Company believes that its future success will depend in part upon its ability to attract and retain additional highly-skilled professional, managerial, sales and marketing personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the personnel that it requires for its business and planned growth. Labor Costs. The Company competes with various health care providers and other employers for limited qualified and skilled personnel in the markets that it serves. The Company expects that its labor costs will 27 28 increase over time. Currently, none of the Company's employees is represented by a labor union. If employees of the Company were to unionize, the Company could incur labor costs higher than those of competitors with non-union employees. The Company's business, results of operations and financial condition could be adversely affected if the Company is unable to control its labor costs. No Prior Trading Market; Potential Volatility of Stock Price. Prior to February 1998, there had been no public market for the Common Stock, and there can be no assurance that an active trading market for the Common Stock will be maintained. The stock market has experienced extreme price and volume fluctuations which have particularly affected the market price for many health care companies and which have often been unrelated to the operating performance of these companies. The trading price of the Common Stock could also be subject to significant fluctuations in response to variations in periodic operating results, changes in management, future announcements concerning the Company, legislative or regulatory changes, general trends in the industry and other events or factors. See "Business -- Competition" and "Business -- Government Regulation." Anti-Takeover Provisions. Certain provisions of the Company's Certificate of Incorporation and Bylaws and Delaware law could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of such provisions allow the Company to issue preferred stock with rights senior to those of the Common Stock and impose various procedural and other requirements which could make it more difficult for stockholders to effect certain corporate actions. Furthermore, the Company has entered into certain leases, and may enter into additional financing arrangements in the future, which provide that the Company will be in default under such leases in the event of a change of control of the Company. See "Change of Control." 28 29 EXECUTIVE OFFICERS The following table sets forth certain information regarding the executive officers of the Company as of September 21, 1998:
NAME AGE POSITION ---- --- -------- Brad E. Hollinger.................... 44 Chairman of the Board, President and Chief Executive Officer and a Director Paul A. Kruis........................ 44 Chief Financial Officer Stephen G. Marcus.................... 45 Chief Operating Officer Brian L. Barth....................... 37 Chief Development Officer David K. Barber...................... 44 Senior Vice President -- Project Management Russell A. DiGilio................... 42 Senior Vice President -- Outlook Pointe(R)Division Douglas L. Brewer.................... 37 Senior Vice President -- Mergers and Acquisitions Mark S. Moore........................ 37 Senior Vice President -- Financial Operations Robert J. Sutton..................... 49 Vice President -- Corporate Services and Secretary Clint T. Fegan....................... 40 Vice President -- Corporate Controller Diane M. Borger...................... 42 Vice President and Treasurer Robin L. Barber...................... 35 Senior Counsel and Vice President -- Legal Affairs and Assistant Secretary
Brad E. Hollinger has served as a director and as Chairman of the Board, President and Chief Executive Officer of the Company since its founding in April 1995. Previously he served as Executive Vice President of the Contract Service Group of Continental Medical Systems ("CMS"), a national provider of medical rehabilitation services and contract therapy services from 1992 to 1995. During his eight years with CMS, Mr. Hollinger also served as Senior Vice President/Development from 1987 to 1990, leading the development and financing of eighteen medical rehabilitation hospitals in seven states. From 1985 to 1987, Mr. Hollinger was Vice President of Development of Rehab Hospital Service Corporation. Mr. Hollinger, without admitting or denying the allegations, settled a proposed civil action brought by the Securities and Exchange Commission (the "Commission") contending that he violated certain federal securities laws in connection with trading in the common stock of Continental Medical Systems, Inc. prior to its merger with Horizon Healthcare, Inc. in 1995. The Commission approved the settlement on May 12, 1998, which consisted of the entry of an order enjoining him from future violations of such securities laws and the payment of $21,625, representing profits allegedly realized by him and a family member, plus interest, and a civil money penalty in an amount equal to such payment, plus interest. Paul A. Kruis has served as the Chief Financial Officer of the Company since November 1997. From 1987 through 1993, Mr. Kruis served as Senior Vice President, Treasurer and Chief Financial Officer of Rehab Systems Company ("RSC"), a company in the business of developing, building and operating comprehensive medical rehabilitation hospitals. Mr. Kruis was a founding officer of RSC, which was acquired by Novacare, Inc., in 1991. Mr. Kruis remained with Novacare, Inc. in the same capacity until 1993. Prior to his employment with RSC, Mr. Kruis was affiliated with Rehab Hospital Services Corporation from 1983 through 1987, serving as Chief Financial Officer from 1986 through 1987 and as Assistant Corporate Controller from 1983 through 1985. During the period following his departure from Novacare in 1993, Mr. Kruis explored the formation of two new health care ventures, among other business activities. Mr. Kruis is a CPA and a graduate of the College of William and Mary. Stephen G. Marcus, has served as the Chief Operating Officer of the Company since January 1998. Prior to joining the Company, he served as President of SelectRehab, a subsidiary of Horizon/CMS Healthcare corporation, from July 1994 to November 1997 and in various capacities during seven years with CMS, including Senior Vice President -- Unit Management Group from January 1993 through July 1994, as Senior Vice President Development from July 1991 through December 1992 and as Vice President -- Development from 29 30 August 1987 through July 1991. From April 1986 through July 1987, Mr. Marcus was Regional Vice President - Operations for the Southeastern Regional Office of Rehab Hospital Services Corporation ("RHSC") and, from January 1985 through March 1986, Executive Director/Chief Executive Officer of Garden State Rehabilitation Hospital, an RHSC facility. Brian L. Barth has served as Chief Development Officer of the Company since October 1997. Prior to October, Mr. Barth served as Vice President -- Acquisitions of the Company since its founding in April 19'95. He served as Director of Medical Specialty Unit Development for Integrated Health Services, Inc. ("IHS"), a post-acute care services company, from 1994 to 1995. Mr. Barth's duties included oversight of the sub-acute program development for the Northern Division. Prior to joining IHS, Mr. Barth was Director of Development for CMS from 1987 to 1994. David K. Barber has served as Senior Vice President -- Project Management of the Company since July 1998. Mr. Barber was previously Vice President -- Construction and Design from June 1996 to June 1998. He previously worked in the health care construction field as Chief Financial Officer of CCI Construction Company from 1986 to 1995. Russell A. DiGilio has served as Senior Vice President -- Outlook Pointe(R) Division of the Company since July 1998. Mr. DiGilio was previously Vice President -- Assisted Living Group from April 1996 to June 1998. Prior to joining the Company, he served as Regional Director and as Executive Director of Operations for the Forum Group, a company engaged in providing assisted living and retirement services, from 1987 to 1995. Douglas L. Brewer has served as Senior Vice President -- Mergers and Acquisitions since September 1998. Prior to joining the Company, Mr. Brewer served from April 1997 as an officer and Vice President of Select Medical Corporation, a privately held company. Prior thereto, he served as Senior Vice President -- Business Development of Continental Medical System's unit management group from August 1995 until March 1997. Other capacities in which Mr. Brewer served at Continental Medical Systems include: Vice President -Unit Management and Director of Business Development from 1993 to 1990, respectively. Mark S. Moore has served as Senior Vice President -- Financial Operations of the Company since July 1998. Mr. Moore was previously Senior Vice President -- Finance and Treasurer from July 1997 to June 1998 and Vice President -- Financial Operations from January 1997 to June 1997. Prior to joining the Company, he served in various capacities during eight years with CMS, including Vice President -- Rehab Hospital Group Controller from September 1996 to December 1996, as Vice President -- Eastern Division Controller from January 1995 to August 1996 and as Regional Controller from August 1988 to December 1994. Robert J. Sutton has served as Vice President -- Corporate Services and Secretary of the Company since its founding in April 1995. From 1993 to 1995, he was Vice President, Finance and Strategy, of CMS. Mr. Sutton served in a variety of managerial positions at Marriott Corporation from 1987 to 1993, including Vice President of Finance and Strategic Planning for Marriott Management Services and Director of Finance of the Courtyard Hotel Division. Clint T. Fegan has served as Vice President -- Corporate Controller of the Company since July 1998 and as Corporate Controller from July 1997 to June 1998. From 1994 to 1997, he served as Corporate Controller of Wilmac Corporation, a privately owned nursing home and assisted living company. From 1987 to 1994, Mr. Fegan was a senior manager in the KPMG Peat Marwick LLP health care audit practice. Diane M. Borger has served as Vice President -- Treasurer of the Company since May 1998. Ms. Borger was Director of Accounting for the Company from November 1995 until May 1998. Prior to joining the Company, she served in various capacities during four years with Continental Medical Systems, Inc., including Accounting Manager -- Rehab Hospital Group from July 1993 to November 1995, as Manager of Corporate Financial Planning from March 1992 to July 1993, and as Corporate Financial Analyst from July 1991 to March 1992. From August 1987 to July 1991 she was employed by KPMG Peat Marwick LLP and served in both the audit practice and the healthcare consulting services practice. Robin L. Barber has served the Company as Senior Counsel and Vice President -- Legal Affairs since September 1997, as Director -- Legal Services from February 1996 to August 1997, and as Legal Consultant 30 31 from October 1995 to January 1996. Prior to joining the Company, she was in private practice with the law firm of Eckert Seamans Cherin & Mellot LLP from June 1993 until August 1995. Ms. Barber is the sister-in-law of Brad E. Hollinger. ITEM 2--PROPERTIES The Company's corporate office is located in Mechanicsburg, Pennsylvania. In addition to its corporate office, as of June 30, 1998, the Company operated a total of 37 assisted living facilities, 13 skilled nursing facilities and four independent living facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Virginia, Ohio and Wisconsin, as well as a home health care agency in Missouri and eight rehabilitation therapy operations located in Pennsylvania and Arkansas. The buildings range in size from 27,000 square feet to 68,000 square feet and are adaptable to construction on sites ranging from two to five acres. Assuming completion of the planned divestiture of the Company's assisted living facilities in Wisconsin, the Company will own nine, lease 27 and manage 11 senior living and health care facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Ohio and Virginia. A more detailed outline of information with regard to the various properties that the Company owns and leases can be found at "Operating Facilities" in Part I. ITEM 3--LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the ordinary course of business. However, the Company is not involved in any legal proceedings that it believes would have a materially adverse effect on its business, financial condition or results of operations. In addition, lawsuits may be brought against the Company, including those involving environmental and safety and health matters. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company's course of business and its liquidity within a particular period may be materially affected by unforeseen circumstances. Based on facts currently available, management believes that the disposition of these matters will not have a material adverse effect on the financial position of the Company. ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. PART II ITEM 5-- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE AND HOLDERS OF COMMON STOCK The Common Stock of the Company is listed on the American Stock Exchange and traded under the symbol "BAL." The final prospectus filed in connection with the Company's initial public offering was declared effective on February 11, 1998 and the Common Stock began trading on the American Stock Exchange on February 12, 1998. The following table sets forth for the fiscal periods indicated the high and low sales prices of the Common Stock as reported on the American Stock Exchange. No cash dividends were paid on the Common Stock during such periods.
HIGH LOW ---- --- Fiscal year ended June 30, 1998: 3rd Quarter (from February 12, 1998)...................... $10 5/8 $6 3/4 4th Quarter............................................... 10 6 3/4
On September 18, 1998, the last reported sales price for the Common Stock as reported on the American Stock Exchange was $6.25 per share. The number of holders of record of the Common Stock on September 18, 1998 was approximately 105 (approximately 1,833 beneficial owners). 31 32 DIVIDENDS The Company has not paid or declared any dividends on its capital stock since its inception. The Company intends to retain earnings for development of its business and will not distribute them to stockholders as dividends. The declaration and payment by the Company of any future dividends and the amount thereof will depend upon the Company's results of operations, financial condition, cash requirements, future prospects, limitations imposed by credit agreements or senior securities and other factors deemed relevant by the Board of Directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources," which is incorporated by reference from the Company's 1998 Annual Report. PRIVATELY PLACED SECURITIES On April 24, 1998, the Company issued warrants to Hakman & Co. to purchase 40,250 shares of Common Stock at an exercise price of $8.88 per share in a transaction intended to be exempt from the registration requirements of the Securities Act of 1993, as amended (the "Securities Act") , by virtue of Section 4(2) thereof. The warrants are exercisable one year from the date of grant and have a term of three years. On February 24, 1998, the Company issued warrants to Susan McBroom to purchase 7,500 shares of Common Stock at an exercise price of $6.94 per share in a transaction intended to be exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The warrants are exercisable in increments of 25% per year from the date of grant and have a term of five years. ITEM 6--SELECTED FINANCIAL DATA The information required by this Item is contained in the Company's 1998 Annual Report to Stockholders under the caption "Corporate Profile" and is incorporated herein by reference. ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is contained in the Company's 1998 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference. ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company did not have any investment securities subject to market risk at June 30, 1998. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is contained in the Company's 1998 Annual Report to Stockholders under the captions "Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. ITEM 9-- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this Item (other than the information regarding executive officers set forth at the end of Item 1 of Part I of this Form 10-K) will be contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the captions "Board of Directors and Election of Directors" and 32 33 "Security Ownership -- Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. ITEM 11--EXECUTIVE COMPENSATION The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the captions "Board of Directors and Election of Directors" and "Executive Compensation," and is incorporated herein by reference. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption "Security Ownership," and is incorporated herein by reference. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption "Certain Transactions and Relationships with the Company; Legal Proceedings," and is incorporated herein by reference. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS: The information required by this Item is contained in the Company's 1998 Annual Report to Stockholders under the captions "Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. (A)(2) FINANCIAL STATEMENT SCHEDULE: See (d) below. (A)(3) EXHIBITS: The following exhibits are filed herewith or incorporated by reference herein:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Underwriting Agreement dated as of February 11, 1998, among Balanced Care Corporation, BancAmerica Robertson Stephens, Smith Barney, Inc. and BT Alex. Brown Incorporated (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K dated February 18, 1998 (File No. 1-13845)) 2.1 Asset Purchase Agreement, dated as of September 18, 1997, by and between Balanced Care Corporation and Butler Senior Care, Inc. (incorporated by reference to Exhibit 2.17 to the Registration Statement on Form S-1 (No. 333-37833)) 2.2 Asset Purchase Agreement, dated as of September 3, 1997, by and among Balanced Care Corporation, Delores Feltrop Nahar, with the joinder of Albert L. Nahar and Kenneth A. Feltrop, with the joinder of Lori L. Feltrop, individually and d/b/a Feltrop Personal Care Home (incorporated by reference to Exhibit 2.18 to the Registration Statement on Form S-1 (No. 333-37833))
33 34
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.3 Asset Purchase Agreement, dated as of October 16, 1997, by and among Managed Healthcare, Inc., Long Term Pharmaceutical Care, Inc., Balanced Care Corporation and Omnicare, Inc. (incorporated by reference to Exhibit 2.19 to the Registration Statement on Form S-1 (No. 333-37833)) 2.4 Asset Purchase Agreement, dated as of October 24, 1997, by and between Balanced Care Corporation and Triangle Retirement Services, Inc. (incorporated by reference to Exhibit 2.20 to the Registration Statement on Form S-1 (No. 333-37833)) 2.5 Asset Purchase Agreement, dated as of November 26, 1997, by and between Balanced Care Corporation and Gethsemane Retirement Community and Rehabilitation Center, Inc. (incorporated by reference to Exhibit 2.21 to the Registration Statement on Form S-1 (No. 333-37833)) 2.6 Asset Purchase Agreement, dated as of November 26, 1997, by and between Balanced Care Corporation and Gethsemane Assisted Living, Inc. (incorporated by reference to Exhibit 2.22 to the Registration Statement on Form S-1 (No. 333-37833)) 3.1 Amended and Restated Certificate of Incorporation of Balanced Care Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (No. 333-37833)) 3.2 Bylaws of Balanced Care Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (No. 333-37833)) 4.1 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-1 (No. 333-37833)) 4.2 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-1 (No. 333-37833)) 4.3 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-1 (No. 333-37833)) 10.1 Form of Meditrust Facility Lease Agreement, together with schedule (incorporated by reference to Exhibit 10.46 to the Registration Statement on Form S-1 (No. 333-37833)) 10.2 Form of Meditrust Facility Lease Agreement (filed herewith) 10.3 Schedule to Form of Meditrust Facility Lease Agreement (filed herewith) 10.4 Form of Meditrust Leasehold Improvement Agreement (filed herewith) 10.5 Schedule to Form of Meditrust Leasehold Improvement Agreement (filed herewith) 10.6 Form of Meditrust Option Agreement (filed herewith) 10.7 Schedule to Form of Meditrust Option Agreement (filed herewith) 10.8 Form of Meditrust Shortfall Funding Agreement (filed herewith) 10.9 Schedule to Form of Meditrust Shortfall Funding Agreement (filed herewith) 10.10 Form of Meditrust Working Capital Assurance Agreement (filed herewith) 10.11 Schedule to Form of Meditrust Working Capital Assurance Agreement (filed herewith) 10.12 Form of Nationwide Health Properties, Inc. ("NHP") First Series Lease and Security Agreement (filed herewith) 10.13 Schedule to Form of NHP First Series Lease and Security Agreement (filed herewith) 10.14 Form of NHP Second Series Lease and Security Agreement (filed herewith) 10.15 Schedule to Form of NHP Second Series Lease and Security Agreement (filed herewith) 10.16 Form of NHP Development Agreement (filed herewith) 10.17 Schedule to Form of NHP Development Agreement (filed herewith) 10.18 NHP First Series Master Investment Agreement (filed herewith) 10.19 NHP Second Series Master Investment Agreement (filed herewith)
34 35
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.20 Form of NHP First Series Option Agreement (filed herewith) 10.21 Schedule to Form of NHP First Series Option Agreement (filed herewith) 10.22 Form of NHP Second Series Option Agreement (filed herewith) 10.23 Schedule to Form of NHP Second Series Option Agreement (filed herewith) 10.24 Form of NHP First Series Shortfall Funding Agreement (filed herewith) 10.25 Schedule to Form of NHP First Series Shortfall Funding Agreement (filed herewith) 10.26 Form of NHP Second Series Shortfall Funding Agreement (filed herewith) 10.27 Schedule to Form of NHP Second Series Shortfall Funding Agreement (filed herewith) 10.28 Form of NHP First Series Working Capital Assurance Agreement (filed herewith) 10.29 Schedule to Form of NHP First Series Working Capital Assurance Agreement (filed herewith) 10.30 Form of NHP Second Series Working Capital Assurance Agreement (filed herewith) 10.31 Schedule to Form of NHP Second Series Working Capital Assurance Agreement (filed herewith) 10.32 Form of American Health Properties, Inc. ("AHP") Lease and Security Agreement (filed herewith) 10.33 Schedule to Form of AHP Lease and Security Agreement (filed herewith) 10.34 Form of AHP Development Agreement, together with schedule (incorporated by reference to Exhibit 10.74 to the Registration Statement on Form S-1 (No. 333-37833)) 10.35 Schedule to Form of AHP Development Agreement (filed herewith) 10.36 Form of AHP Option Agreement (filed herewith) 10.37 Schedule to Form of AHP Option Agreement (filed herewith) 10.38 AHP Option Agreement II (filed herewith) 10.39 Form of AHP Shortfall Funding Agreement, together with schedule (incorporated by reference to Exhibit 10.75 to the Registration Statement on Form S-1 (No. 333-37833)) 10.40 Schedule to Form of AHP Shortfall Funding Agreement (filed herewith) 10.41 Form of AHP Working Capital Assurance Agreement, together with schedule (incorporated by reference to Exhibit 10.80 to the Registration Statement on Form S-1 (No. 333-37833)) 10.42 Schedule to Form of AHP Working Capital Assurance Agreement (filed herewith) 10.43 Form of Ocwen Financial Corporation ("Ocwen") Lease Agreement (filed herewith) 10.44 Schedule to Form of Ocwen Lease Agreement (filed herewith) 10.45 Form of Ocwen Development Agreement (filed herewith) 10.46 Schedule to Form of Ocwen Development Agreement (filed herewith) 10.47 Form of Ocwen Option Agreement (filed herewith) 10.48 Schedule to Form of Ocwen Option Agreement (filed herewith) 10.49 Form of Ocwen Shortfall Funding Agreement (filed herewith) 10.50 Schedule to Form of Ocwen Shortfall Funding Agreement (filed herewith) 10.51 Ocwen Shortfall Funding Agreement II (filed herewith) 10.52 Form of Ocwen Working Capital Assurance Agreement (filed herewith) 10.53 Schedule to Form of Ocwen Working Capital Assurance Agreement (filed herewith) 10.54 Ocwen Working Capital Assurance Agreement II (filed herewith) 10.55 First Amendment to Option Agreements, Shortfall Funding Agreements and Stock Pledge Agreements (filed herewith)
35 36
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.56 Form of Capstone Lease, together with schedule (incorporated by reference to Exhibit 10.22 to the Registration Statement on Form S-1 (No. 333-37833)) 10.57 Form of Capstone Lease (filed herewith) 10.58 Schedule to Form of Capstone Lease (filed herewith) 10.59 Capstone Development Agreement (filed herewith) 10.60 Form of Capstone Option Agreement (filed herewith) 10.61 Schedule to Form of Capstone Option Agreement (filed herewith) 10.62 Form of Capstone Shortfall Funding Agreement (filed herewith) 10.63 Schedule to Form of Capstone Shortfall Funding Agreement (filed herewith) 10.64 Form of Capstone Working Capital Assurance Agreement (filed herewith) 10.65 Schedule to Form of Capstone Working Capital Assurance Agreement (filed herewith) 10.66 Form of Capstone Assignment, Assumption and Amendment Agreement (filed herewith) 10.67 Schedule to Form of Capstone Assignment, Assumption and Amendment Agreement (filed herewith) 10.68 Lease, dated as of March 21, 1996, by and between HCPI Trust and BCC at Mt. Royal Pines, Inc. (incorporated by reference to Exhibit 10.34 to the Registration Statement on Form S-1 (No. 333-37833)) 10.69 First Amendment, dated as of March 31, 1997, to Lease dated as of March 21, 1996 by and between HCPI Trust and BCC at Mt. Royal Pines, Inc. (incorporated by reference to Exhibit 10.35 to the Registration Statement on Form S-1 (No. 333-37833)) 10.70 Balanced Care Corporation 1996 Stock Incentive Plan as Amended and Restated, effective July 25, 1997 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (No. 333-37833)) 10.71 Master Distribution Agreement, dated as of March 3, 1997, between Sysco Corporation and Balanced Care Corporation (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 (No. 333-37833)) 10.72 Sublease, dated as of January 16, 1997, by and between Ryder Truck Rental, Inc. and Balanced Care Corporation (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (No. 333-37833)) 10.73 Sublease, dated as of June 26, 1996, by and between Liberty Mutual Insurance Company and Balanced Care Corporation (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 (No. 333-37833)) 10.74 Second Lease Amendment, dated as of July 1, 1997, by and between Noble House of Dixon, Inc. And Dixon Management, Inc. (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (No. 333-37833)) 10.75 Employment Agreement, dated as of August 1, 1996, by and between Balanced Care Corporation and Brad E. Hollinger (incorporated by reference to Exhibit 10.37 to the Registration Statement on Form S-1 (No. 333-37833))** 10.76 Employment Agreement, dated as of May 1, 1996, by and between Balanced Care Corporation and William T. McCarthy (incorporated by reference to Exhibit 10.38 to the Registration Statement on Form S-1 (No. 333-37833))** 10.77 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care Corporation and Robert J. Sutton (incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-1 (No. 333-37833))**
36 37
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.78 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care Corporation and Brian L. Barth (incorporated by reference to Exhibit 10.40 to the Registration Statement on Form S-1 (No. 333-37833))** 10.79 Amendment to Employment Agreement, dated as of July 1, 1998, by and between Balanced Care Corporation and Brian L. Barth (filed herewith)** 10.80 Employment Agreement, dated as of September 1, 1996, by and among Foster Health Care Group, Inc., John D. Foster and Balanced Care Corporation (incorporated by reference to Exhibit 10.41 to the Registration Statement on Form S-1 (No. 333-37833))** 10.81 Assignment, Assumption and Consent Agreement, dated as of June 30, 1997, by and among Foster Health Care Group, Inc., BCC Management Company at Missouri, Inc. And John Foster (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-1 (No. 333-37833)) 10.82 Employment Agreement, dated as of November 24, 1997, by and between Balanced Care Corporation and Stephen G. Marcus (incorporated by reference to Exhibit 10.43 to the Registration Statement on Form S-1 (No. 333-37833))** 10.83 Consulting Agreement, dated as of October 3, 1996, by and between Balanced Care Corporation and Kenneth F. Barber (incorporated by reference to Exhibit 10.44 to the Registration Statement on Form S-1 (No. 333-37833)) 10.84 First Amendment, dated as of March 13, 1997, to the Consulting Agreement dated as of October 3, 1996 by and between Balanced Care Corporation and Kenneth F. Barber (incorporated by reference to Exhibit 10.45 to the Registration Statement on Form S-1 (No. 333-37833)) 13.1 Portions of the Annual Report to Stockholders for the Year Ended June 30, 1998 (filed herewith) 21.1 Schedule of Subsidiaries of Balanced Care Corporation (filed herewith) 23.1 Independent Auditors' Consent -- KPMG Peat Marwick LLP (filed herewith) 27.1 Financial Data Schedule (filed herewith)
- --------------- * Certain exhibits and schedules to the Exhibits attached hereto have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished to the Commission upon request. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. (B) REPORTS ON FORM 8-K: No Current Reports on Form 8-K were filed for the quarter ended June 30, 1998. (C) EXHIBITS: See (a) (3) above. (D) FINANCIAL STATEMENT SCHEDULE: Schedule II--Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the United States Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the consolidated financial statements or notes thereto. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the United States Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. BALANCED CARE CORPORATION By: /s/ BRAD E. HOLLINGER ---------------------------------- Brad E. Hollinger Chairman of the Board, President and Chief Executive Officer Date: September 28, 1998 Pursuant to the requirements of the United States Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ BRAD E. HOLLINGER Chairman of the Board, September 28, 1998 - ----------------------------------------------------- President and Chief Brad E. Hollinger Executive Officer and a Director (Principal Executive Officer) /s/ PAUL A. KRUIS Chief Financial Officer September 28, 1998 - ----------------------------------------------------- (Principal Financial Paul A. Kruis Officer and Principal Accounting Officer) /s/ JOHN M. BRENNAN Director September 28, 1998 - ----------------------------------------------------- John M. Brennan /s/ BILL R. FOSTER Director September 22, 1998 - ----------------------------------------------------- Bill R. Foster /s/ DAVID L. GOLDSMITH Director September 28, 1998 - ----------------------------------------------------- David L. Goldsmith /s/ EDWARD R. STOLMAN Director September 22, 1998 - ----------------------------------------------------- Edward R. Stolman Director - ----------------------------------------------------- George H. Strong /s/ RAYMOND E. SCHULTZ Director September 23, 1998 - ----------------------------------------------------- Raymond E. Schultz
38 39 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2 Form of Meditrust Facility Lease Agreement 10.3 Schedule to Form of Meditrust Facility Lease Agreement 10.4 Form of Meditrust Leasehold Improvement Agreement 10.5 Schedule to Form of Meditrust Leasehold Improvement Agreement 10.6 Form of Meditrust Option Agreement 10.7 Schedule to Form of Meditrust Option Agreement 10.8 Form of Meditrust Shortfall Funding Agreement 10.9 Schedule to Form of Meditrust Shortfall Funding Agreement 10.10 Form of Meditrust Working Capital Assurance Agreement 10.11 Schedule to Form of Meditrust Working Capital Assurance Agreement 10.12 Form of Nationwide Health Properties, Inc. ("NHP") First Series Lease and Security Agreement 10.13 Schedule to Form of NHP First Series Lease and Security Agreement 10.14 Form of NHP Second Series Lease and Security Agreement 10.15 Schedule to Form of NHP Second Series Lease and Security Agreement 10.16 Form of NHP Development Agreement 10.17 Schedule to Form of NHP Development Agreement 10.18 NHP First Series Master Investment Agreement 10.19 NHP Second Series Master Investment Agreement 10.20 Form of NHP First Series Option Agreement 10.21 Schedule to Form of NHP First Series Option Agreement 10.22 Form of NHP Second Series Option Agreement 10.23 Schedule to Form of NHP Second Series Option Agreement 10.24 Form of NHP First Series Shortfall Funding Agreement 10.25 Schedule to Form of NHP First Series Shortfall Funding Agreement 10.26 Form of NHP Second Series Shortfall Funding Agreement 10.27 Schedule to Form of NHP Second Series Shortfall Funding Agreement 10.28 Form of NHP First Series Working Capital Assurance Agreement 10.29 Schedule to Form of NHP First Series Working Capital Assurance Agreement 10.30 Form of NHP Second Series Working Capital Assurance Agreement 10.31 Schedule to Form of NHP Second Series Working Capital Assurance Agreement 10.32 Form of American Health Properties, Inc. ("AHP") Lease and Security Agreement 10.33 Schedule to Form of AHP Lease and Security Agreement 10.35 Schedule to Form of AHP Development Agreement 10.36 Form of AHP Option Agreement 10.37 Schedule to Form of AHP Option Agreement 10.38 AHP Option Agreement II 10.40 Schedule to Form of AHP Shortfall Funding Agreement 10.42 Schedule to Form of AHP Working Capital Assurance Agreement 10.43 Form of Ocwen Financial Corporation ("Ocwen") Lease Agreement
39 40
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.44 Schedule to Form of Ocwen Lease Agreement 10.45 Form of Ocwen Development Agreement 10.46 Schedule to Form of Ocwen Development Agreement 10.47 Form of Ocwen Option Agreement 10.48 Schedule to Form of Ocwen Option Agreement 10.49 Form of Ocwen Shortfall Funding Agreement 10.50 Schedule to Form of Ocwen Shortfall Funding Agreement 10.51 Ocwen Shortfall Funding Agreement II 10.52 Form of Ocwen Working Capital Assurance Agreement 10.53 Schedule to Form of Ocwen Working Capital Assurance Agreement 10.54 Ocwen Working Capital Assurance Agreement II 10.55 First Amendment to Option Agreements, Shortfall Funding Agreements and Stock Pledge Agreements 10.57 Form of Capstone Lease 10.58 Schedule to Form of Capstone Lease 10.59 Capstone Development Agreement 10.60 Form of Capstone Option Agreement 10.61 Schedule to Form of Capstone Option Agreement 10.62 Form of Capstone Shortfall Funding Agreement 10.63 Schedule to Form of Capstone Shortfall Funding Agreement 10.64 Form of Capstone Working Capital Assurance Agreement 10.65 Schedule to Form of Capstone Working Capital Assurance Agreement 10.66 Form of Capstone Assignment, Assumption and Amendment Agreement 10.67 Schedule to Form of Capstone Assignment, Assumption and Amendment Agreement 10.79 Amendment to Employment Agreement, dated as of July 1, 1998, by and between Balanced Care Corporation and Brian L. Barth** 13.1 Portions of the Annual Report to Stockholders for the Year Ended June 30, 1998 21.1 Schedule of Subsidiaries of Balanced Care Corporation 23.1 Independent Auditors' Consent -- KPMG Peat Marwick LLP 27.1 Financial Data Schedule
- --------------- * Certain exhibits and schedules to the Exhibits attached hereto have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished to the Commission upon request. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. 40 41 BALANCED CARE CORPORATIONS AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ------------------------ ---------- ------------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BEGINNING OPERATING OTHER BALANCE AT DESCRIPTION OF PERIOD ACCOUNTS ACCOUNTS DEDUCTIONS END OF PERIOD ----------- ---------- ---------- ---------- ---------- ------------- Year ended June 30, 1998: Allowance for doubtful accounts.................... $330 $722 $ -- $(136)(2) $916 ==== ==== ==== ===== ==== Year ended June 30, 1997: Allowance for doubtful accounts.................... $ -- $ 40 $326(1) $ (36)(2) $330 ==== ==== ==== ===== ==== Year ended June 30, 1996: Allowance for doubtful accounts.................... $ -- $ -- $ -- $ -- $ -- ==== ==== ==== ===== ====
- --------------- (1) Net additions as a result of acquisitions (2) Amount represents bad debt write-offs 41 EX-10.2 2 BALANCED CARE CORPORATION 1 Exhibit 10.2 F O R M O F F A C I L I T Y L E A S E A G R E E M E N T MEDITRUST COMPANY LLC (A Delaware Limited Liability Company) as Lessor AND TC REALTY OF ____________, INC. (A Delaware Corporation) as Lessee Dated As Of June 30, 1998 (____________) 2 TABLE OF CONTENTS ARTICLE 1 LEASED PROPERTY; TERM; CONSTRUCTION; EXTENSIONS 1.1 Leased Property 1.2 Term 1.3 Extended Terms ARTICLE 2 DEFINITIONS AND RULES OF CONSTRUCTION 2.1 Definitions 2.2 Rules of Construction ARTICLE 3 RENT 3.1 Base Rent for Land, Leased Improvements, Related Rights and Fixtures 3.2 Calculation and Payment of Additional Rent; Annual Reconciliation 3.2.1 Estimates and Payments 3.2.2 Annual Statement 3.2.3 Deficits 3.2.4 Overpayments 3.2.5 Final Determination 3.2.6 Best Efforts to Maximize Gross Revenues 3.3 Confirmation and Audit of Additional Rent 3.3.1 Maintain Accounting Systems 3.3.2 Audit by Lessor 3.3.3 Deficiencies and Overpayments 3.3.4 Survival 3.4 Additional Charges 3.5 [Intentionally Deleted] 3.6 Net Lease 3.7 No Lessee Termination or Offset 3.7.1 No Termination 3.7.2 Waiver 3.7.3 Independent Covenants 3.8 Abatement of Rent Limited ARTICLE 4 IMPOSITIONS; TAXES; UTILITIES; INSURANCE PAYMENTS 3 4.1 Payment of Impositions 4.1.1 Lessee To Pay 4.1.2 Installment Elections 4.1.3 Returns and Reports 4.1.4 Refunds 4.1.5 Protest 4.2 Notice of Impositions 4.3 Adjustment of Impositions 4.4 Utility Charges 4.5 Insurance Premiums 4.6 Deposits 4.6.1 Lessor's Option 4.6.2 Use of Deposits 4.6.3 Deficits 4.6.4 Other Properties 4.6.5 Transfers 4.6.6 Security 4.6.7 Return 4.6.8 Receipts ARTICLE 5 OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY; INSTALLATION, REMOVAL AND REPLACEMENT OF PERSONAL PROPERTY; 5.1 Ownership of the Leased Property 5.2 Personal Property; Removal and Replacement of Personal Property 5.2.1 Lessee To Equip Facility 5.2.2 Sufficient Personal Property 5.2.3 Removal and Replacement; Lessor's Option to Purchase ARTICLE 6 SECURITY FOR LEASE OBLIGATIONS 6.1 Security for Lessee's Obligations; Permitted Prior Security Interests 6.1.1 Security 6.1.2 Purchase-Money Security Interests and Equipment Leases 4 6.2 Guaranties ARTICLE 7 CONDITION AND USE OF LEASED PROPERTY; MANAGEMENT AGREEMENTS 7.1 Condition of the Leased Property 7.2 Use of the Leased Property; Compliance; Management 7.2.1 Obligation to Operate 7.2.2 Permitted Uses 7.2.3 Compliance with Insurance Requirements 7.2.4 No Waste 7.2.5 No Impairment 7.2.6 No Liens 7.3 Compliance with Legal Requirements 7.4 Management Agreements ARTICLE 8 REPAIRS; RESTRICTIONS 8.1 Maintenance and Repair 8.1.1 Lessee's Responsibility 8.1.2 No Lessor Obligation 8.1.3 Lessee May Not Obligate Lessor 8.2 Encroachments; Title Restrictions ARTICLE 9 MATERIAL STRUCTURAL WORK AND CAPITAL ADDITIONS 9.1 Lessor's Approval 9.2 General Provisions as to Capital Additions and Certain Material Structural Work 9.2.1 No Liens 9.2.2 Lessee's Proposal Regarding Capital Additions and Material Structural Work 9.2.3 Lessor's Options Regarding Capital Additions and Material Structural Work 9.2.4 Lessor May Elect to Finance Capital Additions or Material Structural Work 9.3 Capital Additions and Material Structural Work Financed by Lessor 5 9.3.1 Lessee's Financing Request 9.3.2 Lessor's General Requirements 9.3.3 Payment of Costs 9.4 General Limitations 9.5 Non-Capital Additions ARTICLE 10 WARRANTIES AND REPRESENTATIONS 10.1 Representations and Warranties 10.1.1 Existence; Power; Qualification 10.1.2 Valid and Binding 10.1.3 Single Purpose 10.1.4 No Violation 10.1.5 Consents and Approvals 10.1.6 No Liens or Insolvency Proceedings 10.1.7 No Burdensome Agreements 10.1.8 Commercial Acts 10.1.9 Adequate Capital, Not Insolvent 10.1.10 Not Delinquent 10.1.11 No Affiliate Debt 10.1.12 Taxes Current 10.1.13 Financials Complete and Accurate 10.1.14 Pending Actions, Notices and Reports 10.1.15 Compliance with Legal and Other Requirements 10.1.16 No Action By Governmental Authority 10.1.17 Property Matters 10.1.18 Third Party Payor Agreements 10.1.19 Rate Limitations 10.1.20 Free Care 10.1.21 No Proposed Changes 10.1.22 ERISA 10.1.23 No Broker 10.1.24 No Improper Payments 10.1.25 Nothing Omitted 10.1.26 No Margin Security 10.1.27 No Default 10.1.28 Principal Place of Business 10.1.29 Labor Matters 10.1.30 Intellectual Property 10.1.31 Management Agreements 10.1.32 Option Purchase Documents 10.1.33 Working Capital Loan Documents 6 10.2 Continuing Effect of Representations and Warranties ARTICLE 11 FINANCIAL AND OTHER COVENANTS 11.1 Status Certificates 11.2 Financial Statements; Reports; Notice and Information 11.2.1 Obligation to Furnish 11.2.2 Responsible Officer 11.2.3 No Material Omission 11.2.4 Confidentiality 11.3 Financial Covenants 11.3.1 Rent Coverage Ratio of Lessee 11.3.2 [Intentionally Deleted] 11.3.3 [Intentionally Deleted] 11.3.4 No Indebtedness 11.3.5 No Guaranties 11.4 Affirmative Covenants 11.4.1 Maintenance of Existence 11.4.2 Materials 11.4.3 Compliance with Legal Requirements and Applicable Agreements 11.4.4 Books and Records 11.4.5 Participation in Third Party Payor Programs 11.4.6 Conduct of its Business 11.4.7 Address 11.4.8 Subordination of Certain Transactions 11.4.9 Inspection 11.4.10 Additional Property 11.4.11 Annual Facility Upgrade Expenditures 11.5 Additional Negative Covenants 11.5.1 Restrictions Relating to Lessee 11.5.2 No Liens 11.5.3 Limits on Certain Transactions 11.5.4 Non-Competition 11.5.5 No Default 11.5.6 Restrictions Relating to the Guarantor and the Developer 11.5.7 [Intentionally Deleted] 7 11.5.8 ERISA 11.5.9 Forgiveness of Indebtedness 11.5.10 Value of Assets 11.5.11 Changes in Fiscal Year and Accounting Procedures 11.6 Access to Records ARTICLE 12 INSURANCE AND INDEMNITY 12.1 General Insurance Requirements 12.1.1 Types and Amounts of Insurance 12.1.2 Insurance Company Requirements 12.1.3 Policy Requirements 12.1.4 Notices; Certificates and Policies 12.1.5 Lessor's Right to Place Insurance 12.1.6 Payment of Proceeds 12.1.7 Irrevocable Power of Attorney 12.1.8 Blanket Policies 12.1.9 No Separate Insurance 12.1.10 Assignment of Unearned Premiums 12.2 Indemnity 12.2.1 Indemnification 12.2.2 Indemnified Parties 12.2.3 Limitation on Lessor Liability 12.2.4 Risk of Loss ARTICLE 13 FIRE AND CASUALTY 13.1 Restoration Following Fire or Other Casualty 13.1.1 Following Fire or Casualty 13.1.2 Procedures 13.1.3 Disbursement of Insurance Proceeds 13.2 Disposition of Insurance Proceeds 13.2.1 Proceeds To Be Released To Pay For Work 13.2.2 Proceeds Not To Be Released 13.2.3 Lessee Responsible for Short-Fall 13.3 Tangible Personal Property 13.4 Restoration of Certain Improvements and the Tangible Personal Property 8 13.5 No Abatement of Rent 13.6 Termination of Certain Rights 13.7 Waiver 13.8 Application of Rent Loss and/or Business Interruption Insurance 13.9 Obligation To Account ARTICLE 14 CONDEMNATION 14.1 Parties' Rights and Obligations 14.2 Total Taking 14.3 Partial or Temporary Taking 14.4 Restoration 14.5 Award Distribution 14.6 Control of Proceedings ARTICLE 15 PERMITTED CONTESTS 15.1 Lessee's Right to Contest 15.2 Lessor's Cooperation 15.3 Lessee's Indemnity ARTICLE 16 DEFAULT 16.1 Events of Default 16.2 Remedies 16.3 Damages 16.4 Lessee Waivers 16.5 Application of Funds 16.6 [Intentionally Deleted] 16.7 Lessor's Right to Cure 16.8 No Waiver by Lessor 16.9 Right of Forbearance 16.10 Cumulative Remedies ARTICLE 17 SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING OVER 17.1 Surrender 17.2 Transfer of Permits and Contracts 17.3 No Acceptance of Surrender 17.4 Holding Over 9 ARTICLE 18 PURCHASE OF THE LEASED PROPERTY 18.1 Purchase of the Leased Property 18.2 Appraisal 18.2.1 Designation of Appraisers 18.2.2 Appraisal Process 18.2.3 Specific Enforcement and Costs 18.3 Lessee's Limited Right of First Refusal 18.4 Lessee's Option to Purchase 18.4.1 Conditions to Option 18.4.2 Exercise of Option 18.4.3 Conveyance 18.4.4 Calculation of Purchase Price 18.4.5 Payment of Purchase Price 18.4.6 Place and Time of Closing 18.4.7 Condition of Leased Property 18.4.8 Quality of Title 18.4.9 Lessor's Inability to Perform 18.4.10 Merger by Deed 18.4.11 Use of Purchase Price to Clear Title 18.4.12 Lessee's Default ARTICLE 19 SUBLETTING AND ASSIGNMENT 19.1 Subletting and Assignment 19.2 Permitted Subleases 19.3 Attornment 19.4 Permitted Assignments 19.5 Other Permitted Transfers ARTICLE 20 TITLE TRANSFERS AND LIENS GRANTED BY LESSOR 20.1 No Merger of Title 20.2 Transfers by Lessor 20.3 Lessor May Grant Liens 20.4 Subordination and Non-Disturbance ARTICLE 21 LESSOR OBLIGATIONS 21.1 Quiet Enjoyment 21.2 Memorandum of Lease 21.3 Default by Lessor ARTICLE 22 NOTICES 10 ARTICLE 23 LIMITATION OF LIABILITY ARTICLE 24 MISCELLANEOUS PROVISIONS 24.1 Broker's Fee Indemnification 24.2 No Joint Venture or Partnership 24.3 Amendments, Waivers and Modifications 24.4 Captions and Headings 24.5 Time is of the Essence 24.6 Counterparts 24.7 Entire Agreement 24.8 WAIVER OF JURY TRIAL 24.9 Successors and Assigns 24.10 No Third Party Beneficiaries 24.11 Governing Law 24.12 General ARTICLE 25 SUBSTITUTION OF PROPERTY 25.1 Substitution of Property for the Leased Property 25.2 Conditions to Substitution 25.3 Conveyance to Lessee 25.4 Expenses EXHIBIT A LEGAL DESCRIPTION OF THE LAND EXHIBIT B PERMITTED ENCUMBRANCES EXHIBIT C LIST OF SHAREHOLDERS EXHIBIT D NATIONAL ACCOUNTS AND LOCAL DISCOUNTS EXHIBIT E [INTENTIONALLY DELETED] EXHIBIT F RATE LIMITATIONS EXHIBIT G FREE CARE REQUIREMENTS EXHIBIT H WORKING CAPITAL LOAN DOCUMENTS EXHIBIT I RENT COVERAGE RATIO CALCULATION 11 FACILITY LEASE AGREEMENT (____________) This FACILITY LEASE AGREEMENT ("Lease") is dated as of the 30th day of June, 1998, and is between MEDITRUST COMPANY LLC ("Lessor"), a Delaware limited liability company having its principal office at 197 First Avenue, Needham Heights, Massachusetts 02494, and TC REALTY OF ____________, INC., a Delaware corporation ("Lessee"). ARTICLE 1 LEASED PROPERTY; TERM; CONSTRUCTION; EXTENSIONS 1.1 LEASED PROPERTY. Upon and subject to the terms and conditions hereinafter set forth, Lessor leases to Lessee and Lessee rents and leases from Lessor all of Lessor's rights and interests in and to the following real and personal property (collectively, the "Leased Property"): (a) the real property described in EXHIBIT A attached hereto (the "Land"); (b) all buildings, structures, Fixtures (as hereinafter defined) and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines, and parking areas and roadways appurtenant to such buildings and structures presently or hereafter situated upon the Land (collectively, the "Leased Improvements"); (c) all easements, rights and appurtenances of every nature and description now or hereafter relating to or benefitting any or all of the Land and the Leased Improvements; and (d) all equipment, machinery, building fixtures, and other items of property (whether realty, personalty or mixed), including all components thereof, now or hereafter located in, on or used in connection with, and permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, and built-in oxygen and vacuum systems, all of which, to the greatest extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Tangible Personal Property (as hereinafter defined) 12 which are not permanently affixed to or incorporated in the Leased Property (collectively, the "Fixtures"). The Leased Property is leased in its present condition, AS IS, without representation or warranty of any kind, express or implied, by Lessor and subject to: (i) the rights of parties in possession; (ii) the existing state of title including all covenants, conditions, Liens (as hereinafter defined) and other matters of record (including, without limitation, the matters set forth in EXHIBIT B); (iii) all applicable laws and (iv) all matters, whether or not of a similar nature, which would be disclosed by an inspection of the Leased Property or by an accurate survey thereof. 1.2 TERM. The term of this Lease shall consist of: the "Initial Term", which shall commence on June 30, 1998 (the "Commencement Date") and end on the date (the "Expiration Date"), that constitutes the tenth (10th) anniversary of the first "Conversion Date" to occur under the Related Leases (as hereinafter defined); provided, however, that this Lease may be sooner terminated as hereinafter provided. In addition, Lessee shall have the option(s) to extend the Term (as hereinafter defined) as provided for in Section 1.3. 1.3 EXTENDED TERMS. Provided that this Lease has not been previously terminated, and as long as there exists no Lease Default (as hereinafter defined) at the time of exercise and on the last day of the Initial Term or the then current Extended Term (as hereinafter defined), as the case may be, Lessee is hereby granted the option to extend the Initial Term of this Lease for three (3) additional periods (collectively, the "Extended Terms") as follows: three (3) successive five (5) year periods for a maximum Term, if all such options are exercised, which ends on the fifteenth (15th) anniversary of the Expiration Date. Lessee's extension options shall be exercised by Lessee by giving written notice to Lessor of each such extension at least one hundred eighty (180) days, but not more than three hundred sixty (360) days, prior to the termination of the Initial Term or the then current Extended Term, as the case may be. Lessee shall have no right to rescind any such notice once given. Lessee may not exercise its option for more than one Extended Term at a time. During each effective Extended Term, all of the terms and conditions of this Lease shall continue in full force and effect, except that the Base Rent (as hereinafter defined) for each such Extended Term shall be adjusted as set forth in Section 3.1(b). Notwithstanding anything to the contrary set forth herein, Lessee's rights to exercise the options granted in this Section 1.3 are subject to the further condition that concurrently with the exercise of any extension option hereunder, Lessee shall have exercised its option to extend the terms of all of the Related Leases in accordance with the provisions of the Agreement Regarding Related Lease Transactions and the provisions of Section 1.3 of each of the Related Leases. 13 ARTICLE 2 DEFINITIONS AND RULES OF CONSTRUCTION 2.1 DEFINITIONS. For all purposes of this Lease and the other Lease Documents (as hereinafter defined), except as otherwise expressly provided or unless the context otherwise requires, (I) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular and (II) all references in this Lease or any of the other Lease Documents to designated "Articles", "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease or the other applicable Lease Document. ACCOUNTS: As defined in the UCC. ACCREDITATION BODY: CARF, JCAHO, ________ Department of Social Services and all other Persons having or claiming jurisdiction over the accreditation, certification, evaluation or operation of the Facility. ADDITIONAL CHARGES: As defined in Article 3. ADDITIONAL LAND: As defined in Section 9.3. ADDITIONAL RENT: As defined in Section 3.1(c). ADDITIONAL RENT COMMENCEMENT DATE: As defined in Section 3.1(c). AFFILIATE: With respect to any Person (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, twenty-five percent (25%) or more of the outstanding capital stock, shares or equity interests of such Person or (iii) any officer, director, employee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. AFFILIATED PARTY SUBORDINATION AGREEMENT: That certain Affiliated Party Subordination Agreement of even date herewith by and among Lessee, the other TC Realty Parties, the Guarantor, the Current Manager and Lessor. 14 AGREEMENT REGARDING RELATED LEASE TRANSACTIONS: That certain Amended and Restated Agreement Regarding Related Lease Transactions dated January 7, 1998, as amended by First Amendment to Amended and Restated Agreement Regarding Related Lease Transactions of even date, by and among Lessee, Lessor and any other Tenant Party that is a party to any Related Lease. Lessor and Lessee anticipate that the Agreement Regarding Related Lease Transactions will be amended from time to time in connection with future transactions in order to include Affiliates of Lessor and/or Affiliates of Lessee as parties thereto and to expand or otherwise modify the definition of "Related Leases" set forth therein. ANNUAL FACILITY UPGRADE EXPENDITURE: The aggregate amount spent on Upgrade Renovations during any Lease Year. APPURTENANT AGREEMENTS: Collectively, all instruments, documents and other agreements that now or hereafter create any utility, access or other rights or appurtenances benefiting or relating to the Leased Property. ARCHITECT'S ASSIGNMENT: As defined in the Leasehold Improvement Agreement. ARCHITECT'S CONTRACT: As defined in the Leasehold Improvement Agreement. ASSIGNMENT AGREEMENT: That certain Assignment of even date herewith by and between the Guarantor and Lessee, relating to the Option Agreement. ASSIGNMENT OF SUBLEASES: That certain Assignment of Subleases and Rents of even date herewith from the Lessee to the Lessor. AWARD: All compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. BASE RENT: The Pre-Conversion Base Rent from the Commencement Date through the day preceding the Conversion Date and the Post-Conversion Base Rent from the Conversion Date through the remainder of the Term. BCC GUARANTY: As defined in Section 19.4. BCC OPTION AGREEMENT: That certain Option Agreement of even date herewith by and among TC Realty Holding Company and the Guarantor. BCC STOCK PLEDGE: As defined in Section 19.4. BUSINESS DAY: Any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America, the Commonwealth of Massachusetts, the State or the state in which Lessor's depository bank is located. CARF: The Commission on Accreditation of Rehabilitation Facilities. 15 CAPITAL ADDITIONS: Collectively, all new buildings and additional structures annexed to any portion of any of the Leased Improvements and material expansions of any of the Leased Improvements which are constructed on any portion of the Land during the Term, including, without limitation, the construction of a new wing or new story, the renovation of any of the Leased Improvements on the Leased Property in order to provide a functionally new facility that is needed or used to provide services not previously offered and any expansion, construction, renovation or conversion or in order to (i) increase the unit or bed capacity of the Facility, (ii) change the purpose for which such units or beds are utilized and/or (iii) change the utilization of any material portion of any of the Leased Improvements. CAPITAL ADDITION COST: The cost of any Capital Addition made by Lessee whether paid for by Lessee or Lessor. Such cost shall include all costs and expenses of every nature whatsoever incurred directly or indirectly in connection with the development, permitting, construction and financing of a Capital Addition as reasonably determined by, or to the reasonable satisfaction of, Lessor. CASH ADJUSTMENT: As defined in Section 25.2. CASH COLLATERAL: As defined in the Deposit Pledge Agreement. CASH FLOW: The Consolidated Net Income (or Consolidated Net Loss) before federal and state income taxes for any period plus (i) the amount of the provision for depreciation and amortization actually deducted on the books of the applicable Person for the purposes of computing such Consolidated Net Income (or Consolidated Net Loss) for the period involved, plus (ii) Rent and interest on all other Indebtedness which is fully subordinated to the Lease Obligations, plus (iii) any indebtedness which is fully subordinated to the Lease Obligations pursuant to the Affiliated Party Subordination Agreement. CASUALTY: As defined in Section 13.1. CHAMPUS: The Civilian Health and Medical Program of the Uniform Service, a program of medical benefits covering retirees and dependents of members or former members of a uniformed service provided, financed and supervised by the United States Department of Defense and established by 10 USC Sections 1071 et seq. CHATTEL PAPER: As defined in the UCC. CLOSING: As defined in Section 18.4. CODE: The Internal Revenue Code of 1986, as amended. COLLATERAL: All of the property in which security interests are granted to Lessor and the other Meditrust Entities pursuant to the Lease Documents and the Related Party 16 Agreements to secure the Lease Obligations, including, without limitation, the Cash Collateral and the Receivables. COMMENCEMENT DATE: As defined in Section 1.2. COMPARABLE FACILITY: As defined in Section 25.1. COMPLETION DATE: As defined in the Leasehold Improvement Agreement. COMPLETION GUARANTY: That certain Guaranty of even date executed by Guarantor in favor of Lessor, relating to completion of the Facility. CONDEMNATION: With respect to the Leased Property or any interest therein or right accruing thereto or use thereof (i) the exercise of any Governmental Authority, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of Condemnation or Taking or while legal proceedings for Condemnation or Taking are pending. CONDEMNOR: Any public or quasi-public authority, or private corporation or individual, having the power of condemnation. CONSOLIDATED AND CONSOLIDATING: The consolidated and consolidating accounts of the relevant Person and its Subsidiaries consolidated in accordance with GAAP. CONSOLIDATED FINANCIALS: For any fiscal year or other accounting period for any Person and its consolidated Subsidiaries, statements of earnings and retained earnings and of changes in financial position for such period and for the period from the beginning of the respective fiscal year to the end of such period and the related balance sheet as at the end of such period, together with the notes thereto, all in reasonable detail and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, and prepared in accordance with GAAP, and disclosing all liabilities of such Person and its consolidated Subsidiaries, including, without limitation, contingent liabilities. CONSTRUCTION ASSIGNMENT: As defined in the Leasehold Improvement Agreement. CONSTRUCTION CONTRACT: As defined in the Leasehold Improvement Agreement. CONSULTANTS: Collectively, the architects, engineers, inspectors, surveyors and other consultants that are engaged from time to time by Lessor to perform services for Lessor in connection with this Lease. CONSUMER PRICE ADJUSTMENT FACTOR: A fraction, the numerator of which is the Consumer Price Index in effect as of first day of the Lease Year for which the Annual 17 Facility Upgrade Expenditure increase is being calculated and the denominator of which is the Consumer Price Index in effect as of the Commencement Date. CONSUMER PRICE INDEX: The Consumer Price Index for Urban Wage Earners and Clerical Workers, All Items-U.S. City Average (1982-84=100), published by the Bureau of Labor Statistics, U.S. Department of Labor. If the Bureau of Labor Statistics should cease to publish such Price Index in its present form and calculated on the present basis, then the most similar index published by the same Bureau shall be used for the same purpose. If there is no such similar index, a substitute index which is then generally recognized as being similar to the Consumer Price Index shall be used, with such substitute index to be reasonably selected by Lessor. CONTRACTS: All agreements (including, without limitation, Provider Agreements and Patient Admission Agreements), contracts, (including without limitation, construction contracts, subcontracts, and architects' contracts,) contract rights, warranties and representations, franchises, and records and books of account benefiting, relating to or affecting the Leased Property or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession, or operation thereof, or the operation of any programs or services in conjunction with the Leased Property and all renewals, replacement and substitutions therefor, now or hereafter issued by or entered into with any Governmental Authority, Accreditation Body or Third Party Payor or maintained or used by any member of the Leasing Group or entered into by any member of the Leasing Group with any third Person. CONVERSION DATE: The earlier to occur of (i) the Completion Date, (ii) the completion of the Project in accordance with the Project Plans and the Leasehold Improvement Agreement and the issuance by the appropriate Governmental Authorities of a Certificate of Occupancy (or its equivalent) or (iii) the date that the first resident is admitted to the Facility. CURRENT ASSETS: All assets of any Person which would, in accordance with GAAP, be classified as current assets of a Person conducting a business the same as or similar to that of such Person, excluding however, any and all advances to or Current Liabilities owed to such Person by its Subsidiaries. CURRENT LIABILITIES: All liabilities of any Person which would, in accordance with GAAP, be classified as current liabilities of a Person conducting a business the same as or similar to that of such Person, including without limitation, all rental and other payments under leases and fixed payments of, and sinking fund payments with respect to, Indebtedness required to be made within one (1) year from the date of determination. CURRENT MANAGER: Balanced Care at ____________, Inc. CURRENT MANAGEMENT AGREEMENT: That certain Management Agreement of even date by and between Lessee and the Current Manager. 18 DATE OF TAKING: The date the Condemnor has the right to possession of the property being condemned. DEED: As defined in Section 18.4. DEPARTMENT OF SOCIAL SERVICES: _________________________ Department of Social Services. DEPOSIT PLEDGE AGREEMENT: The pledge and security agreement so captioned and dated as of even date herewith between Lessee and Lessor. DEVELOPER: BCC Development and Management Co., a Delaware corporation, and its successors and assigns. DEVELOPER PERMITS ASSIGNMENT: That certain Collateral Assignment of Permits, Licenses and Contracts of even date granted by the Developer to Lessor. DOCUMENTS: As defined in the UCC. ENCUMBRANCE: As defined in Section 20.3. ENVIRONMENTAL INDEMNITY AGREEMENT: The Environmental Indemnity Agreement of even date herewith by and among Lessee, the Developer and Lessor. ENVIRONMENTAL LAWS: As defined in the Environmental Indemnity Agreement. ERISA: The Employment Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT: As defined in Article 16. EXCESS GROSS REVENUES: Gross Revenues for a fiscal year less the Gross Revenues for the immediately preceding fiscal year. EXPIRATION DATE: As defined in Section 1.2. EXTENSION TERM ADJUSTMENT DATES: During any Extended Terms, the tenth (10th), fifteenth (15th) and twentieth (20th) anniversaries of the Conversion Date. EXTENDED TERMS: As defined in Section 1.3. FACILITY: The adult care residence with eighty (80) licensed beds (located in eighty (80) units) to be known as "______________________________" to be constructed on the Land (together with related parking and other amenities). FAILURE TO PERFORM: As defined Article 16. 19 FAIR MARKET ADDED VALUE: The Fair Market Value of the Leased Property (including all Capital Additions) minus the Fair Market Value of the Leased Property determined as if no Capital Additions paid for by Lessee had been constructed. FAIR MARKET VALUE OF THE CAPITAL ADDITION: The amount by which the Fair Market Value of the Leased Property upon the completion of a particular Capital Addition exceeds the Fair Market Value of the Leased Property just prior to the construction of the particular Capital Addition. FAIR MARKET VALUE OF THE LEASED PROPERTY: The fair market value of the Leased Property, including all Capital Additions, and including the Land and all other portions of the Leased Property, and (a) assuming the same is unencumbered by this Lease, (b) determined in accordance with the appraisal procedures set forth in Section 18.2 or in such other manner as shall be mutually acceptable to Lessor and Lessee and (c) not taking into account any reduction in value resulting from any Lien to which the Leased Property is subject and which Lien Lessee or Lessor is otherwise required to remove at or prior to closing of the transaction. However, the positive or negative effect on the value of the Leased Property attributable to the interest rate, amortization schedule, maturity date, prepayment provisions and other terms and conditions of any Lien on the Leased Property which is not so required or agreed to be removed shall be taken into account in determining the Fair Market Value of the Leased Property. The Fair Market Value shall be determined as the overall value based on due consideration of the "income" approach, the "comparable sales" approach, and the "replacement cost" approach. FAIR MARKET VALUE OF THE MATERIAL STRUCTURAL WORK: The amount by which the Fair Market Value of the Leased Property upon the completion of any particular Material Structural Work exceeds the Fair Market Value of the Leased Property just prior to the construction of the applicable Material Structural Work. FEE MORTGAGE: As defined in Section 20.3. FEE MORTGAGEE: As defined in Section 20.3. FINANCING PARTY: Any Person who is or may be participating with Lessor in any way in connection with the financing of any Capital Addition. FINANCING STATEMENTS: Uniform Commercial Code financing statements evidencing the security interests granted to Lessor in connection with the Lease Documents. FIRST LEASEHOLD MORTGAGE: That certain Line of Credit Leasehold Deed of Trust and Security Agreement of even date herewith granted by the Lessee to the Lessor, securing the Lessee's obligations under the Lessee's Guaranty. FISCAL QUARTER: Each of the three (3) month periods commencing on July 1st, October 1st, January 1st and April 1st. FISCAL YEAR: The twelve (12) month period from July 1st to June 30th. 20 FIXTURES: As defined in Article 1. GAAP: Generally accepted accounting principles, consistently applied throughout the relevant period. GENERAL INTANGIBLES: As defined in the UCC. GOVERNMENTAL AUTHORITIES: Collectively, all agencies, authorities, bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence. GROSS REVENUES: Collectively, all revenues generated by reason of the operation of the Leased Property (including any Capital Additions), whether or not directly or indirectly received or to be received by the Lessee, including, without limitation, all patient and/or resident revenues received or receivable for the use of, or otherwise by reason of, all rooms, beds, units and other facilities provided, meals served, services performed, space or facilities subleased or goods sold on or from the Leased Property and further including, without limitation, except as otherwise specifically provided below, any consideration received under any subletting, licensing, or other arrangements with any Person relating to the possession or use of the Leased Property and all revenues from all ancillary services provided at or relating to the Leased Property; provided, however, that Gross Revenues shall not include non-operating revenues such as interest income or gain from the sale of assets not sold in the ordinary course of business; and provided, further, that there shall be excluded or deducted (as the case may be) from such revenues: (i) contractual allowances (relating to any period during the Term of this Lease and thereafter until the Rent hereunder is paid in full) for billings not paid by or received from the appropriate Governmental Authorities or Third Party Payors, (ii) allowances according to GAAP for uncollectible accounts, (iii) all proper patient and/or resident billing credits and adjustments according to GAAP relating to health care accounting, (iv) federal, state or local sales, use, gross receipts and excise taxes and any tax based upon or measured by said Gross Revenues which is added to or made a part of the amount billed to the patient, resident or other recipient of such services or goods, whether included in the billing or stated separately, (v) provider discounts for hospital or other medical facility utilization contracts, 21 (vi) the cost of any federal, state or local governmental program imposed specially to provide or finance indigent patient and/or resident care (other than Medicare, Medicaid and the like), and (vii) deposits refundable to residents of the Facility. To the extent that the Leased Property is subleased or occupied by an Affiliate of the Lessee, Gross Revenues calculated for all purposes of this Lease (including, without limitation, the determination of the Additional Rent payable under this Lease) shall include the Gross Revenues of such Sublessee with respect to the premises demised under the applicable Sublease (i.e., the Gross Revenues generated from the operations conducted on such subleased portion of the Leased Property) and the rent received or receivable from such Sublessee pursuant to such Subleases shall be excluded from Gross Revenues for all such purposes. As to any Sublease between the Lessee and a non-Affiliate of the Lessee (other than the Guarantor or any Affiliate of the Guarantor), only the rental actually received by the Lessee from such non-Affiliate shall be included in Gross Revenues. GUARANTIES: Collectively, the Completion Guaranty and any BCC Guaranty hereafter executed and delivered to Lessor by the Guarantor in accordance with the terms of Section 19.4. GUARANTOR: Balanced Care Corporation, a Delaware corporation, and its successors and assigns. HAZARDOUS SUBSTANCES: As defined in the Environmental Indemnity Agreement. IMPOSITIONS: Collectively, all taxes (including, without limitation, all capital stock and franchise taxes of Lessor, all ad valorem, property, sales, use, single business, gross receipts, transaction privilege, rent or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water and sewer rents, water charges or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), transfer taxes and recordation taxes imposed as a result of the conveyance of the Land to Lessor (and/or any conveyance of the Leased Property to Lessee pursuant to the terms of this Lease), this Lease or any extensions hereof, and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of either or both of the Leased Property and the Rent (including all interest and penalties thereon due to any failure in payment by Lessee), which at any time prior to, during or in respect of the Term hereof and thereafter until the Leased Property is surrendered to Lessor as required by the terms of this Lease, may be assessed or imposed on or in respect of or be a Lien upon (a) Lessor or Lessor's interest in the Leased Property, (b) the Leased Property or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, sales from, or activity conducted on, or in connection with, the Leased Property or the leasing or use of the Leased Property. Notwithstanding 22 the foregoing, nothing contained in this Lease shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor or any other Person, except Lessee or its successors, (2) any net revenue tax of Lessor or any other Person, except Lessee and its successors, (3) any tax imposed with respect to the proceeds, or any portion thereof, received by Lessor as a result of the sale, exchange or other disposition by Lessor of the Leased Property, except any sale, transfer, exchange or other disposition of the Leased Property to Lessee, or (4) except as expressly provided elsewhere in this Lease, any principal or interest on any Encumbrance on the Leased Property; provided, however, the provisos set forth in clauses (1) and (2) of this sentence shall not be applicable to the extent that any tax, assessment, tax levy or charge which Lessee is obligated to pay pursuant to the first sentence of this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof. In computing the amount of any franchise tax or capital stock tax which may be or become an Imposition, the amount payable by Lessee shall be equitably apportioned based upon all properties owned by Lessor that are located within the particular jurisdiction subject to any such tax. INDEBTEDNESS: The total of all obligations of a Person, whether current or long-term, which in accordance with GAAP would be included as liabilities upon such Person's balance sheet at the date as of which Indebtedness is to be determined, and shall also include (i) all capital lease obligations and (ii) all guarantees, endorsements (other than for collection of instruments in the ordinary course of business), or other arrangements whereby responsibility is assumed for the obligations of others, whether by agreement to purchase or otherwise acquire the obligations of others, including any agreement contingent or otherwise to furnish funds through the purchase of goods, supplies or services for the purpose of payment of the obligations of others. INDEMNIFIED PARTIES: As defined in Section 12.2. INDEX: The rate of interest of actively traded marketable United States Treasury Securities bearing a fixed rate of interest adjusted for a constant maturity of ten (10) years as calculated by the Federal Reserve Board. INITIAL TERM: As defined in Section 1.2. INSTRUMENTS: As defined in the UCC. INSURANCE REQUIREMENTS: All terms of any insurance policy required by this Lease, all requirements of the issuer of any such policy with respect to the Leased Property and the activities conducted thereon and the requirements of any insurance board, association or organization or underwriters' regulations pertaining to the Leased Property. JCAHO: The Joint Commission on Accreditation of Healthcare Organizations. LAND: As defined in Article 1. 23 LEASE: As defined in the preamble of this Lease. LEASE DEFAULT: The occurrence of any default or breach of condition continuing beyond any applicable notice and/or grace periods under this Lease and/or any of the other Lease Documents. LEASE DOCUMENTS: Collectively, this Lease, the Guaranties, the Security Agreement, the Deposit Pledge Agreement, the Pledge Agreement, the Leasehold Improvement Agreement, the Note, the Lessee's Guaranty, the First Leasehold Mortgage, the Agreement Regarding Related Lease Transactions, the Permits Assignments, the Financing Statements, the Affiliated Party Subordination Agreement, the Environmental Indemnity Agreement, the Construction Assignment, the Architect's Assignment, the Assignment of Subleases, the Assignment Agreement, the Working Capital Assurance Documents and any and all other instruments, documents, certificates and/or agreements now or hereafter (i) executed or furnished by any member of the Leasing Group in connection with the transactions evidenced by this Lease and/or any of the foregoing documents and/or (ii) evidencing or securing any of Lessee's obligations relating to the Leased Property, including, without limitation, Lessee's obligations hereunder and/or under the Leasehold Improvement Agreement. LEASEHOLD IMPROVEMENT AGREEMENT: That certain Leasehold Improvement Agreement of even date herewith by and among Lessor, Lessee and the Developer. LEASE OBLIGATIONS: Collectively, all indebtedness, covenants, liabilities, obligations, agreements and undertakings (other than Lessor's obligations) under this Lease and the other Lease Documents. LEASE YEAR: Each twelve-month period during the Term commencing on the Conversion Date and any anniversary of the Conversion Date. LEASED IMPROVEMENTS: As defined in Article 1. LEASED PROPERTY: As defined in Article 1. LEASING GROUP: Collectively, Lessee, the Pledgor, the Guarantor, the Developer, any Sublessee and any Manager. LEGAL REQUIREMENTS: Collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use, health care licensing and senior housing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting Lessor, any member of the Leasing Group or the Leased Property or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with the Leased Property, including, without limitation, any of the foregoing which may (i) require 24 repairs, modifications or alterations in or to the Leased Property, (ii) in any way affect (adversely or otherwise) the use and enjoyment of the Leased Property or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from the Leased Property. Without limiting the foregoing, the term Legal Requirements includes all Environmental Laws and shall also include all Permits and Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. LESSEE: As defined in the preamble of this Lease and its successors and assigns. LESSEE PERMITS ASSIGNMENT: That certain Collateral Assignment of Permits, Licenses and Contracts of even date granted by Lessee to Lessor. LESSEE'S ELECTION NOTICE: As defined in Section 14.3. LESSEE'S GUARANTY: That certain Guaranty of even date herewith executed by the Lessee for the benefit of Lessor, guarantying the obligations under the Note. LESSEE'S PURCHASE OPTION NOTICE: As defined in Section 18.4. LESSOR: As defined in the preamble of this Lease and its successors and assigns. LIEN: With respect to any real or personal property, any mortgage, easement, restriction, lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property, whether or not choate, vested or perfected. LIMITED PARTIES: As defined in Section 11.5; provided, however, in no event shall the term Limited Parties include any Person in its capacity as a shareholder of a public entity, unless such shareholder is a member of the Leasing Group or an Affiliate of any member of the Leasing Group. MANAGED CARE PLANS: All health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. MANAGEMENT AGREEMENT: Any agreement, whether written or oral, between Lessee or any Sublessee and any other Person pursuant to which Lessee or such Sublessee provides any payment, fee or other consideration to any other Person to operate or manage the Facility. MANAGER: Any Person who has entered into a Management Agreement with Lessee or any Sublessee. 25 MATERIAL STRUCTURAL WORK: Any (i) structural alteration, (ii) structural repair or (iii) structural renovation to the Leased Property that would require (a) the design and/or involvement of a structural engineer and/or architect and/or (b) the issuance of a Permit. MEDICAID: The medical assistance program established by Title XIX of the Social Security Act (42 USC Section 1396 et seq.) and any statute succeeding thereto. MEDICARE: The health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 USC Sections 1395 et seq.) and any statute succeeding thereto. MEDITRUST ENTITIES: Collectively, Lessor and any other Affiliate of Lessor which may now or hereafter be a party to any Related Party Agreement. MEDITRUST INVESTMENT: The sum of (i) the Original Meditrust Investment plus (ii) the aggregate amount now or hereafter advanced under the Leasehold Improvement Agreement, including, without limitation, the aggregate amount which may hereafter be advanced by Lessor to Lessee in connection with the consummation of the Stock Transfer in the event that the Lessee elects to request that Lessor advance an amount equal to the outstanding principal, accrued interest and any other sum due under the Note in order to satisfy the outstanding obligations thereunder, plus (iii) the aggregate amount of all Subsequent Investments. MONTHLY DEPOSIT DATE: As defined in Section 4.6. NET INCOME (OR NET LOSS): The net income (or net loss, expressed as a negative number) of a Person for any period, after all taxes actually paid or accrued and all expenses and other charges determined in accordance with GAAP. NOTE: That certain Promissory Note of even date herewith made by the Pledgor to the order of Lessor in the original principal amount of ____________ THOUSAND AND NO/100 DOLLARS ($_________.00). OBLIGATIONS: Collectively, the Lease Obligations and the Related Party Obligations. OFFER: As defined in Section 18.3. OFFICER'S CERTIFICATE: A certificate of Lessee signed on behalf of Lessee by the Chairman of the Board of Directors, the President, any Vice President or the Treasurer of Lessee, or another officer authorized to so sign by the Board of Directors or By-Laws of Lessee, or any other Person whose power and authority to act has been authorized by delegation in writing by any of the Persons holding the foregoing offices. OPTION AGREEMENT: That certain Option Agreement dated as of ________ _______________ by and between the Guarantor and _____________________________. 26 OPTION PURCHASE DOCUMENTS: Collectively, the Option Agreement and all other documents and instruments now or hereafter executed and/or delivered in connection therewith or pursuant thereto. ORIGINAL MEDITRUST INVESTMENT: _________________________ THOUSAND AND __/100 DOLLARS ($_______.__). OVERDUE RATE: On any date, a rate of interest per annum equal to the greater of: (i) a variable rate of interest per annum equal to one hundred twenty percent (120%) of the Prime Rate, or (ii) eighteen percent (18%) per annum; provided, however, in no event shall the Overdue Rate be greater than the maximum rate then permitted under applicable law to be charged by Lessor. PATIENT ADMISSION AGREEMENTS: Collectively, all contracts, agreements and consents executed by or on behalf of any patient or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. PBGC: Pension Benefit Guaranty Corporation. PERMITS: Collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditations, certificates, certifications, consents, agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements benefiting, relating or affecting the Leased Property or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Leased Property and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor to any member of the Leasing Group, or maintained or used by any member of the Leasing Group, or entered into by any member of the Leasing Group with any third Person. PERMITS ASSIGNMENTS: Collectively, the Lessee Permits Assignment and the Developer Permits Assignment. PERMITTED ENCUMBRANCES: As defined in Section 10.1. PERMITTED PRIOR SECURITY INTERESTS: As defined in Section 6.1. PERSON: Any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. PLANS AND SPECIFICATIONS: As defined in Section 13.1. PLEDGE AGREEMENT: The Stock Pledge Agreement of even date herewith by and among the Pledgor, Lessee and Lessor. 27 PLEDGOR: TC Realty Holding Company, a Delaware corporation. POST-CONVERSION BASE RENT: As defined in Section 3.1. PRE-CONVERSION BASE RENT: As defined in Section 3.1. PRE-CONVERSION RENT ADJUSTMENT RATE: One Hundred Ninety (190) basis points over the Prime Rate. PRIMARY INTENDED USE: The use of the Facility as an adult care residence with eighty (80) licensed beds (located in eighty (80) units) or such additional number of beds or units as may hereafter be permitted under this Lease, and such ancillary uses as are permitted by law and may be necessary in connection therewith or incidental thereto. PRIME RATE: The variable rate of interest per annum from time to time announced by the Reference Bank as its prime rate of interest and in the event that the Reference Bank no longer announces a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate of interest or base rate of interest from time to time announced by any other major bank or other financial institution reasonably selected by Lessor. PRINCIPAL PLACE OF BUSINESS: As defined in Section 10.1. PROCEEDS: As defined in the UCC. PROJECT: As defined under the Leasehold Improvement Agreement. PROJECT FUNDS: As defined under the Leasehold Improvement Agreement. PROJECT PLANS: As defined under the Leasehold Improvement Agreement. PROPOSED FACILITY: As defined in Section 25.2. PRORATION FACTOR: As defined in Section 3.1(c). PROVIDER AGREEMENTS: All participation, provider and reimbursement agreements or arrangements now or hereafter in effect for the benefit of Lessee or any Sublessee in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with Lessee's or such Sublessee's participation in any Third Party Payor Program. PURCHASE OPTION: As defined in Section 18.4. PURCHASE OPTION DATE: As defined in Section 18.4. PURCHASE PRICE: As defined in Section 18.4. 1 28 PURCHASER: As defined in Section 11.5. RECEIVABLES: Collectively, all (i) Instruments, Documents, Accounts, Proceeds, General Intangibles and Chattel Paper and (ii) rights to payment for goods sold or leased or services rendered by Lessee or any other party, whether now in existence or arising from time to time hereafter and whether or not yet earned by performance, including, without limitation, obligations evidenced by an account, note, contract, security agreement, chattel paper, or other evidence of indebtedness. REFERENCE BANK: Fleet Bank of Connecticut, N.A. RELATED LEASES: As defined under the Agreement Regarding Related Lease Transactions. RELATED PARTIES: Collectively, each Person that may now or hereafter be a party to any Related Party Agreement other than the Meditrust Entities, including, without limitation, until such time as the Stock Transfer may be consummated in accordance with the provisions of Section 19.4 and the satisfaction of the conditions set forth in Section 19.4, those TC Realty Parties that are not owned and controlled, directly or indirectly, by the Guarantor and, after such consummation of the Stock Transfer, all TC Realty Parties that are owned and controlled, directly or indirectly, by the Guarantor. RELATED PARTY AGREEMENT: Any agreement, document or instrument now or hereafter evidencing or securing any Related Party Obligation. RELATED PARTY DEFAULT: The occurrence of a default or breach of condition continuing beyond the expiration of any applicable notice and grace periods, if any, under the terms of any Related Party Agreement. RELATED PARTY OBLIGATIONS: Collectively, all indebtedness, covenants, liabilities, obligations, agreements and undertakings due to, or made for the benefit of, Lessor or any of the other Meditrust Entities by Lessee or any other member of the Leasing Group (other than the Guarantor, the Developer and the Current Manager, but only until such time as the Stock Transfer has been consummated or the Guarantor has exercised its rights and remedies under the Second Leasehold Mortgage in accordance with the terms of the Subordination and Standstill Agreement) or any of their respective Affiliates; whether such indebtedness, covenants, liabilities, obligations, agreements and/or undertakings are direct or indirect, absolute or contingent, liquidated or unliquidated, due or to become due, joint, several or joint and several, primary or secondary, now existing or hereafter arising, including, without limitation, the obligations under the Related Leases. RENT: Collectively, the Base Rent, the Additional Rent, the Additional Charges and all other sums payable under this Lease and the other Lease Documents. 2 29 RENT ADJUSTMENT DATE: The Conversion Date and each Extension Term Adjustment Date during the Term of the Lease, including, without limitation, any Extended Terms. RENT ADJUSTMENT RATE: Three hundred forty (340) basis points over the Index. RENT COVERAGE RATIO: The ratio of (i) Cash Flow for each applicable period to (ii) the total of all Base Rent (or, in the case of a Comparable Facility, all rent and other sums payable under the proposed Substitution Lease) payable during the initial Lease Year or accrued for such period. RENT INSURANCE PROCEEDS: As defined in Section 13.8. RESIDENCE AGREEMENTS: Collectively, all Subleases now or hereafter entered into by or on behalf of any Person allowing such Person to reside at the Facility. RETAINAGE: As defined in Section 13.1. RIGHT OF FIRST REFUSAL: As defined in Section 18.3. SECOND LEASEHOLD MORTGAGE: That certain Line of Credit Leasehold Deed of Trust and Security Agreement of even date herewith granted by Lessee to Guarantor, encumbering Lessee's interest under this Lease. SECURITY AGREEMENT: The Security Agreement as of even date herewith between Lessee and Lessor. SHORTFALL AGREEMENT: That certain Shortfall Agreement of even date by and between the Lessee and the Guarantor. STATE: The state or commonwealth in which the Leased Property is located. STATE COLLEGE LEASE: That certain Amended and Restated Facility Lease Agreement, dated as of November 1, 1996, by and between Lessor and BCC at State College, Inc., as amended, and as the same may hereafter be further amended. STOCK TRANSFER: As defined in Section 19.4. SUBLEASE: Collectively, all subleases, licenses, use agreements, concession agreements, tenancy at will agreements, room rentals, rentals of other facilities of the Leased Property and all other occupancy agreements of every kind and nature (but excluding Patient Admission Agreements), whether oral or in writing, now in existence or subsequently entered into by Lessee, encumbering or affecting the Leased Property. SUBLESSEE: Any sublessee, licensee, concessionaire, tenant or other occupant under any of the Subleases, but, specifically excluding any resident of the Facility under any Residence Agreement. 3 30 SUBORDINATION AND STANDSTILL AGREEMENT: That certain Subordination and Standstill Agreement of even date herewith by and between Lessor and Guarantor, subordinating the Working Capital Loan Obligations to the Lease Obligations. SUBSEQUENT INVESTMENTS: The aggregate amount of all sums expended and liabilities incurred by Lessor in connection with Capital Additions. SUBSIDIARY OR SUBSIDIARIES: With respect to any Person, any corporation or other entity of which such Person, directly, or indirectly, through another entity or otherwise, owns, or has the right to control or direct the voting of, fifty percent (50%) or more of the outstanding capital stock or other ownership interest having general voting power (under ordinary circumstances). SUBSTITUTION CLOSING COSTS: As defined in Article 25. SUBSTITUTION DATE: As defined in Article 25. SUBSTITUTION DOCUMENTS: As defined in Article 25. SUBSTITUTION LEASE: As defined in Article 25. SUBSTITUTION NOTICE: As defined in Article 25. SUBSTITUTION RIGHT: As defined in Article 25. TAKING: A taking or voluntary conveyance during the Term of the Leased Property, or any interest therein or right accruing thereto, or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced. TANGIBLE NET WORTH: An amount determined in accordance with GAAP equal to the total assets of any Person, excluding the total intangible assets of such Person, minus the total liabilities of such Person. Total intangible assets shall be deemed to include, but shall not be limited to, the excess of cost over book value of acquired businesses accounted for by the purchase method, formulae, trademarks, trade names, patents, patent rights and deferred expenses (including, but not limited to, unamortized debt discount and expense, organizational expense and experimental and development expenses). TANGIBLE PERSONAL PROPERTY: All machinery, equipment, furniture, furnishings, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, and other personal property owned or leased (pursuant to equipment leases) by Lessee and used in connection with the operation of the Leased Property. TC REALTY PARTIES: As defined under the Agreement Regarding Related Lease Transactions. 31 TENANT PARTIES: As defined under the Agreement Regarding Related Lease Transactions. TERM: Collectively, the Initial Term and each Extended Term which has become effective pursuant to Section 1.3, as the context may require, unless earlier terminated pursuant to the provisions hereof. THIRD PARTIES: Collectively, each Person that may now or hereafter be a party to any Third Party Agreement. THIRD PARTY AGREEMENT: Any agreement, document or instrument now or hereafter evidencing or securing any Third Party Obligation. THIRD PARTY DEFAULT: The occurrence of a default or breach of condition continuing beyond the expiration of any applicable notice and grace periods, if any, under the terms of any Third Party Agreement. THIRD PARTY OBLIGATIONS: Collectively, all indebtedness, covenants, liabilities, obligations, agreements and undertakings due to, or made for the benefit of, Lessor or any of the other Meditrust Entities by any entity (other than Lessee, the other TC Realty Parties and any other wholly-owned subsidiaries of the Pledgor) with respect to which the Guarantor holds an option to purchase the issued and outstanding capital stock of such entity or other applicable ownership interests in such entity; whether such indebtedness, covenants, liabilities, obligations, agreements and/or undertakings are direct or indirect, absolute or contingent, liquidated or unliquidated, due or to become due, joint, several or joint and several, primary or secondary, now existing or hereafter arising. THIRD PARTY PAYOR PROGRAMS: Collectively, all third party payor programs in which Lessee or any Sublessee presently or in the future may participate, including without limitation, Medicare, Medicaid, Champus, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. THIRD PARTY PAYORS: Collectively, Medicare, Medicaid, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs. TIME OF CLOSING: As defined in Section 18.4. TITLE COMPANY: As defined in Section 25.2. UCC: The Uniform Commercial Code as in effect from time to time in the Commonwealth of Virginia. UNAVOIDABLE DELAYS: Delays due to strikes, lockouts, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for 32 performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto. UNITED STATES TREASURY SECURITIES: The uninsured treasury securities issued by the United States Federal Reserve Bank. UNSUITABLE FOR ITS PRIMARY INTENDED USE: As used anywhere in this Lease, the term "Unsuitable For Its Primary Intended Use" shall mean that, by reason of Casualty, or a partial or temporary Taking by Condemnation, in the good faith judgment of Lessor, the Facility cannot be operated on a commercially practicable basis for the Primary Intended Use, taking into account, among other relevant factors, the number of usable beds affected by such Casualty or partial or temporary Taking. UPGRADE RENOVATIONS: Collectively, repairs and refurbishing made to the Leased Property, other than normal janitorial, cleaning and maintenance activities. WORK: As defined in Section 13.1. WORK CERTIFICATES: As defined in Section 13.1. WORKING CAPITAL ASSURANCE AGREEMENT: That certain Working Capital Assurance Agreement of even date by and among the Guarantor, the Lessee and the Lessor. WORKING CAPITAL ASSURANCE DOCUMENTS: Collectively, the Working Capital Assurance Agreement, the Subordination and Standstill Agreement, and all other documents and instruments now or hereafter executed and/or delivered in connection therewith or pursuant thereto. WORKING CAPITAL LOAN DOCUMENTS: Collectively, the Shortfall Agreement, the Second Leasehold Mortgage, the BCC Option Agreement, the Current Management Agreement and all other documents and instruments now or hereafter evidencing and/or securing the Working Capital Loans. WORKING CAPITAL LOAN OBLIGATIONS: Collectively, all indebtedness, covenants, liabilities, obligations, agreements and undertakings (other than the Guarantor's obligations) under the Working Capital Loan Documents. WORKING CAPITAL LOANS: As defined in the Working Capital Loan Agreement. WORKING CAPITAL PAYOFF: As defined in Section 19.4. WORKING CAPITAL RESERVE: An amount equal to _______________________ ____________________ AND /100 DOLLARS ($_________.00) which shall equal the original principal amount under the Note. 2.2 RULES OF CONSTRUCTION. The following rules of construction shall apply to the Lease and each of the other Lease Documents: (a) references to "herein", "hereof" 33 and "hereunder" shall be deemed to refer to this Lease or the other applicable Lease Document, and shall not be limited to the particular text or section or subsection in which such words appear; (b) the use of any gender shall include all genders and the singular number shall include the plural and vice versa as the context may require; (c) references to Lessor's attorneys shall be deemed to include, without limitation, special counsel and local counsel for Lessor; (d) reference to attorneys' fees and expenses shall be deemed to include all costs for administrative, paralegal and other support staff; (e) references to Leased Property shall be deemed to include references to all of the Leased Property and references to any portion thereof; (f) references to the Lease Obligations shall be deemed to include references to all of the Lease Obligations and references to any portion thereof; (g) references to the Obligations shall be deemed to include references to all of the Obligations and references to any portion thereof; (h) the term "including", when following any general statement, will not be construed to limit such statement to the specific items or matters as provided immediately following the term "including" (whether or not non-limiting language such as "without limitation" or "but not limited to" or words of similar import are also used), but rather will be deemed to refer to all of the items or matters that could reasonably fall within the broadest scope of the general statement; (i) any requirement that financial statements be Consolidated in form shall apply only to such financial statements as relate to a period during any portion of which the relevant Person has one or more Subsidiaries; (j) all accounting terms not specifically defined in the Lease Documents shall be construed in accordance with GAAP; and (k) all exhibits annexed to any of the Lease Documents as referenced therein shall be deemed incorporated in such Lease Document by such annexation and/or reference. ARTICLE 3 RENT 3.1 BASE RENT FOR LAND, LEASED IMPROVEMENTS, RELATED RIGHTS AND FIXTURES. Lessee will pay to Lessor, in lawful money of the United States of America, at Lessor's address set forth herein or at such other place or to such other Person as Lessor from time to time may designate in writing, rent for the Leased Property, as follows. (a) PRE-CONVERSION BASE RENT: From and after the Commencement Date and until the Conversion Date, Lessee shall pay, commencing on September 1, 1998, and on the first day of each calendar month thereafter, as well as on the Conversion Date, a base rent (the "Pre-Conversion Base Rent") in arrears that is equal to the product of (i) the Meditrust Investment from time to time outstanding multiplied by (ii) the Pre-Conversion Rent Adjustment Rate in effect from time to time, calculated on a daily basis. (b) POST-CONVERSION BASE RENT: From and after the Conversion Date, Lessee shall pay a base rent (the "Post-Conversion Base Rent") per annum that is equal to the product of (i) the Meditrust Investment multiplied by (ii) the Rent Adjustment Rate in effect on the Conversion Date, payable in advance in equal, consecutive monthly installments due on the first day of each calendar month; 34 provided, however, that on each Rent Adjustment Date, the Base Rent shall be adjusted to equal the greater of (A) the then current Post-Conversion Base Rent multiplied by 1.02 or (B) an amount equal to the Meditrust Investment multiplied by the Rent Adjustment Rate then in effect on such subsequent Rent Adjustment Date and further, provided, however, that on the Conversion Date, Lessee shall pay to Lessor the proportionate share of the Post-Conversion Base Rent due for the period from (and including) the Conversion Date through the end of the calendar month during which the Conversion Date occurred. (c) ADDITIONAL RENT: In addition to the Base Rent, commencing on the first anniversary of the Conversion Date (the "Additional Rent Commencement Date") the Lessee shall pay to the Lessor additional rent (the "Additional Rent") which shall equal, in each fiscal year, the sum of (i) the Additional Rent payable with respect to the immediately preceding fiscal year plus (ii) an amount equal to twenty percent (20%) of Excess Gross Revenues for the then current fiscal year. Additional Rent shall accrue commencing on the Additional Rent Commencement Date and shall be payable during the Term, quarterly in arrears, commencing on the first day of the first fiscal quarter commencing after the Additional Rent Commencement Date occurs and there shall be an annual reconciliation as provided in Section 3.2 below. Notwithstanding the foregoing, in no event shall any increase to the Additional Rent for any fiscal year exceed two percent (2%) of the total of Base Rent and Additional Rent payable with respect to the immediately preceding fiscal year. Additional Rent payable hereunder for any fractional fiscal year shall be prorated so that such Additional Rent shall equal the product of (x) the Additional Rent payable with respect to the immediately preceding fiscal year plus an amount equal to twenty percent (20%) of the annualized Excess Gross Revenues for the applicable fractional fiscal year multiplied by (y) a fraction (the "Proration Factor"), the numerator of which is the number of days in the applicable fractional fiscal year and the denominator of which is 365; provided, however, that, in no event shall the Additional Rent payable during (A) the fiscal year in which the Additional Rent Commencement Date occurs exceed the product of two percent (2%) of the total of Base Rent payable with respect to the immediately preceding fiscal year multiplied by the applicable Proration Factor and (B) any other fractional fiscal year increase by more than the product of two percent (2%) of the total of Base Rent and Additional Rent payable with respect to the immediately preceding fiscal year multiplied by the applicable Proration Factor. (d) Except as otherwise expressly provided in Section 3.1(a) and (b) above, the Base Rent (as it may be adjusted) shall be paid monthly in advance in equal, consecutive monthly installments on the first day of each calendar month. (e) Without limiting any of the other terms and conditions of the Lease, Base Rent may be adjusted pursuant to Section 19.4 hereof. 35 3.2 CALCULATION AND PAYMENT OF ADDITIONAL RENT; ANNUAL RECONCILIATION. 3.2.1 ESTIMATES AND PAYMENTS. Commencing on the Additional Rent Commencement Date, Additional Rent to be paid during each fiscal year during the Term shall be estimated by the Lessee at the beginning of each fiscal year for which it is payable (and in no event shall such estimate be less than the Additional Rent payable for the prior fiscal year, except with respect to the estimate to be made on the Additional Rent Commencement Date), and shall be paid quarterly in arrears (in equal installments on the first day of July, October, January and April) based on such estimate, to be adjusted at the end of each such year based on the actual Excess Gross Revenues during that fiscal year. In addition, on the Additional Rent Commencement Date, the Lessee shall estimate the Additional Rent to be paid for the period from (and including) the Additional Rent Commencement Date through (and including) the end of the fiscal quarter during which the Additional Rent Commencement Date occurs. Notwithstanding the foregoing, on a quarterly basis, with the prior consent of the Lessor, the Lessee may also adjust the quarterly payments of Additional Rent to be made hereunder based upon a comparison of (a) the actual Gross Revenues generated by the Leased Property during the applicable fiscal quarter and (b) the original estimate of Additional Rent for the applicable fiscal year prepared by the Lessee and the amount of Additional Rent already paid by the Lessee pertaining to the applicable fiscal year. 3.2.2 ANNUAL STATEMENT. In addition, within sixty (60) days following any fiscal year for which Additional Rent is payable hereunder, the Lessee shall deliver to the Lessor an Officer's Certificate, reasonably acceptable to the Lessor and certified by the chief financial officer of the Lessee, setting forth the Gross Revenues for the immediately preceding fiscal year. 3.2.3 DEFICITS. If the Additional Rent, as finally determined for any fiscal year (or portion thereof), exceeds the sum of the quarterly payments of Additional Rent previously paid by the Lessee with respect to said fiscal year, within thirty (30) days after such determination is required to be made hereunder, the Lessee shall pay such deficit to the Lessor and, if the deficit exceeds five percent (5%) of the Additional Rent which was previously paid to the Lessor with respect to said fiscal year, then the Lessee shall also pay the Lessor interest on such deficit at the Overdue Rate from the applicable quarterly date that such payment should have originally been made by the Lessee to the date that the Lessor receives such payment. 3.2.4 OVERPAYMENTS. If the Additional Rent, as finally determined for any fiscal year (or portion thereof), is less than the amount previously paid with respect thereto by the Lessee, and if no Lease Default exists, the Lessee shall notify the Lessor either (a) to pay to the Lessee an amount equal to such difference or (b) to grant the Lessee a credit against Additional Rent next coming due in the amount of such difference. 36 3.2.5 FINAL DETERMINATION. The obligation to pay Additional Rent shall survive the expiration or earlier termination of the Term (as to Additional Rent payments that are due and payable with respect to periods prior to the expiration or earlier termination of the Term and during any periods that the Lessee remains in possession of the Leased Property), and a final reconciliation, taking into account, among other relevant adjustments, any contractual allowances which related to Gross Revenues that accrued prior to the date of such expiration or earlier termination, but which have been determined to be not payable. The Lessee's good faith best estimate of the amount of any unresolved contractual allowances shall be made not later than two (2) years after said expiration or termination date. Within sixty (60) days after the expiration or earlier termination of the Term, the Lessee shall advise the Lessor of the Lessee's best estimate of the approximate amount of such adjustments, which estimate shall not be binding on the Lessee or have any legal effect whatsoever. 3.2.6 BEST EFFORTS TO MAXIMIZE GROSS REVENUES. The Lessee further covenants that the operation of the Facility shall be conducted in a manner consistent with the prevailing standards and practices recognized in the assisted living industry as those customarily utilized by first class business operations in the geographic region in which the Facility is located. Subject to any applicable Legal Requirements, the members of the Leasing Group shall use their best efforts to maximize the Facility's Gross Revenues, and to that end, but without limiting the foregoing, (a) an adequate staff of employees shall be maintained at the Facility and (b) a maximum amount of space in the Facility shall be devoted to revenue producing activities and only such part thereof shall be devoted for office, storage and non-revenue producing purposes as shall be reasonably necessary. 3.3 CONFIRMATION AND AUDIT OF ADDITIONAL RENT. 3.3.1 MAINTAIN ACCOUNTING SYSTEMS. The Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with usual and customary practices in the assisted living industry and in accordance with GAAP which will accurately record all Gross Revenues. The Lessee shall retain, for at least three (3) years after the expiration of each fiscal year (and in any event until the final reconciliation described in Section 3.2 above has been made), adequate records conforming to such accounting system showing all Gross Revenues for such fiscal year. 3.3.2 AUDIT BY LESSOR. The Lessor, at its own expense except as provided hereinbelow, shall have the right, from time to time and upon reasonable notice to the Lessee, to have the Lessor's accountants or representatives audit the information set forth in the Officer's Certificate referred to in Section 3.2 and in connection with such audits, to examine the Lessee's records with respect thereto (including supporting data, income tax and sales tax returns), subject to any prohibitions or limitations on disclosure of any such data under applicable law or regulations, including without limitation, any duly enacted "Patients' Bill of 37 Rights" or similar legislation, including such limitations as may be necessary to preserve the confidentiality of any Facility-patient relationship and any physician-patient privilege. 3.3.3 DEFICIENCIES AND OVERPAYMENTS. If any such audit discloses a deficiency in the reporting of Gross Revenues and either the Lessee agrees with the result of such audit or the matter is compromised, the Lessee shall forthwith pay to the Lessor the amount of the deficiency in Additional Rent which would have been payable by it had such deficiency in reporting Gross Revenues not occurred, as finally agreed or determined, together with interest on the Additional Rent which should have been payable by it, calculated at the Overdue Rate, from the date when said payment should have been made by the Lessee to the date that the Lessor receives such payment. Notwithstanding anything to the contrary herein, with respect to any audit that is commenced more than two (2) years after the date Gross Revenues for any fiscal year are reported by the Lessee to the Lessor, the deficiency, if any, with respect to Additional Rent shall bear interest as permitted herein only from the date such determination of deficiency is made, unless such deficiency is the result of gross negligence or willful misconduct on the part of the Lessee (or any Affiliate thereof). If any audit conducted for the Lessor pursuant to the provisions hereof discloses that (a) the Gross Revenues actually received by the Lessee for any fiscal year exceed those reported by the Lessee by more than five percent (5%), the Lessee shall pay the reasonable cost of such audit and examination or (b) the Lessee has overpaid Additional Rent, and if no Lease Default exists, the Lessor shall so notify the Lessee and the Lessee shall direct the Lessor either (i) to refund the overpayment to the Lessee or (ii) grant a credit against Additional Rent next coming due in the amount of such difference. 3.3.4 SURVIVAL. The obligations of the Lessor and the Lessee contained in this Section shall survive the expiration or earlier termination of this Lease. 3.4 ADDITIONAL CHARGES. Subject to the rights to contest as set forth in Article 15, in addition to the Base Rent, (a) Lessee will also pay and discharge as and when due and payable all Impositions, all amounts, liabilities and obligations under the Appurtenant Agreements due from or payable by the owner of the Leased Property, all amounts, liabilities and obligations under the Permitted Encumbrances due from or payable by the owner of the Leased Property and all other amounts, liabilities and obligations which Lessee assumes or agrees to pay under this Lease, and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) above, Lessee will also promptly pay and discharge every fine, penalty, interest and cost which may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) above being referred to herein collectively as the "Additional Charges"), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided in this Lease, by statute or otherwise, in the case of non-payment of the Additional Charges, as well as the Base Rent. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to any other Person to which such Additional Charges would otherwise be due. 38 3.5 [INTENTIONALLY DELETED]. 3.6 NET LEASE. The Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to Lessor the full amount of the installments of Base Rent, and the payments of Additional Charges throughout the Term. 3.7 NO LESSEE TERMINATION OR OFFSET. 3.7.1 NO TERMINATION. Except as may be otherwise specifically and expressly provided in Article 13 or Article 14 in this Lease, Lessee, to the extent not prohibited by applicable law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of Rent, or set-off against the Rent, nor shall the respective obligations of Lessor and Lessee be otherwise affected by reason of (a) any Casualty or any Taking of the Leased Property, (b) the lawful or unlawful prohibition of, or restriction upon, Lessee's use of the Leased Property or the interference with such use by any Person (other than Lessor, except to the extent permitted hereunder) or by reason of eviction by paramount title; (c) any claim that Lessee has or might have against Lessor, (d) any default or breach of any warranty by Lessor or any of the other Meditrust Entities under this Lease, any other Lease Document or any Related Party Agreement, (e) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor or (f) any other cause whether similar or dissimilar to any of the foregoing, other than a discharge of Lessee from any of the Lease Obligations as a matter of law. Notwithstanding the foregoing, any amounts collected by Lessor under any title insurance policies insuring Lessor's interest in the Leased Property (less any costs and expenses incurred by Lessor in collecting the same) shall be credited against the Lease Obligations. 3.7.2 WAIVER. Lessee to the fullest extent not prohibited by applicable law, hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (a) modify, surrender or terminate this Lease or quit or surrender the Leased Property or (b) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Lessee hereunder, except as otherwise specifically and expressly provided in this Lease. 3.7.3 INDEPENDENT COVENANTS. The obligations of Lessor and Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or (except in those instances where the obligation to pay expressly survives the termination of this Lease) by termination of this Lease other than by reason of an Event of Default. 39 3.8 ABATEMENT OF RENT LIMITED. There shall be no abatement of Rent on account of any Casualty, Taking or other event, except that in the event of a partial Taking or a temporary Taking as described in Section 14.3, the Base Rent shall be abated as follows: (a) in the case of such a partial Taking, the Meditrust Investment shall be reduced for the purposes of calculating Base Rent pursuant to Section 3.1 by subtracting therefrom, as applicable, the net amount of the Award received by Lessor, and (b) in the case of such a temporary Taking, by reducing the Base Rent for the period of such a temporary Taking, by the net amount of the Award received by Lessor. For the purposes of this Section 3.8, the "net amount of the Award received by Lessor" shall mean the Award paid to Lessor on account of such Taking, minus all costs and expenses incurred by Lessor in connection therewith, and minus any amounts paid to or for the account of Lessee to reimburse for the costs and expenses of reconstructing the Facility following such Taking in order to create a viable and functional Facility under all of the circumstances. ARTICLE 4 IMPOSITIONS; TAXES; UTILITIES; INSURANCE PAYMENTS 4.1 PAYMENT OF IMPOSITIONS. 4.1.1 LESSEE TO PAY. Subject to the provisions of Article 15, Lessee will pay or cause to be paid all Impositions before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing authority where feasible, and Lessee will promptly furnish Lessor copies of official receipts or other satisfactory proof evidencing payment not later than the last day on which the same may be paid without penalty or interest. Subject to the provisions of Article 15 and Section 4.1.2, Lessee's obligation to pay such Impositions shall be deemed absolutely fixed upon the date such Impositions become a lien upon the Leased Property or any part thereof. 4.1.2 INSTALLMENT ELECTIONS. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay such installments during the Term hereof (subject to Lessee's right to contest pursuant to the provisions of Section 4.1.5 below) as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. 4.1.3 RETURNS AND REPORTS. Lessor, at its expense, shall, to the extent permitted by applicable law, prepare and file all tax returns and reports as may be required by Governmental Authorities in respect of Lessor's net income, gross 40 receipts, franchise taxes and taxes on its capital stock, and Lessee, at its expense, shall, to the extent permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by Governmental Authorities. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. In the event that any Governmental Authority classifies any property covered by this Lease as personal property, Lessee shall file all personal property tax returns in such jurisdictions where it may legally so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any portion of Leased Property so classified as personal property. Where Lessor is legally required to file personal property tax returns, if Lessee notifies Lessor of the obligation to do so in each year at least thirty (30) days prior to the date any protest must be filed, Lessee will be provided with copies of assessment notices so as to enable Lessee to file a protest. 4.1.4 REFUNDS. If no Lease Default shall have occurred and be continuing, any refund due from any taxing authority in respect of any Imposition paid by Lessee shall be paid over to or retained by Lessee. If a Lease Default shall have occurred and be continuing, at Lessor's option, such funds shall be paid over to Lessor and/or retained by Lessor and applied toward the Obligations in accordance with the Lease Documents and/or the Related Party Agreements. 4.1.5 PROTEST. Upon giving notice to Lessor, at Lessee's option and sole cost and expense, and subject to compliance with the provisions of Article 15, Lessee may contest, protest, appeal, or institute such other proceedings as Lessee may deem appropriate to effect a reduction of any Imposition and Lessor, at Lessee's cost and expense as aforesaid, shall fully cooperate in a reasonable manner with Lessee in connection with such protest, appeal or other action. 4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt notice to Lessee of all Impositions payable by Lessee hereunder of which Lessor at any time has knowledge, but Lessor's failure to give any such notice shall in no way diminish Lessee's obligations hereunder to pay such Impositions. 4.3 ADJUSTMENT OF IMPOSITIONS. Impositions imposed in respect of the period during which the expiration or earlier termination of the Term occurs shall be adjusted and prorated between Lessor and Lessee, whether or not such Impositions are imposed before or after such expiration or termination, and Lessee's obligation to pay its prorated share thereof shall survive such expiration or termination. 4.4 UTILITY CHARGES. Lessee will pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone and other utilities used in the Leased Property during the Term and thereafter until Lessee surrenders the Leased Property in the manner required by this Lease. 41 4.5 INSURANCE PREMIUMS. Lessee will pay or cause to be paid all premiums for the insurance coverage required to be maintained pursuant to Article 12 during the Term, and thereafter until Lessee yields up the Leased Property in the manner required by this Lease. All such premiums shall be paid annually in advance and Lessee shall furnish Lessor with evidence satisfactory to Lessor that all such premiums have been so paid prior to the commencement of the Term and thereafter at least thirty (30) days prior to the due date of each premium which thereafter becomes due. Notwithstanding the foregoing, Lessee may pay such insurance premiums to the insurer in monthly installments so long as the applicable insurer is contractually obligated to give Lessor not less than a sixty (60) days notice of non-payment and so long as no Lease Default has occurred and is continuing. In the event of the failure of Lessee either to comply with the insurance requirements in Article 12, or to pay the premiums for such insurance, or to deliver such policies or certificates thereof to Lessor at the times required hereunder, Lessor shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, which premiums shall be a demand obligation of Lessee to Lessor. 4.6 DEPOSITS. 4.6.1 LESSOR'S OPTION. Upon a Lease Default, or an event which, with the giving of notice or passage of time, and/or both, would constitute a Lease Default, at the option of Lessor, which may be exercised at any time thereafter, Lessee shall, upon written request of Lessor, on the first day of the calendar month immediately following such request, and on the first day of each calendar month thereafter during the Term (each of which dates is referred to as a "Monthly Deposit Date"), pay to and deposit with Lessor a sum equal to one-twelfth (1/12th) of the Impositions to be levied, charged, filed, assessed or imposed upon or against the Leased Property within one (1) year after said Monthly Deposit Date and a sum equal to one-twelfth (1/12th) of the premiums for the insurance policies required pursuant to Article 12 which are payable within one (1) year after said Monthly Deposit Date. If the amount of the Impositions to be levied, charged, assessed or imposed or insurance premiums to be paid within the ensuing one (1) year period shall not be fixed upon any Monthly Deposit Date, such amount for the purpose of computing the deposit to be made by Lessee hereunder shall be estimated by Lessor with an appropriate adjustment to be promptly made between Lessor and Lessee as soon as such amount becomes determinable. In addition, Lessor may, at its option, from time to time require that any particular deposit be greater than one-twelfth (1/12th) of the estimated amount payable within one (1) year after said Monthly Deposit Date, if such additional deposit is required in order to provide to Lessor a sufficient fund from which to make payment of all Impositions on or before the next due date of any installment thereof, or to make payment of any required insurance premiums not later than the due date thereof. 4.6.2 USE OF DEPOSITS. The sums deposited by Lessee under this Section 4.6 shall be held by Lessor and shall be applied in payment of the Impositions or insurance premiums, as the case may be, when due. Any such deposits may be commingled with other assets of Lessor, and shall be deposited by Lessor at such bank as Lessor may, from time to time select. Lessor may, at its election from 42 time to time exercised, invest all or part of such deposits in one or more of the investment vehicles described on EXHIBIT A to the Deposit Pledge Agreement. Lessor shall not be liable to Lessee or any other Person (a) based on Lessor's (or such bank's) choice of investment vehicles, (b) for any consequent loss of principal or interest or (c) for any unavailability of funds based on such choice of investment. Furthermore, Lessor shall bear no responsibility for the financial condition of, nor any act or omission by, Lessor's depository bank. The income from such investment or interest on such deposit shall be paid to Lessee on a semi-annual basis as long as no Lease Default has occurred and is then continuing, and as long as no fact or circumstance exists which, with the giving of notice and/or the passage of time, would constitute a Lease Default. Lessee shall give not less than ten (10) days prior written notice to Lessor in each instance when an Imposition or insurance premium is due, specifying the Imposition or premium to be paid and the amount thereof, the place of payment, and the last day on which the same may be paid in order to comply with the requirements of this Lease. If Lessor, in violation of its obligations under this Lease, does not pay any Imposition or insurance premium when due, for which a sufficient deposit exists, Lessee shall not be in default hereunder by virtue of the failure of Lessor to pay such Imposition or such insurance premium and Lessor shall pay any interest or fine assessed by virtue of Lessor's failure to pay such Imposition or insurance premium. 4.6.3 DEFICITS. If for any reason any deposit held by Lessor under this Section 4.6 shall not be sufficient to pay an Imposition or insurance premium within the time specified therefor in this Lease, then, within ten (10) days after demand by Lessor, Lessee shall deposit an additional amount with Lessor, increasing the deposit held by Lessor so that Lessor holds sufficient funds to pay such Imposition or premium in full (or in installments as otherwise provided for herein), together with any penalty or interest due thereon. Lessor may change its estimate of any Imposition or insurance premium for any period on the basis of a change in an assessment or tax rate or on the basis of a prior miscalculation or for any other good faith reason; in which event, within ten (10) days after demand by Lessor, Lessee shall deposit with Lessor the amount in excess of the sums previously deposited with Lessor for the applicable period which would theretofore have been payable under the revised estimate. 4.6.4 OTHER PROPERTIES. If any Imposition shall be levied, charged, filed, assessed, or imposed upon or against the Leased Property, and if such Imposition shall also be a levy, charge, assessment, or imposition upon or for any other real or personal property that does not constitute a part of the Leased Property, then the computation of the amounts to be deposited under this Section 4.6 shall be based upon the entire amount of such Imposition and Lessee shall not have the right to apportion any deposit with respect to such Imposition. 4.6.5 TRANSFERS. In connection with any assignment of Lessor's interest under this Lease, the original Lessor named herein and each successor in interest shall have the right to transfer all amounts deposited pursuant to the provisions of this Section 4.6 and still in its possession to such assignee (as the subsequent holder 43 of Lessor's interest in this Lease) and upon such transfer and delivery of notice thereof to Lessee, the original Lessor named herein or the applicable successor in interest transferring the deposits shall thereupon be completely released from all liability with respect to such deposits so transferred and Lessee shall look solely to said assignee, as the subsequent holder of Lessor's interest under this Lease, in reference thereto. 4.6.6 SECURITY. All amounts deposited with Lessor pursuant to the provisions of this Section 4.6 shall be held by Lessor as additional security for the payment and performance of the Obligations and, upon the occurrence of any Lease Default, Lessor may, in its sole and absolute discretion, apply said amounts towards payment or performance of such Obligations. 4.6.7 RETURN. Upon the expiration or earlier termination of this Lease, provided, that, all of the Lease Obligations have been fully paid and performed, any sums then held by Lessor under this Section 4.6 shall be refunded to Lessee; unless a Related Party Default has occurred, in which event such sums may be applied towards the Obligations in accordance with the Related Party Agreements. 4.6.8 RECEIPTS. Lessee shall deliver to Lessor copies of all notices, demands, claims, bills and receipts in relation to the Impositions and insurance premiums immediately upon receipt thereof by Lessee. ARTICLE 5 OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY; INSTALLATION, REMOVAL AND REPLACEMENT OF PERSONAL PROPERTY; 5.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the exclusive possession and use of the Leased Property upon the terms and conditions of this Lease. 5.2 PERSONAL PROPERTY; REMOVAL AND REPLACEMENT OF PERSONAL PROPERTY. 5.2.1 LESSEE TO EQUIP FACILITY. Lessee, at its sole cost and expense, shall install, affix or assemble or place on the Leased Property, sufficient items of Tangible Personal Property to enable the Leased Property to be operated from and after the Conversion Date in accordance with the requirements of this Lease for the Primary Intended Use, and such Tangible Personal Property and replacements thereof, shall be at all times the property of Lessee. 5.2.2 SUFFICIENT PERSONAL PROPERTY. Lessee shall maintain, during the entire Term, the Tangible Personal Property in good order and repair and shall provide at its expense all necessary replacements thereof, as may be necessary in order to operate the Leased Property, from and after the Conversion Date, in 44 compliance with all applicable Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the Primary Intended Use. In addition, Lessee shall, from and after the Conversion Date, (a) furnish all necessary replacements of obsolete items of the Tangible Personal Property during the Term, unless Lessee provides Lessor with an explanation (reasonably acceptable to Lessor) as to why such Tangible Personal Property is no longer required in connection with the operation of the Leased Property and (b) at least once a year, and more frequently if requested by Lessor, deliver to Lessor, a detailed inventory of all such Tangible Personal Property. 5.2.3 REMOVAL AND REPLACEMENT; LESSOR'S OPTION TO PURCHASE. Lessee shall not remove from the Leased Property any one or more items of Tangible Personal Property (whether now owned or hereafter acquired), the fair market value of which exceeds THIRTY-FIVE THOUSAND DOLLARS ($35,000), individually or ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00) collectively, except if such Tangible Personal Property is simultaneously suitably replaced or Lessee provides Lessor with an explanation (reasonably satisfactory to Lessor) as to why such Tangible Personal Property is no longer required in connection with the operation of the Leased Property. At its sole cost and expense, Lessee shall restore the Leased Property to the condition required by Article 8, including repair of all damage to the Leased Property caused by the removal of the Tangible Personal Property, whether effected by Lessee or Lessor. Upon the expiration or earlier termination of this Lease, Lessor shall have the option, which may be exercised prior to or within sixty (60) days following such expiration or termination, of (a) acquiring the Tangible Personal Property (pursuant to a bill of sale and assignments of any equipment leases, all in such forms as are reasonably satisfactory to Lessor) upon payment of its book value (Lessee's cost, minus depreciation), but not in excess of its fair market value or (b) requiring Lessee to remove the Tangible Personal Property. If Lessor exercises its option to purchase the Tangible Personal Property, the price to be paid by Lessor shall be (i) reduced by the amount of all payments due on any equipment leases or any other Permitted Prior Security Interests assumed by Lessor and (ii) applied to the Lease Obligations before any payment to Lessee. If Lessor requires the removal of the Tangible Personal Property, then all of the Tangible Personal Property that is not removed by Lessee within ten (10) days following such request shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. 45 ARTICLE 6 SECURITY FOR LEASE OBLIGATIONS 6.1 SECURITY FOR LESSEE'S OBLIGATIONS; PERMITTED PRIOR SECURITY INTERESTS. 6.1.1 SECURITY. In order to secure the payment and performance of all of the Obligations, Lessee agrees to provide or cause there to be provided, among other things, the following security: (a) a first lien and exclusive security interest in the Tangible Personal Property, Receivables and certain other Collateral as more particularly provided for in the Security Agreement; (b) the Cash Collateral; (c) a first lien and exclusive pledge of all of the capital stock of Lessee all as more particularly set forth in the Pledge Agreement. If any Person other than the Lessee shall ever operate the Facility, a pledge of all capital stock of, or partnership or other ownership interests, in such Person shall also be provided pursuant to a pledge and security agreement substantially similar to the Pledge Agreement; and (d) a first lien and exclusive pledge and assignment of, and security interest in, all Permits and Contracts, as more particularly provided for in the Permits Assignments. 46 6.1.2 PURCHASE-MONEY SECURITY INTERESTS AND EQUIPMENT LEASES. Notwithstanding any other provision hereof regarding the creation of Liens, but subject to Section 11.3.4, Lessee may (a) grant priority purchase money security interests in items of Tangible Personal Property and (b) lease Tangible Personal Property from equipment lessors for the exclusive use of the Facility, as long as in each instance: (i) the secured party or equipment lessor enters into an intercreditor agreement with, and satisfactory to, Lessor, pursuant to which, without limiting the foregoing, (x) Lessor shall be afforded the option of curing defaults and the option of succeeding to the rights of Lessee and (y) Lessor's security interest in Tangible Personal Property, shall be subordinated to the security interest granted to such secured party (ii) all of the terms, conditions and provisions of the financing, security interest or lease are reasonably acceptable to Lessor, (iii) Lessee provides a true and complete copy, as executed, of each such purchase money security agreement, financing document and equipment lease and all amendments thereto and (iv) no such security interest, financing agreement or lease is cross-defaulted or cross-collateralized with any other obligation. Notwithstanding the foregoing, Lessee may lease, or grant purchase money security interests in, new items of Tangible Personal Property having an aggregate cost during the Term in an amount not to exceed TWO HUNDRED THOUSAND DOLLARS ($200,000) without complying with the foregoing requirements, provided that Lessee shall provide Lessor with a true and complete copy, as executed, of each purchase money security agreement, related financing document and equipment lease, and all amendments thereto. Security interests granted by Lessee in full compliance with the provisions of this Section 6.1.2 are referred to as "Permitted Prior Security Interests". 6.2 GUARANTIES. Completion of the Facility shall be unconditionally and irrevocably guaranteed by the Guarantor pursuant to the Completion Guaranty and the Pledgor's obligations under the Note shall be unconditionally and irrevocably guaranteed by the Lessee pursuant to the Lessee's Guaranty. 47 ARTICLE 7 CONDITION AND USE OF LEASED PROPERTY; MANAGEMENT AGREEMENTS 7.1 CONDITION OF THE LEASED PROPERTY. Lessee acknowledges receipt and delivery of possession of the Leased Property and that Lessee has examined and otherwise has acquired knowledge of the condition of the Leased Property prior to the execution and delivery of this Lease and has found the same to be in good order and repair and satisfactory for its purposes hereunder. Lessee is leasing the Leased Property "AS-IS" in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASED PROPERTY, EITHER AS TO ITS FITNESS FOR ANY PARTICULAR PURPOSE OR USE, ITS DESIGN OR CONDITION OR OTHERWISE, OR AS TO DEFECTS IN THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT; IT BEING AGREED THAT ALL RISKS RELATING TO THE DESIGN, CONDITION AND/OR USE OF THE LEASED PROPERTY ARE TO BE BORNE BY LESSEE. LESSEE HEREBY ASSUMES ALL RISK OF THE PHYSICAL CONDITION OF THE LEASED PROPERTY, THE SUITABILITY OF THE LEASED PROPERTY FOR LESSEE'S PURPOSES, AND THE COMPLIANCE OR NON-COMPLIANCE OF THE LEASED PROPERTY WITH ALL APPLICABLE REQUIREMENTS OF LAW, INCLUDING BUT NOT LIMITED TO ENVIRONMENTAL LAWS AND ZONING OR LAND USE LAWS. Upon the request of Lessor, accompanied by an explanation reasonably establishing a justification for such request, at any time and from time to time during the Term, Lessee shall engage one (1) or more independent professional consultants, engineers and inspectors, qualified to do business in the State and acceptable to Lessor to perform any environmental and/or structural investigations and/or other inspections of the Leased Property and the Facility as Lessor may reasonably request in order to detect (a) any structural deficiencies in the Leased Improvements or the utilities servicing the Leased Property or (b) the presence of any condition that (i) may be harmful or present a health hazard to the patients, residents and other occupants of the Leased Property or (ii) constitutes a breach or violation of any of the Lease Documents. In the event that Lessor reasonably determines that the results of such testing or inspections are unsatisfactory, within thirty (30) days of notice from Lessor, Lessee shall commence such appropriate remedial actions as may be reasonably requested by Lessor to correct such unsatisfactory conditions and, thereafter, shall diligently and continuously prosecute such remedial actions to completion within the time limits prescribed in this Lease or the other Lease Documents. 48 7.2 USE OF THE LEASED PROPERTY; COMPLIANCE; MANAGEMENT. 7.2.1 OBLIGATION TO OPERATE. From and after the Conversion Date, Lessee shall continuously operate the Leased Property in accordance with the Primary Intended Use and maintain its qualifications for licensure and accreditation as required by all applicable Legal Requirements and Insurance Requirements. 7.2.2 PERMITTED USES. From and after the Conversion Date, Lessee shall use the Leased Property, or permit the Leased Property to be used, only for the Primary Intended Use and, prior to the Conversion Date, the Leased Property may only be used for the completion of the construction of the Project in accordance with the terms of the Leasehold Improvement Agreement. Lessee shall not use the Leased Property or permit the Leased Property to be used for any other use without the prior written consent of Lessor, which consent may be withheld in Lessor's sole and absolute discretion. 7.2.3 COMPLIANCE WITH INSURANCE REQUIREMENTS. No use shall be made or permitted to be made of the Leased Property and no acts shall be done which will cause the cancellation of any insurance policy covering the Leased Property, nor shall Lessee, any Manager or any other Person sell or otherwise provide to any patients, residents, other occupants or invitees therein, or permit to be kept, used or sold in or about the Leased Property, any article which may be prohibited by any Legal Requirement or by any of the Insurance Requirements. Furthermore, Lessee shall, at its sole cost and expense, take whatever other actions that may be necessary to comply with and to insure that the Leased Property complies with all Insurance Requirements. 7.2.4 NO WASTE. Lessee shall not commit or suffer to be committed any waste on, in or under the Leased Property, nor shall Lessee cause or permit any nuisance thereon. 7.2.5 NO IMPAIRMENT. Lessee shall neither suffer nor permit the Leased Property to be used in such a manner as (a) might reasonably tend to impair Lessor's title thereto or (b) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public or of implied dedication of the Leased Property. 7.2.6 NO LIENS. Except as permitted pursuant to Section 6.1.2, Lessee shall not permit or suffer any Lien to exist on the Tangible Personal Property and shall in no event cause, permit or suffer any Lien to exist with respect to the Leased Property other than as set forth in Section 11.5.2. 7.3 COMPLIANCE WITH LEGAL REQUIREMENTS. Lessee covenants and agrees that the Leased Property shall not be used for any unlawful purpose and that Lessee, at its sole cost and expense, will promptly (a) comply with, and shall cause every other member of the Leasing Group to comply with, all Legal Requirements relating to the use, operation, 49 maintenance, repair and restoration of the Leased Property, whether or not compliance therewith shall require structural change in any of the Leased Property or interfere with the use and enjoyment of the Leased Property and (b) procure, maintain and comply with (in all material respects), and shall cause every other member of the Leasing Group to procure, maintain and comply with (in all material respects), all Contracts and Permits necessary in order to operate the Leased Property for the Primary Intended Use, and for compliance with all of the terms and conditions of this Lease. Unless a Lease Default has occurred or any event has occurred which, with the passage of time and/or the giving of notice would constitute a Lease Default, Lessee may, upon prior written notice to Lessor, contest any Legal Requirement to the extent permitted by, and in accordance with, Article 15. 7.4 MANAGEMENT AGREEMENTS. From and after the Commencement Date, Lessee shall not enter into any Management Agreement without the prior written approval of Lessor, in each instance, which approval shall not be unreasonably withheld. Lessee shall not, without the prior written approval of Lessor, in each instance, which approval shall not be unreasonably withheld, agree to or allow: (a) any change in the Manager or change in the ownership or control of the Manager, (b) any change in the Management Agreement, (c) the termination of any Management Agreement (other than in connection with the exercise by Lessee of any of its remedies under any Management Agreement as a result of any default by any Manager thereunder), (d) any assignment by the Manager of its interest under the Management Agreement or (e) any material amendment of the Management Agreement. In addition, Lessee shall, at its sole cost and expense, promptly and fully perform or cause to be performed every covenant, condition, promise and obligation of the licensed operator of the Leased Property under any Management Agreement. Notwithstanding the foregoing, in the event that Lessee enters into any Management Agreement with an Affiliate of Lessee, Lessor shall consent to the execution and delivery of such Management Agreement provided, that, concurrently with the execution and delivery of such Management Agreement, the Affiliated Party Subordination Agreement is amended so as to add as a party thereto the applicable Affiliate of Lessee that is to be the Manager (so that the payments to be made under such Management Agreement are fully subordinated to the Lease Obligations). Each Management Agreement shall provide that Lessor shall be provided notice of any defaults thereunder and, at Lessor's option, an opportunity to cure such default. Lessee shall furnish to Lessor, within three (3) days after receipt thereof, or after the mailing or service thereof by Lessee, as the case may be, a copy of each notice of default which Lessee shall give to, or receive from any Person, based upon the occurrence, or alleged occurrence, of any default in the performance of any covenant, condition, promise or obligation under any Management Agreement. Whenever and as often as Lessee shall fail to perform, promptly and fully, at its sole cost and expense, any covenant, condition, promise or obligation on the part of the licensed operator of the Leased Property under and pursuant to any Management Agreement, Lessor, or a lawfully appointed receiver of the Leased Property, may, at their respective options (and without any obligation to do so), after five (5) days' prior notice to Lessee (except in the case of an emergency) enter upon the Leased Property and perform, 50 or cause to be performed, such work, labor, services, acts or things, and take such other steps and do such other acts as they may deem advisable, to cure such defaulted covenant, condition, promise or obligation, and any amount so paid or advanced by Lessor or such receiver and all costs and expenses reasonably incurred in connection therewith (including, without limitation, attorneys' fees and expenses and court costs), shall be a demand obligation of Lessee to Lessor or such receiver, and, Lessor shall have the same rights and remedies for failure to pay such costs on demand as for Lessee's failure to pay any other sums due hereunder. 51 ARTICLE 8 REPAIRS; RESTRICTIONS 8.1 MAINTENANCE AND REPAIR. 8.1.1 LESSEE'S RESPONSIBILITY. Lessee, at its sole cost and expense, shall keep the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto which are under Lessee's control in good order and repair (whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of the Leased Property or such private roadways, sidewalks and curbs or any other cause whatsoever) and, subject to Articles 9, 13 and 14, Lessee shall promptly, with the exercise of all reasonable efforts, undertake and diligently complete all necessary and appropriate repairs, replacements, renovations, restorations, alterations and modifications thereof of every kind and nature, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition (concealed or otherwise) existing prior to the commencement of, or during, the Term and thereafter until Lessee surrenders the Leased Property in the manner required by this Lease. In addition, Lessee, at its sole cost and expense, shall make all repairs, modifications, replacements, renovations and alterations of the Leased Property (and such private roadways, sidewalks and curbs) that are necessary to comply with all applicable Legal Requirements and Insurance Requirements so that, from and after the Conversion Date, the Leased Property can be legally operated for the Primary Intended Use. All repairs, replacements, renovations, alterations, and modifications required by the terms of this Section 8.1 shall be (a) performed in a good and workmanlike manner in compliance with all Legal Requirements, Insurance Requirements and the requirements of Article 9 hereof, using new materials well suited for their intended purpose and (b) consistent with the operation of the Leased Property in a first class manner. Lessee will not take or omit to take any action the taking or omission of which might materially impair the value or the usefulness of the Leased Property for the Primary Intended Use. To the extent that any of the repairs, replacements, renovations, alterations or modifications required by the terms of this Section 8.1 constitute Material Structural Work, Lessee shall obtain Lessor's prior written approval (which approval shall not be unreasonably withheld) of the specific repairs, replacements, renovations, alterations and modifications to be performed by or on behalf of Lessee in connection with such Material Structural Work. Notwithstanding the foregoing, in the event of a bona fide emergency during which Lessee is unable to contact the appropriate representatives of Lessor, Lessee may commence such Material Structural Work as may be necessary in order to address such emergency without Lessor's prior approval, provided, however, that Lessee shall immediately thereafter advise Lessor of such emergency and the nature and scope of the Material Structural Work commenced and shall obtain Lessor's approval of the remaining Material Structural Work to be completed. 52 8.1.2 NO LESSOR OBLIGATION. Lessor shall not, under any circumstances, be required to build or rebuild any improvements on the Leased Property (or any private roadways, sidewalks or curbs appurtenant thereto), or to make any repairs, replacements, renovations, alterations, restorations, modifications, or renewals of any nature or description to the Leased Property (or any private roadways, sidewalks or curbs appurtenant thereto), whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto in connection with this Lease, or to maintain the Leased Property (or any private roadways, sidewalks or curbs appurtenant thereto) in any way. 8.1.3 LESSEE MAY NOT OBLIGATE LESSOR. Nothing contained herein nor any action or inaction by Lessor shall be construed as (a) constituting the consent or request of Lessor, express or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any labor or services for any construction, alteration, addition, repair or demolition of or to the Leased Property or (b) giving Lessee any right, power or permission to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Lessor for the payment thereof or to make any agreement that may create, or in any way be the basis for, any right, title or interest in, or Lien or claim against, the estate of Lessor in the Leased Property. Without limiting the generality of the foregoing, the right title and interest of Lessor in and to the Leased Property shall not be subject to liens or encumbrances for the performance of any labor or services or the furnishing of any materials or other property furnished to the Leased Property at or by the request of Lessee or any other Person other than Lessor. Lessee shall notify any contractor, subcontractor, laborer, materialman or vendor providing any labor, services or materials to the Leased Property of this provision. 8.2 ENCROACHMENTS; TITLE RESTRICTIONS. If any of the Leased Improvements shall, at any time, encroach upon any property, street or right-of-way adjacent to the Leased Property, or shall violate the agreements or conditions contained in any lawful restrictive covenant or other Lien now or hereafter affecting the Leased Property, or shall impair the rights of others under any easement, right-of-way or other Lien to which the Leased Property is now or hereafter subject, then promptly upon the request of Lessor, Lessee shall, at its sole cost and expense, subject to Lessee's right to contest the existence of any encroachment, violation or impairment as set forth in Article 15, (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment or (b) make such alterations to the Leased Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable, to remove such encroachment, or to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements. Notwithstanding the foregoing, Lessee shall, in any event, take all such actions as may be reasonably necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use substantially in the manner and to the extent that the Leased Improvements were operated prior to the assertion of such 53 encroachment, violation or impairment as contemplated by this Lease, the Leasehold Improvement Agreement and the other Lease Documents and nothing contained herein shall limit Lessee's obligations to operate the Leased Property, from and after the Conversion Date, in accordance with its Primary Intended Use. Any such alteration made pursuant to the terms of this Section 8.2 shall be completed in conformity with the applicable requirements of Section 8.1 and Article 9. Lessee's obligations under this Section 8.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance. ARTICLE 9 MATERIAL STRUCTURAL WORK AND CAPITAL ADDITIONS 9.1 LESSOR'S APPROVAL. Without the prior written consent of Lessor, which consent may be withheld by Lessor, in its sole and absolute discretion, Lessee shall make no Capital Addition or Material Structural Work to the Leased Property (including, without limitation, any change in the size or unit or bed capacity of the Facility), except as may be otherwise expressly required pursuant to Article 8. 9.2 GENERAL PROVISIONS AS TO CAPITAL ADDITIONS AND CERTAIN MATERIAL STRUCTURAL WORK. As to any Capital Addition or Material Structural Work (other than such Material Structural Work that is required to be performed pursuant to the terms of Section 8.1) for which Lessor has granted its prior written approval, the following terms and conditions shall apply unless otherwise expressly set forth in Lessor's written approval. 9.2.1 NO LIENS. Lessee shall not be permitted to create any Lien on the Leased Property in connection with any Capital Addition or Material Structural Work. 9.2.2 LESSEE'S PROPOSAL REGARDING CAPITAL ADDITIONS AND MATERIAL STRUCTURAL WORK. If Lessee desires to undertake any Capital Addition or Material Structural Work, Lessee shall submit to Lessor in writing a proposal setting forth in reasonable detail any proposed Capital Addition or Material Structural Work and shall provide to Lessor copies of, or information regarding, the applicable plans and specifications, Permits, Contracts and any other materials concerning the proposed Capital Addition or Material Structural Work, as the case may be, as Lessor may reasonably request. Without limiting the generality of the foregoing, each such proposal pertaining to any Capital Addition shall indicate the approximate projected cost of constructing such Capital Addition, the use or uses to which it will be put and a good faith estimate of the change, if any, in the gross revenues that Lessee anticipates will result from the construction of such Capital Addition. 9.2.3 LESSOR'S OPTIONS REGARDING CAPITAL ADDITIONS AND MATERIAL STRUCTURAL WORK. Lessor shall have the options of: (a) denying permission for the 54 construction of the applicable Capital Addition or Material Structural Work, (b) offering to finance the construction of the Capital Addition or Material Structural Work pursuant to Section 9.3, (c) allowing Lessee to pay for or separately finance the construction of the Capital Addition or Material Structural Work, subject to compliance with the terms and conditions of Section 9.2.1, Section 9.4, Section 13.1, all Legal Requirements and all other requirements of this Lease and to such other terms and conditions as Lessor may in its discretion impose or (d) any combination of the foregoing. Unless Lessor notifies Lessee in writing of a contrary election within forty-five (45) days of Lessee's request, Lessor shall be deemed to have denied the request for the Capital Addition or Material Structural Work. 9.2.4 LESSOR MAY ELECT TO FINANCE CAPITAL ADDITIONS OR MATERIAL STRUCTURAL WORK. If Lessor elects to offer financing for the proposed Capital Addition or Material Structural Work, the provisions of Section 9.3 shall apply. 9.3 CAPITAL ADDITIONS AND MATERIAL STRUCTURAL WORK FINANCED BY LESSOR. 9.3.1 LESSEE'S FINANCING REQUEST. Lessee may request that Lessor provide or arrange financing for a Capital Addition or Material Structural Work by providing to Lessor such information about the Capital Addition or Material Structural Work as Lessor may reasonably request, including, without limitation, all information referred to in Section 9.2 above. Lessee understands, however, that Lessor shall be under no obligation to agree to such request. Nevertheless, Lessor shall use reasonable efforts to notify Lessee, within forty-five (45) days of receipt of such information, as to whether Lessor will finance the proposed Capital Addition or Material Structural Work and, if so, the terms and conditions upon which it would do so, including the terms of any amendment to this Lease (including, without limitation, an increase in Base Rent based on Lessor's then existing terms and prevailing conditions to compensate Lessor for the additional funds advanced by it). Lessee may withdraw its request by notice to Lessor at any time before such time as Lessee accepts Lessor's terms and conditions. All advances of funds for any such financing shall be made in accordance with Lessor's then standard construction loan requirements and procedures, which may include, without limitation, the requirements and procedures applicable to Work under Section 13.1. 9.3.2 LESSOR'S GENERAL REQUIREMENTS. If Lessor agrees to finance the proposed Capital Addition or Material Structural Work and Lessee accepts Lessor's proposal therefor, in addition to all other items which Lessor or any applicable Financing Party may reasonably require, Lessee shall provide to Lessor the following: (a) prior to any advance of funds, (i) any information, opinions, certificates, Permits or documents reasonably requested by Lessor or any applicable Financing Party which are necessary to confirm that Lessee will be able to use the Capital Addition upon the completion thereof or the 55 applicable portion of the Facility upon the completion of the Material Structural Work in accordance with the Primary Intended Use and (ii) evidence satisfactory to Lessor and any applicable Financing Party that all Permits required for the construction and use of the Capital Addition or the applicable portion of the Facility have been obtained, are in full force and effect and are not subject to appeal, except only for those Permits which cannot in the normal course be obtained prior to commencement or completion of the construction; provided, that Lessor and any applicable Financing Party are furnished with reasonable evidence that the same will be available in the normal course of business without unusual condition; (b) prior to any advance of funds, an Officer's Certificate and, if requested, a certificate from Lessee's architect, setting forth in reasonable detail the projected (or actual, if available) Capital Addition Cost or the cost of the Material Structural Work; (c) bills of sale, instruments of transfer and other documents required by Lessor so as to vest title to the Capital Addition or the applicable Material Structural Work in Lessor free and clear of all Liens, and amendments to this Lease and any recorded notice or memorandum thereof, duly executed and acknowledged, in form and substance reasonably satisfactory to Lessor, providing for any changes required by Lessor including, without limitation, changes in the Base Rent and the legal description of the Land; (d) upon payment therefor, a deed conveying to Lessor title to any land acquired for the purpose of constructing the Capital Addition or the applicable Material Structural Work ("Additional Land") free and clear of any Liens except those approved by Lessor; (e) upon completion of the Capital Addition or the Material Structural Work, a final as-built survey thereof reasonably satisfactory to Lessor, if required by Lessor; (f) during and following the advance of funds and the completion of the Capital Addition or the Material Structural Work, endorsements to any outstanding policy of title insurance covering the Leased Property satisfactory in form and substance to Lessor and any Financing Party (i) updating the same without any additional exception except as may be reasonably permitted by Lessor, (ii) if applicable, including the Additional Land in the premises covered by such title insurance policy and (iii) increasing the coverage thereof by an amount equal to any amount paid by Lessor for the Additional Land plus the Fair Market Value of the Capital Addition or the Fair Market Value of the Material Structural Work (except to the extent covered by the owner's policy of title insurance referred to in subparagraph (g) below); 56 (g) simultaneous with the initial advance of funds, if appropriate, (i) an owner's policy of title insurance insuring fee simple title to any Additional Land conveyed to Lessor pursuant to subparagraph (d) free and clear of all Liens except those approved by Lessor and (ii) a lender's policy of title insurance reasonably satisfactory in form and substance to any applicable Financing Party; (h) following the completion of the Capital Addition or the Material Structural Work, if reasonably deemed necessary by Lessor, an appraisal of the Leased Property by an M.A.I. appraiser acceptable to Lessor, which states that the Fair Market Value of the Leased Property upon completion of the Capital Addition or the Material Structural Work exceeds the Fair Market Value of the Leased Property prior to the commencement of the construction of such Capital Addition or Material Structural Work by an amount not less than one hundred five percent (105%) of the Capital Addition Cost or the cost of the Material Structural Work; and (i) during or following the advancement of funds, prints of architectural and engineering drawings relating to the Capital Addition or the Material Structural Work and such other materials, including, without limitation, endorsements to the title insurance policies (insuring Lessor and any applicable Financing Party with respect to the Leased Property) contemplated by subsection (f) above, opinions of counsel, appraisals, surveys, certified copies of duly adopted resolutions of the board of directors of Lessee authorizing the execution and delivery of the lease amendment and any other documents and instruments as may be reasonably required by Lessor and any applicable Financing Party. 9.3.3 PAYMENT OF COSTS. By virtue of making a request to finance a Capital Addition or any Material Structural Work, whether or not such financing is actually consummated, Lessee shall be deemed to have agreed to pay, upon demand, all costs and expenses reasonably incurred by Lessor and any Person participating with Lessor in any way in the financing of the Capital Addition or Material Structural Work, including, but not limited to (a) fees and expenses of their respective attorneys, (b) all photocopying expenses, if any, (c) the amount of any filing, registration and recording taxes and fees, (d) documentary stamp taxes and intangible taxes and (e) title insurance charges and appraisal fees. 9.4 GENERAL LIMITATIONS. Without in any way limiting Lessor's options with respect to proposed Capital Additions or Material Structural Work: (a) no Capital Addition or Material Structural Work shall be completed that could, upon completion, significantly alter the character or purpose or detract from the value or operating efficiency of the Leased Property, or significantly impair the revenue-producing capability of the Leased Property, or adversely affect the ability of Lessee to comply with the terms of this Lease, (b) no Capital Addition or Material Structural Work shall be completed which would tie in or connect any Leased Improvements on the Leased Property with any 57 other improvements on property adjacent to the Leased Property (and not part of the Land covered by this Lease) including, without limitation, tie-ins of buildings or other structures or utilities, unless Lessee shall have obtained the prior written approval of Lessor, which approval may be withheld in Lessor's sole and absolute discretion and (c) all proposed Capital Additions and Material Structural Work shall be architecturally integrated and consistent with the Leased Property. 9.5 NON-CAPITAL ADDITIONS. Lessee shall have the obligation and right to make repairs, replacements and alterations which are not Capital Additions as required by the other Sections of this Lease, but in so doing, Lessee shall always comply with and satisfy the conditions of Section 9.4, mutatis, mutandis. Lessee shall have the right, from time to time, to make additions, modifications or improvements to the Leased Property which do not constitute Capital Additions or Material Structural Work as it may deem to be desirable or necessary for its uses and purposes, subject to the same limits and conditions imposed under Section 9.4. The cost of any such repair, replacement, alteration, addition, modification or improvement shall be paid by Lessee and the results thereof shall be included under the terms of this Lease and become a part of the Leased Property, without payment therefor by Lessor at any time. Notwithstanding the foregoing, all such additions, modifications and improvements which affect the structure of any of the Leased Improvements, or which involve the expenditure of more than TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), shall be undertaken only upon compliance with the provisions of Section 13.1, all Legal Requirements and all other applicable requirements of this Lease; provided, however, that in the event of a bona fide emergency during which Lessee is unable to contact the appropriate representatives of Lessor, Lessee may commence such additions, modifications and improvements as may be necessary in order to address such emergency without Lessor's prior approval, as long as Lessee immediately thereafter advises Lessor of such emergency and the nature and scope of the additions, modifications and improvements performed and obtains Lessor's approval of the remaining work to be completed. ARTICLE 10 WARRANTIES AND REPRESENTATIONS 10.1 REPRESENTATIONS AND WARRANTIES. Lessee hereby represents and warrants to, and covenants and agrees with, Lessor that: 58 10.1.1 EXISTENCE; POWER; QUALIFICATION. Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Lessee has all requisite corporate power to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted and is duly qualified to transact business and is in good standing in each jurisdiction where such qualification is necessary or desirable in order to carry out its business as presently conducted and as proposed to be conducted. As of the date of this Agreement, Lessee does not have any Subsidiaries and Lessee is not a member of any partnership or joint venture. Attached hereto as EXHIBIT C is a true and correct list of all of the shareholders of Lessee and their respective ownership interests in Lessee. 10.1.2 VALID AND BINDING. Lessee is duly authorized to make and enter into all of the Lease Documents to which Lessee is a party and to carry out the transactions contemplated therein. All of the Lease Documents to which Lessee is a party have been duly executed and delivered by Lessee, and each is a legal, valid and binding obligation of Lessee, enforceable in accordance with its terms. 10.1.3 SINGLE PURPOSE. Lessee is, and during the entire time that this Lease remains in force and effect shall be, engaged in no business, trade or activity other than the construction of the Project in accordance with the terms of the Leasehold Improvement Agreement and, from and after the Conversion Date, operation of the Leased Property for the Primary Intended Use. The fiscal year of Lessee and the Guarantor is the Fiscal Year. 10.1.4 NO VIOLATION. The execution, delivery and performance of the Lease Documents and the consummation of the transactions thereby contemplated shall not result in any breach of, or constitute a default under, or result in the acceleration of, or constitute an event which, with the giving of notice or the passage of time, or both, could result in default or acceleration of any obligation of any member of the Leasing Group under any of the Permits or Contracts or any other contract, mortgage, lien, lease, agreement, instrument, franchise, arbitration award, judgment, decree, bank loan or credit agreement, trust indenture or other instrument to which any member of the Leasing Group is a party or by which any member of the Leasing Group or the Leased Property may be bound or affected and do not violate or contravene any Legal Requirement. 10.1.5 CONSENTS AND APPROVALS. Except as already obtained or filed, as the case may be, no consent or approval or other authorization of, or exemption by, or declaration or filing with, any Person and no waiver of any right by any Person is required to authorize or permit, or is otherwise required as a condition of the execution and delivery of any of the Lease Documents, the Construction Contract or the Architect's Agreement by any member of the Leasing Group and the performance of such member's obligations thereunder or as a condition to the validity (assuming the due authorization, execution and delivery by Lessor of the 59 Lease Documents to which it is a party) and the first priority of any Liens granted under the Lease Documents, except the filing of the Financing Statements. 10.1.6 NO LIENS OR INSOLVENCY PROCEEDINGS. Each member of the Leasing Group is financially solvent and there are no actions, suits, investigations or proceedings including, without limitation, outstanding federal or state tax liens, garnishments or insolvency or bankruptcy proceedings, pending or, to the best of Lessee's knowledge and belief, threatened: (a) against or affecting any member of the Leasing Group, which if adversely resolved to such member of the Leasing Group, would materially adversely affect the ability of any of the foregoing to perform their respective obligations under the Lease Documents; (b) against or affecting the Leased Property or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof; or (c) which may involve or affect the validity, priority or enforceability of any of the Lease Documents, at law or in equity, or before or by any arbitrator or Governmental Authority. 10.1.7 NO BURDENSOME AGREEMENTS. No member of the Leasing Group is a party to any agreement the terms of which now have, or, as far as can be reasonably foreseen, may have, a material adverse affect on its respective financial condition or business or on the operation of the Leased Property. 10.1.8 COMMERCIAL ACTS. Lessee's performance of and compliance with the obligations and conditions set forth herein and in the other Lease Documents will constitute commercial acts done and performed for commercial purposes. 10.1.9 ADEQUATE CAPITAL, NOT INSOLVENT. After giving effect to the consummation of the transactions contemplated by the Lease Documents, each member of the Leasing Group: (a) will be able to pay its debts as they become due; (b) will have sufficient funds and capital to carry on its business as now conducted or as contemplated to be conducted (in accordance with the terms of the Lease Documents); (c) will own property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts as they become due; and (d) will not be rendered insolvent as determined by applicable law. 60 10.1.10 NOT DELINQUENT. No member of the Leasing Group is delinquent or claimed to be delinquent under any obligation for the payment of borrowed money. 10.1.11 NO AFFILIATE DEBT. Lessee has not created, incurred, guaranteed, endorsed, assumed or suffered to exist any liability (whether direct or contingent) for borrowed money from the Guarantor (or any of its Affiliates) or any Affiliate of Lessee that is not fully subordinated to the Lease Obligations pursuant to the Affiliated Party Subordination Agreement or the Subordination and Standstill Agreement. 10.1.12 TAXES CURRENT. Each member of the Leasing Group has filed all federal, state and local tax returns which are required to be filed as to which extensions are not currently in effect and have paid all taxes, assessments, impositions, fees and other governmental charges (including interest and penalties) which have become due pursuant to such returns or pursuant to any assessment or notice of tax claim or deficiency received by each such member of the Leasing Group. No tax liability has been asserted by the Internal Revenue Service against any member of the Leasing Group or any other federal, state or local taxing authority for taxes, assessments, impositions, fees or other governmental charges (including interest or penalties thereon) in excess of those already paid. 10.1.13 FINANCIALS COMPLETE AND ACCURATE. The financial statements of each member of the Leasing Group given to Lessor in connection with the execution and delivery of the Lease Documents were true, complete and accurate, in all material respects, and fairly presented the financial condition of each such member of the Leasing Group as of the date thereof and for the periods covered thereby, having been prepared in accordance with GAAP and such financial statements disclosed all liabilities, including, without limitation, contingent liabilities, of each such member of the Leasing Group. There has been no material adverse change since such date with respect to the Tangible Net Worth of any member of the Leasing Group or with respect to any other matters contained in such financial statements, nor have any additional material liabilities, including, without limitation, contingent liabilities, of any member of the Leasing Group arisen or been incurred or asserted since such date. The projections heretofore delivered to Lessor continue to be reasonable (with respect to the material assumptions upon which such projections are based) and Lessee reasonably anticipates the results projected therein will be achieved, there having been (a) no material adverse change in the business, assets or condition, financial or otherwise of any member of the Leasing Group or the Leased Property and (b) no material depletion of the cash or decrease in working capital of any member of the Leasing Group. 61 10.1.14 PENDING ACTIONS, NOTICES AND REPORTS. (a) There is no action or investigation pending or, to the best knowledge and belief of Lessee, threatened, anticipated or contemplated (nor, to the knowledge of Lessee, is there any reasonable basis therefor) against or affecting the Leased Property or any member of the Leasing Group (or any Affiliate thereof) before any Governmental Authority, Accreditation Body or Third Party Payor which could prevent or hinder the consummation of the transactions contemplated hereby or call into question the validity of any of the Lease Documents or any action taken or to be taken in connection with the transactions contemplated thereunder or which in any single case or in the aggregate might result in any material adverse change in the business, prospects, condition, affairs or operations of any member of the Leasing Group or the Leased Property (including, without limitation, any action to revoke, withdraw or suspend any Permit necessary or desirable for the operation of the Leased Property in accordance with its Primary Intended Use and any action to transfer or relocate any such Permit to a location other than the Leased Property) or any material impairment of the right or ability of any member of the Leasing Group to carry on its operations as presently conducted or proposed to be conducted or which may materially adversely impact reimbursement to any member of the Leasing Group for services rendered to beneficiaries of Third Party Payor Programs. (b) Neither the Facility nor any member of the Leasing Group has received any notice of any claim, requirement or demand of any Governmental Authority, Accreditation Body, Third Party Payor or any insurance body having or claiming any licensing, certifying, supervising, evaluating or accrediting authority over the Leased Property to rework or redesign the Leased Property, its professional staff or its professional services, procedures or practices in any material respect or to provide additional furniture, fixtures, equipment or inventory or to otherwise take action so as to make the Leased Property conform to or comply with any Legal Requirement; (c) [Intentionally deleted]; and (d) Lessee has delivered or caused to be delivered to Lessor true and correct copies of all licenses, inspection surveys and accreditation reviews relating to the Leased Property, issued by any Governmental Authority or Accreditation Body during the most recent licensing period, together with all plans of correction relating thereto. 62 10.1.15 COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. (a) Lessee and the Leased Property and the ownership, construction, development, maintenance, management, repair, use, occupancy, possession and operation thereof comply with all applicable Legal Requirements and there is no claim of any violation thereof known to Lessee. Without limiting the foregoing, Lessee has obtained all Permits that are necessary or desirable to operate the Leased Property in accordance with its Primary Intended Use and all such Permits are in full force and effect. (b) Except as previously delivered to Lessor pursuant to Section 10.1.14(d) hereof, there are no outstanding notices of deficiencies, notices of proposed action or orders of any kind relating to the Leased Property issued by any Governmental Authority, Accreditation Body or Third Party Payor requiring conformity to any of the Legal Requirements. (c) Lessee knows of no impediments to Lessee and the Facility becoming licensed by the Department of Social Services (and/or any appropriate Governmental Authority with jurisdiction over the operation of the Facility), on or before the Conversion Date to operate eighty (80) licensed beds (located in eighty (80) units) at the Facility. 10.1.16 NO ACTION BY GOVERNMENTAL AUTHORITY. There is no action pending or, to the best knowledge and belief of Lessee, recommended, by any Governmental Authority or Accreditation Body to revoke, repeal, cancel, modify, withdraw or suspend any Permit or Contract or to take any other action of any other type which could have a material adverse effect on the Leased Property. 10.1.17 PROPERTY MATTERS. (a) The Leased Property is free and clear of agreements, covenants and Liens, except those agreements, covenants and Liens to which this Lease is expressly subject, whether presently existing, as are listed on EXHIBIT B or were listed on the UCC lien search results delivered to Lessor at or prior to the execution and delivery of this Lease (and were not required to be terminated as a condition of the execution and delivery of this Lease), or which may hereafter be created in accordance with the terms hereof, including, without limitation, the First Leasehold Mortgage and the Second Leasehold Mortgage (collectively referred to herein as the "Permitted Encumbrances"); and Lessee shall warrant and defend Lessor's title to the Leased Property against any and all claims and demands of every kind and nature whatsoever; (b) There is no Condemnation or similar proceeding pending with respect to or affecting the Leased Property, and Lessee is not aware, to the best of Lessee's knowledge and belief, that any such proceeding is contemplated; 63 (c) To the actual knowledge of Lessee, no part of the Collateral or the Leased Property has been damaged by any fire or other casualty; (d) None of the Permitted Encumbrances has or is likely to have a material adverse impact upon, nor interfere with or impede, in any material respect, the operation of the Leased Property in accordance with the Primary Intended Use; (e) Upon the completion of construction of the Project, all buildings, facilities and other improvements necessary, both legally and practically, for the proper and efficient operation of the Facility are located upon the Leased Property and all real property and personal property currently utilized by Lessee is included within the definition of the Leased Property or the Collateral; (f) The Leased Property abuts on and has direct vehicular access to a public road or access to a public road via permanent, irrevocable, appurtenant easements; (g) The Leased Property constitutes a separate parcel for real estate tax purposes and no portion of any real property that does not constitute a portion of the Leased Property is part of the same tax parcel as any part of the Leased Property; and (h) Prior to the completion of construction of the Project, all utilities necessary for the use and operation of the Facility will be available to the lot lines of the Leased Property: (i) in sufficient supply and capacity; (ii)through validly created and existing easements of record appurtenant to or encumbering the Leased Property (which easements shall not impede or restrict the construction of the Project or the operation of the Facility); and (iii) without need for any Permits and/or Contracts to be issued by or entered into with any Governmental Authority, except as already obtained or executed, as the case may be, or as otherwise shown to the satisfaction of Lessor to be readily obtainable. 10.1.18 THIRD PARTY PAYOR AGREEMENTS. (a) [Intentionally Deleted]. (b) Attached hereto as EXHIBIT D is a list of national accounts and local discount agreements, which constitute all of the agreements between Lessee or the Facility, on the one hand, and Third Party Payors on the other hand, pursuant to which Lessee or the Facility agrees to provide services based on a discount factor from the rates regularly charged for services rendered by Lessee or the Facility. 64 (c) No member of the Leasing Group, nor the Facility has any rate appeal currently pending before any Governmental Authority or any administrator of any Third Party Payor Program or any other referral source other than such appeals which, if determined adversely to any member of the Leasing Group or the Facility would not have a materially adverse effect, either singly or in the aggregate, on the financial condition of any member of the Leasing Group or the Facility. 10.1.19 RATE LIMITATIONS. Except as disclosed on EXHIBIT F, the State currently imposes no restrictions or limitations on rates which may be charged to private pay residents receiving services at the Facility. 10.1.20 FREE CARE. Except as disclosed on EXHIBIT G, there are no Contracts, Permits or Legal Requirements which require that, upon completion of construction of the Project, a percentage of beds or slots in any program at the Facility be reserved for Medicaid or Medicare eligible patients (or residents) or that the Facility provide a certain amount of welfare, free or charity care or discounted or government assisted patient (or resident) care. 10.1.21 NO PROPOSED CHANGES. Lessee has no actual knowledge of any Legal Requirements which have been enacted, promulgated or issued within the eighteen (18) months preceding the date of this Lease or any proposed Legal Requirements currently pending in the State which may materially adversely affect rates at the Facility (or any program operated in conjunction with the Facility) or may result in the likelihood of increased competition at the Facility or the imposition of Medicaid, Medicare, charity, free care, welfare or other discounted or government assisted patients (or residents) at the Facility or require that Lessee or the Facility obtain a certificate of need, Section 1122 approval or the equivalent, which Lessee or the Facility does not currently possess. 10.1.22 ERISA. No employee pension benefit plan maintained by any member of the Leasing Group has any accumulated funding deficiency within the meaning of the ERISA, nor does any member of the Leasing Group have any material liability to the PBGC established under ERISA (or any successor thereto) in connection with any employee pension benefit plan (or other class of benefit which the PBGC has elected to insure), and there have been no "reportable events" (not waived) or "prohibited transactions" with respect to any such plan, as those terms are defined in Section 4043 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as now or hereafter amended, respectively. 10.1.23 NO BROKER. No member of the Leasing Group nor any of their respective Affiliates has dealt with any broker or agent in connection with the transactions contemplated by the Lease Documents. 10.1.24 NO IMPROPER PAYMENTS. No member of the Leasing Group nor any of their respective Affiliates has: 65 (a) made any contributions, payments or gifts of its funds or property to or for the private use of any government official, employee, agent or other Person where either the payment or the purpose of such contribution, payment or gifts is illegal under the laws of the United States, any state thereof or any other jurisdiction (foreign or domestic); (b) established or maintained any unrecorded fund or asset for any purpose or has made any false or artificial entries on any of its books or records for any reason; (c) made any payments to any Person with the intention or understanding that any part of such payment was to be used for any other purpose other than that described in the documents supporting the payment; or (d) made any contribution, or has reimbursed any political gift or contribution made by any other Person, to candidates for public office, whether federal, state or local, where such contribution would be in violation of applicable law. 10.1.25 NOTHING OMITTED. Neither this Lease, nor any of the other Lease Documents, nor any certificate, agreement, statement or other document, including, without limitation, any financial statements concerning the financial condition of any member of the Leasing Group, furnished to or to be furnished to Lessor or its attorneys in connection with the transactions contemplated by the Lease Documents, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to prevent all statements contained herein and therein from being misleading. There is no fact within the special knowledge of Lessee which has not been disclosed herein or in writing to Lessor that materially adversely affects, or in the future, insofar as Lessee can reasonably foresee, may materially adversely affect the business, properties, assets or condition, financial or otherwise, of any member of the Leasing Group or the Leased Property. 10.1.26 NO MARGIN SECURITY. Lessee is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Meditrust Investment will be used to purchase or carry any margin security or to extend credit to others for the purpose of purchasing or carrying any margin security or in any other manner which would involve a violation of any of the regulations of the Board of Governors of the Federal Reserve System. Lessee is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 66 10.1.27 NO DEFAULT. No event or state of facts which constitutes, or which, with notice or lapse of time, or both, could constitute, a Lease Default has occurred and is continuing. 10.1.28 PRINCIPAL PLACE OF BUSINESS. The principal place of business and chief executive office of Lessee is located at 3801 PGA Boulevard, Suite 1000, Palm Beach Gardens, Florida 33410 (the "Principal Place of Business"). 10.1.29 LABOR MATTERS. There are no proceedings now pending, nor, to the best of Lessee's knowledge, threatened with respect to the operation of the Facility before the National Labor Relations Board, State Commission on Human Rights and Opportunities, State Department of Labor, U.S. Department of Labor or any other Governmental Authority having jurisdiction of employee rights with respect to hiring, tenure and conditions of employment, and no member of the Leasing Group has experienced any material controversy with any Facility administrator or other employee of similar stature or with any labor organization. 10.1.30 INTELLECTUAL PROPERTY. Lessee is duly licensed or authorized to use all (if any) copyrights, rights of reproduction, trademarks, trade-names, trademark applications, service marks, patent applications, patents and patent license rights, (all whether registered or unregistered, U.S. or foreign), inventions, franchises, discoveries, ideas, research, engineering, methods, practices, processes, systems, formulae, designs, drawings, products, projects, improvements, developments, know-how and trade secrets which are used in or necessary for the operation of the Facility in accordance with its Primary Intended Use, without conflict with or infringement of any, and subject to no restriction, lien, encumbrance, right, title or interest in others. 10.1.31 MANAGEMENT AGREEMENTS. There is no Management Agreement in force and effect as of the date hereof other than the Current Management Agreement, a true and correct copy of which has been furnished to Lessor. 10.1.32 OPTION PURCHASE DOCUMENTS. True and correct copies of the Option Agreement and other Option Purchase Documents have been delivered to Lessor and the transactions related to the Land contemplated by the Option Purchase Documents have closed in accordance with the terms thereof and in compliance with all applicable Legal Requirements. 10.1.33 WORKING CAPITAL LOAN DOCUMENTS. True and correct copies of the Shortfall Agreement and the other Working Capital Loan Documents have been delivered to Lessor and the transaction contemplated by the Working Capital Loan Documents has closed in accordance with the terms thereof and in compliance with all applicable Legal Requirements. Attached hereto as EXHIBIT H is a true and correct list of all of the Working Capital Loan Documents. There are no agreements in force and effect between Lessee and the Guarantor or any Affiliate of the Guarantor, other than (i) the Leasehold Improvement Agreement, (ii) the Affiliated Party Subordination Agreement, (iii) the Current Management 67 Agreement and (iv) the Working Capital Loan Documents. The Lessee shall not terminate, amend, abridge, modify or otherwise limit any of the Working Capital Loan Documents without the prior written consent of the Lessor, in each instance, which consent may be withheld in the Lessor's sole and absolute discretion. Notwithstanding anything to the contrary set forth herein, from and after the date hereof, the Lessee shall not enter into any contractual arrangement with the Guarantor, the Developer, the Current Manager or any of their Affiliates without the prior written consent of the Lessor, in each instance, which consent may be withheld in the Lessor's sole and absolute discretion. 10.2 CONTINUING EFFECT OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in this Lease and the other Lease Documents shall constitute continuing representations and warranties which shall remain true, correct and complete throughout the Term. Notwithstanding the provisions of the foregoing sentence but without derogation from any other terms and provisions of this Lease, including, without limitation, those terms and provisions containing covenants to be performed or conditions to be satisfied on the part of Lessee, the representations and warranties contained in Sections 10.1.6, 10.1.7, 10.1.10, 10.1.14, 10.1.15, 10.1.17(b), 10.1.17(c), 10.1.18(b), 10.1.18(c), 10.1.19, 10.1.20, 10.1.21, 10.1.22, 10.1.28, 10.1.29, in the second sentence of Section 10.1.12, and in the second and third sentences of Section 10.1.13 shall not constitute continuing representations and warranties throughout the Term. ARTICLE 11 FINANCIAL AND OTHER COVENANTS 11.1 STATUS CERTIFICATES. At any time, and from time to time, upon request from Lessor, Lessee shall furnish to Lessor, within ten (10) Business Days' after receipt of such request, an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications) and the dates to which the Rent has been paid. Any Officer's Certificate furnished pursuant to this Section shall be addressed to any prospective purchaser or mortgagee of the Leased Property as Lessor may request and may be relied upon by Lessor and any such prospective purchaser or mortgagee of the Leased Property. 11.2 FINANCIAL STATEMENTS; REPORTS; NOTICE AND INFORMATION. 11.2.1 OBLIGATION TO FURNISH. Lessee will furnish and shall cause to be furnished to Lessor the following statements, information and other materials: (a) ANNUAL STATEMENTS. Within one hundred (100) days after the end of each of their respective fiscal years, (i) a copy of the Consolidated Financials for each of (x) the Lessee and the Guarantor and (y) any Sublessee for the preceding fiscal year, certified and audited by, and with the unqualified opinion of, independent certified public accountants acceptable to Lessor and certified as true and correct by Lessee and the 68 Guarantor or the applicable Sublessee, as the case may be (and, without limiting anything else contained herein, the Consolidated Financials for Lessee and for each Sublessee shall include a detailed balance sheet for Leased Property as of the last day of such fiscal year and a statement of earnings from the Leased Property for such fiscal year showing, among other things, all rents and other income therefrom and all expenses paid or incurred in connection with the operation of the Leased Property); (ii) separate statements, certified as true and correct by Lessee, the Guarantor and each Sublessee, stating whether, to the best of the signer's knowledge and belief after making due inquiry, Lessee, the Guarantor or such Sublessee, as the case may be, is in default in the performance or observance of any of the terms of this Lease or any of the other Lease Documents and, if so, specifying all such defaults, the nature thereof and the steps being taken to immediately remedy the same; (iii) a copy of all letters from the independent certified accountants engaged to perform the annual audits referred to above, directed to the management of Lessee, the Guarantor or the applicable Sublessee, as the case may be, regarding the existence of any reportable conditions or material weaknesses, (iv) a statement certified as true and correct by Lessee setting forth all Subleases (excluding Residence Agreements) as of the last day of such fiscal year, the respective areas demised thereunder, the names of the Sublessees thereunder, the respective expiration dates of such Subleases, the respective rentals provided for therein, and such other information pertaining to the Subleases as may be reasonably requested by Lessor and (v) evidence satisfactory to Lessor that Lessee has fulfilled its obligation to make the Annual Facility Upgrade Expenditure in accordance with the provisions of Section 11.4.11. (b) MONTHLY STATEMENTS OF LESSEE. Within thirty (30) days after the end of each calendar month during the pendency of this Lease, from and after the Conversion Date, an unaudited, detailed month and year to date income and expense statement for the Leased Property which shall include a comparison to corresponding budget figures, occupancy statistics [including the actual number of patients and residents and the number of units and beds available] and patient/resident mix breakdowns (for each patient or resident day during such month classifying patients and residents by the type of care required and source of payment). (c) QUARTERLY STATEMENTS. (i) Within thirty (30) days after the end of each of their respective fiscal quarters, unaudited Consolidated Financials for each of (i) Lessee and (ii) each Sublessee certified as true and correct by Lessee or the applicable Sublessee, as the case may be and (ii) within thirty (30) days after the end of each Fiscal Quarter, an express written calculation showing the compliance or non-compliance, as the case may be, with the specific financial covenants set forth in Section 11.3 for the applicable period, including, with respect to the calculation of Lessee's Rent 69 Coverage Ratio, a schedule substantially in the form attached hereto as EXHIBIT I. (d) QUARTERLY STATEMENTS OF THE GUARANTOR. Within fifty (50) days after the end of each Fiscal Quarter, unaudited Consolidated Financials for the Guarantor certified as true and correct by the Guarantor. (e) PERMITS AND CONTRACTS. Promptly after the issuance or the execution thereof, as the case may be, true and complete copies of (i) all Permits which constitute operating licenses for the Facility issued by any Governmental Authority having jurisdiction over health care or senior housing matters and (ii) Contracts (involving payments in the aggregate in excess of $100,000 per annum), including, without limitation, all Provider Agreements. (f) CONTRACT NOTICES. Promptly after the receipt thereof, true and complete copies of any notices, consents, terminations or statements of any kind or nature relating to any of the Contracts (involving payments in the aggregate in excess of $100,000 per annum) other than those issued in the ordinary course of business. (g) PERMIT OR CONTRACT DEFAULTS. Promptly after the receipt thereof, true and complete copies of all surveys, follow-up surveys, licensing surveys, complaint surveys, examinations, compliance certificates, inspection reports, statements (other than those statements that are issued in the ordinary course of business), terminations and notices of any kind (other than those notices that are furnished in the ordinary course of business) issued or provided to Lessee or any Sublessee by any Governmental Authority, Accreditation Body or any Third Party Payor, including, without limitation, any notices pertaining to any delinquency in, or proposed revision of, Lessee's or any Sublessee's obligations under the terms and conditions of any Permits or Contracts now or hereafter issued by or entered into with any Governmental Authority, Accreditation Body or Third Party Payor and the response(s) thereto made by or on behalf of Lessee or any Sublessee. (h) OFFICIAL REPORTS. Upon completion or filing thereof, complete copies of all applications (other than those that are furnished in the ordinary course of business), notices (other than those that are furnished in the ordinary course of business), statements, annual reports, cost reports and other reports or filings of any kind (other than those that are furnished in the ordinary course of business) provided by Lessee or any Sublessee to any Governmental Authority, Accreditation Body or any Third Party Payor with respect to the Leased Property. (i) OTHER INFORMATION. With reasonable promptness, such other information as Lessor may from time to time reasonably request respecting (i) the financial condition and affairs of each member of the Leasing Group 70 and the Leased Property and (ii) the licensing and operation of the Leased Property; including, without limitation, audited financial statements, certificates and consents from accountants and all other financial and licensing/operational information as may be required or requested by any Governmental Authority. (j) DEFAULT CONDITIONS. As soon as possible, and in any event within five (5) days after the occurrence of any Lease Default, or any event or circumstance which, with the giving of notice or the passage of time, or both, could constitute a Lease Default, a written statement of Lessee setting forth the details of such Lease Default, event or circumstance and the action which Lessee proposes to take with respect thereto. (k) OFFICIAL ACTIONS. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any Governmental Authority or Accreditation Body which could have a material adverse effect on (i) any member of the Leasing Group to perform any of its obligations under any of the Lease Documents or (ii) the Leased Property. (l) AUDIT REPORTS. Promptly after receipt, a copy of all audits or reports submitted to any member of the Leasing Group by any independent public accountant in connection with any annual, special or interim audits of the books of any such member of the Leasing Group and, if requested by Lessor, any letter of comments directed by such accountant to the management of any such member of the Leasing Group. (m) ADVERSE DEVELOPMENTS. Within five (5) days after Lessee acquires knowledge thereof, written notice of: (i) the potential termination of any Permit or Provider Agreement necessary for the construction of the Project and/or operation of the Leased Property; (ii) any loss, damage or destruction to or of the Leased Property in excess of TWENTY-FIVE THOUSAND DOLLARS ($25,000) (regardless of whether the same is covered by insurance); (iii) any material controversy involving Lessee or any Sublessee and (x) Facility administrator or Facility employee of similar stature or (y) any labor organization; (iv) any controversy that calls into question the eligibility of Lessee or the Facility for the participation in any Medicaid, Medicare or other Third Party Payor Program; 71 (v) any refusal of reimbursement by any Third Party Payor which, singularly or together with all other such refusals by any Third Party Payors, could have a material adverse effect on the financial condition of Lessee or any Sublessee; and (vi) any fact within the special knowledge of any member of the Leasing Group, or any other development in the business or affairs of any member of the Leasing Group, which may be materially adverse to the business, properties, assets or condition, financial or otherwise, of any member of the Leasing Group or the Leased Property. (n) LINE OF CREDIT DEFAULT. Within ten (10) days after becoming aware of a claim by any Person that Lessee is in default of any agreement in connection with the borrowing of money which is not prohibited hereunder, notice of any such claim or default. (o) RESPONSES TO INSPECTION REPORTS. Within thirty (30) days after receipt of an inspection report relating to the Leased Property from Lessor, a written response describing in detail prepared plans to address concerns raised by the inspection report. (p) PUBLIC INFORMATION. Upon the completion or filing, mailing or other delivery thereof, complete copies of all financial statements, reports, notices and proxy statements, if any, sent by any member of the Leasing Group (which is a publicly held corporation) to its shareholders and of all reports, if any, filed by any member of the Leasing Group (which is a publicly held corporation) with any securities exchange or with the Securities Exchange Commission. (q) ANNUAL BUDGETS. At least thirty (30) days prior to the end of each Fiscal Year, Lessee, any Sublessee and/or any Manager shall submit to Lessor a preliminary annual financial budget for the Facility for the next Fiscal Year, a preliminary capital expenditures budget for the Facility for the next Fiscal Year and a report detailing the capital expenditures made in the then current Fiscal Year and on or before the end of the first month of each Fiscal Year, Lessee, any Sublessee and/or any Manager shall submit to Lessor revised finalized versions of such budgets and report. 11.2.2 RESPONSIBLE OFFICER. Any certificate, instrument, notice, or other document to be provided to Lessor hereunder by any member of the Leasing Group shall be signed by an executive officer of such member (in the event that any of the foregoing is not an individual), having a position of Vice President or higher and with respect to financial matters, any such certificate, instrument, notice or other document shall be signed by the chief financial officer of such member. 72 11.2.3 NO MATERIAL OMISSION. No certificate, instrument, notice or other document, including without limitation, any financial statements furnished or to be furnished to Lessor pursuant to the terms hereof or of any of the other Lease Documents shall contain any untrue statement of a material fact or shall omit to state any material fact necessary in order to prevent all statements contained therein from being misleading. 11.2.4 CONFIDENTIALITY. Lessor shall afford any information received pursuant to the provisions of the Lease Documents the same degree of confidentiality that Lessor affords similar information proprietary to Lessor; provided, however, that Lessor does not in any way warrant or represent that such information received from any member of the Leasing Group shall remain confidential (and shall not be liable in any way for any subsequent disclosure of such information by any Person that Lessor has provided such information in accordance with the terms hereof) and provided, further, that Lessor shall have the unconditional right to (a) disclose any such information as Lessor deems necessary or appropriate in connection with any sale, transfer, conveyance, participation or assignment of the Leased Property or any of the Lease Documents or any interest therein and (b) use such information in any litigation or arbitration proceeding between Lessor and any member of the Leasing Group. Without limiting the foregoing, Lessor may also utilize any information furnished to it hereunder as and to the extent (i) counsel to Lessor determines that such utilization is necessary pursuant to 15 U.S.C. 77a-77aa or 15 U.S.C. 78a-78jj and the rules and regulations promulgated thereunder, (ii) Lessor is required or requested by any Governmental Authority to disclose any such information and/or (iii) Lessor is requested to disclose any such information by any of the Meditrust Entities' lenders or potential lenders. Lessor shall not be liable in any way for any subsequent disclosure of such information by any Person to whom Lessor provided such information in accordance with the terms hereof. Nevertheless, in connection with any such disclosure, Lessor shall inform all recipients of any such information of the confidential nature thereof. Lessor additionally shall observe any prohibitions or limitations on the disclosure of any such information under applicable confidentiality law or regulations, to the extent that the same are applicable to such information, including, without limitation, any duly enacted "Patients' Bill of Rights" or similar legislation, including such limitations as may be necessary to preserve the confidentiality of the facility-patient relationship and the physician-patient privilege. 11.3 FINANCIAL COVENANTS. Lessee covenants and agrees that, throughout the Term and as long as Lessee is in possession of the Leased Property: 11.3.1 RENT COVERAGE RATIO OF LESSEE. Commencing with the first full Fiscal Quarter after the first day of the second Lease Year, and for each Fiscal Quarter thereafter through the end of the Term, Lessee shall maintain a Rent Coverage Ratio equal to or greater than 1.25 to 1. 73 11.3.2 [INTENTIONALLY DELETED]. 11.3.3 [INTENTIONALLY DELETED]. 11.3.4 NO INDEBTEDNESS. Lessee shall not create, incur, assume or suffer to exist any liability for borrowed money except (i) Indebtedness to Lessor under the Lease Documents and, (ii) Impositions allowed pursuant to the provisions of the Lease, (iii) unsecured normal trade debt incurred upon customary terms in the ordinary course of business, (iv) Indebtedness created in connection with any financing of any Capital Addition, provided, that each such financing has been approved by Lessor in accordance with the terms of Article 9 hereof, (v) Indebtedness to any Affiliate, provided, that, such Indebtedness is fully subordinated to this Lease pursuant to the Affiliated Party Subordination Agreement, (vi) other Indebtedness of Lessee in the aggregate amount not to exceed TWO HUNDRED THOUSAND DOLLARS ($200,000) incurred, for the exclusive use of the Leased Property, on account of purchase money indebtedness or finance lease arrangements, each of which shall not exceed the fair market value of the assets or property acquired or leased and shall not extend to any assets or property other than those purchased or leased and purchase money security interests in equipment and equipment leases which comply with the provisions of Section 6.1.2, and (vii) liability arising under the Working Capital Loan Documents. 11.3.5 NO GUARANTIES. Lessee shall not assume, guarantee, endorse, contingently agree to purchase or otherwise become directly or contingently liable (including, without limitation, liable by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise to invest in any debtor or otherwise to assure any creditor against loss) in connection with any Indebtedness of any other Person, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. 11.4 AFFIRMATIVE COVENANTS. Lessee covenants and agrees that throughout the Term and any periods thereafter that Lessee remains in possession of the Leased Property: 11.4.1 MAINTENANCE OF EXISTENCE. If Lessee is a corporation, trust or partnership, during the entire time that this Lease remains in full force and effect, Lessee shall keep in effect its existence and rights as a corporation, trust or partnership under the laws of the state of its incorporation or formation and its right to own property and transact business in the State. 11.4.2 MATERIALS. Except as provided in Section 6.1.2, Lessee shall not suffer the use in connection with any renovations or other construction relating to the Leased Property of any materials, fixtures or equipment intended to become part of the Leased Property which are purchased upon lease or conditional bill of sale or to which Lessee does not have absolute and unencumbered title, and Lessee covenants to cause to be paid punctually all sums becoming due for labor, 74 materials, fixtures or equipment used or purchased in connection with any such renovations or construction, subject to Lessee's right to contest to the extent provided for in Article 15. 11.4.3 COMPLIANCE WITH LEGAL REQUIREMENTS AND APPLICABLE AGREEMENTS. Lessee and the Leased Property and all uses thereof shall comply with (i) all Legal Requirements, (ii) all Permits and Contracts, (iii) all Insurance Requirements, (iv) the Lease Documents, (v) the Permitted Encumbrances and (vi) the Appurtenant Agreements. Without limiting the foregoing (a) Lessee shall, on or before the Conversion Date, obtain all necessary Permits to operate the Facility for its Primary Intended Use and shall thereafter throughout the Term maintain such Permits in full force and effect and (b) prior to the issuance of such license, Lessee shall obtain the Department of Social Services' approval of all forms of Residence Agreements to be utilized by Lessee in connection with the operation of the Facility. 11.4.4 BOOKS AND RECORDS. Lessee shall cause to be kept and maintained, and shall permit Lessor and its representatives to inspect at all reasonable times, accurate books of accounts in which complete entries will be made in accordance with GAAP reflecting all financial transactions of Lessee (showing, without limitation, all materials ordered and received and all disbursements, accounts payable and accounts receivable in connection with the operation of the Leased Property). 11.4.5 PARTICIPATION IN THIRD PARTY PAYOR PROGRAMS. From and after the Conversion Date, Lessee and each Sublessee shall participate in all Third Party Payor Programs (which would be participated in by a prudent operator in the good faith exercise of commercially reasonable business judgment), in accordance with all requirements thereof (including, without limitation, all applicable Provider Agreements), and shall remain eligible to participate in such Third Party Payor Programs, all as shall be necessary for the prudent operation of the Facility in the good faith exercise of commercially reasonable business judgment. 11.4.6 CONDUCT OF ITS BUSINESS. Lessee will maintain, and cause any Sublessee and any Manager to maintain, experienced and competent professional management with respect to its business and, from and after the Conversion Date, with respect to the Leased Property. Lessee, any Sublessee and any Manager shall conduct, in the ordinary course, the operation of the Facility, and Lessee and any Sublessee shall not enter into any other business or venture during the Term or such time as Lessee or any Sublessee is in possession of the Leased Property. 11.4.7 ADDRESS. Lessee shall provide Lessor thirty (30) days' prior written notice of any change of its Principal Place of Business from its current Principal Place of Business. Lessee shall maintain the Collateral, including without limitation, all books and records relating to its business, solely at its Principal Place of Business and at the Leased Property. Lessee shall not (a) remove the Collateral, including, without limitation, any books or records relating to Lessee's 75 business from either the Leased Property or Lessee's Principal Place of Business or (b) relocate its Principal Place of Business until after receipt of a certificate from Lessor, signed by an officer thereof, stating that Lessor has, to its satisfaction, obtained all documentation that it deems necessary or desirable to obtain, maintain, perfect and confirm the first priority security interests granted in the Lease Documents. 11.4.8 SUBORDINATION OF CERTAIN TRANSACTIONS. Without limiting the provisions of any other Section of this Lease or the Affiliated Party Subordination Agreement, any payments to be made by Lessee to (a) any member of the Leasing Group (or any Affiliate of any member of the Leasing Group) or (b) any Affiliate of Lessee, in connection with any transaction between Lessee and such Person, including, without limitation, the purchase, sale or exchange of any property, the rendering of any service to or with any such Person (including, without limitation, all allocations of any so-called corporate or central office costs, expenses and charges of any kind or nature) or the making of any loan or other extension of credit or the making of any equity investment, shall be subordinate to the complete payment and performance of the Lease Obligations; provided, however, that all such subordinated payments may be paid at any time unless: (x) after giving effect to such payment, Lessee shall be unable to comply with any of its obligations under any of the Lease Documents or (y) a Lease Default has occurred and is continuing and has not been expressly waived in writing by Lessor or an event or state of facts exists, which, with the giving of notice or the passage of time, or both, would constitute a Lease Default. 11.4.9 INSPECTION. At reasonable times and upon reasonable notice, Lessee shall permit Lessor and its authorized representatives (including, without limitation, the Consultants) to inspect the Leased Property as provided in Section 7.1 above. 11.4.10 ADDITIONAL PROPERTY. In the event that at any time during the Term, Lessee holds the fee title to or a leasehold interest in any real property and/or personal property which is used as an integral part of the operation of the Leased Property (but is not subject to this Lease), Lessee shall (i) provide Lessor with prior notice of such acquisition and (ii) shall take such actions and enter into such agreements as Lessor shall reasonably request in order to grant Lessor a first priority mortgage or other security interest in such real property and personal property, subject only to the Permitted Encumbrances and other Liens reasonably acceptable to Lessor. 11.4.11 ANNUAL FACILITY UPGRADE EXPENDITURES. Commencing with the third Lease Year to occur in the Term, Lessee shall make an Annual Facility Upgrade Expenditure in the Facility in an amount no less than TWO HUNDRED FIFTY DOLLARS ($250) multiplied by the number of units in the Facility, such amount to be increased as of the first day of the fourth Lease Year, and as of the first day of each subsequent Lease Year, by an amount equal to the product of (i) TWO HUNDRED FIFTY DOLLARS ($250) multiplied by (ii) the Consumer Price Adjustment Factor. 76 11.5 ADDITIONAL NEGATIVE COVENANTS. Lessee covenants and agrees that, throughout the Term and such time as Lessee remains in possession of the Leased Property: 11.5.1 RESTRICTIONS RELATING TO LESSEE. Except as may otherwise be expressly provided in Section 19.4 or in any of the other Lease Documents, Lessee shall not, without the prior written consent of Lessor, in each instance, which consent may be withheld in the sole and absolute discretion of Lessor: (a) convey, assign, hypothecate, transfer, dispose of or encumber, or permit the conveyance, assignment, transfer, hypothecation, disposal or encumbrance of all or any part of any legal or beneficial interest in this Lease, its other assets or the Leased Property; provided, however, that this restriction shall not apply to (i) the Permitted Encumbrances that may be created on or after the date hereof pursuant to the Lease Documents; (ii) Liens created in accordance with Section 6.1.2 against Tangible Personal Property securing Indebtedness permitted under Section 11.3.4(vi) relating to equipment leasing or financing for the exclusive use of the Leased Property; (iii) the sale, conveyance, assignment, hypothecation, lease or other transfer of any material asset or assets (whether now owned or hereafter acquired), the fair market value of which equals or is less than THIRTY-FIVE THOUSAND DOLLARS ($35,000), individually, or ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) collectively; (iv) without limitation as to amount, the disposition in the ordinary course of business of any obsolete, worn out or defective fixtures, furnishings or equipment used in the operation of the Leased Property provided that the same are replaced with fixtures, furnishings or equipment of equal or greater utility or value or Lessee provides Lessor with an explanation (reasonably satisfactory to Lessor) as to why such fixtures, furnishings or equipment is no longer required in connection with the operation of the Leased Property; (v) without limitation as to amount, any sale of inventory by Lessee in the ordinary course of business; and (vi) subject to the terms of the Pledge Agreement and the Affiliated Party Subordination Agreement, distributions to the shareholders of Lessee; (b) permit the use of the Facility, from and after the Conversion Date, for any purpose other than the Primary Intended Use; or (c) liquidate, dissolve or merge or consolidate with any other Person. 11.5.2 NO LIENS. Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any Lien, title retention agreement or claim upon or against the Leased Property (including Lessee's interest therein) or Lessee's interest in this Lease or any of the other Lease Documents, or in respect of the Rent, excluding (a) this Lease and any permitted 77 Subleases, (b) the Permitted Encumbrances, (c) Liens which are consented to in writing by Lessor, (d) Liens for those taxes of Lessor which Lessee is not required to pay hereunder, (e) Liens of mechanics, laborers, materialmen, suppliers or vendors for sums either not yet due or being contested in strict compliance with the terms and conditions of Article 15, (f) any Liens which are the responsibility of Lessor pursuant to the provisions of Article 20, (g) Liens for Impositions which are either not yet due and payable or which are in the process of being contested in strict compliance with the terms and conditions of Article 15, and (h) involuntary Liens caused by the actions or omissions of Lessor. 11.5.3 LIMITS ON CERTAIN TRANSACTIONS. Lessee shall not enter into any transaction with any Affiliate or any member of the Leasing Group (or any Affiliate thereof), including, without limitation, the purchase, sale or exchange of any property, the rendering of any service to or with any Affiliate and the making of any loan or other extension of credit, except in the ordinary course of, and pursuant to the reasonable requirements of, Lessee's business and upon fair and reasonable terms no less favorable to the Lessee than would be obtained in a comparable arms'-length transaction with any Person that is not an Affiliate. 11.5.4 NON-COMPETITION. Lessee acknowledges that upon and after any termination of this Lease, any competition by any member of the Leasing Group with any subsequent owner or subsequent lessee of the Leased Property (the "Purchaser") would cause irreparable harm to Lessor and any such Purchaser. To induce Lessor to enter into this Lease, Lessee agrees that, from and after the date hereof and thereafter until the fifth (5th) anniversary of the termination hereof, no member of the Leasing Group nor any Person holding or controlling, directly or indirectly, any interest in any member of the Leasing Group (collectively, the "Limited Parties") shall be involved in any capacity in or lend any of their names to or engage in any capacity in any adult care residence or other similar senior housing facility (or any other facility included within the definition of Primary Intended Use), center, unit or program (or in any Person engaged in any such activity or any related activity competitive therewith), whether such competitive activity shall be as an officer, director, owner, employee, agent, advisor, independent contractor, developer, lender, sponsor, venture capitalist, administrator, manager, investor, partner, joint venturer, consultant or other participant in any capacity whatsoever with respect to an adult care residence or other similar senior housing facility (or any other facility included within the definition of Primary Intended Use), center, unit or program located within a ten (10) mile radius of the Leased Property. Lessee hereby acknowledges and agrees that none of the time span, scope or area covered by the foregoing restrictive covenants is or are unreasonable and that it is the specific intent of Lessee that each and all of the restrictive covenants set forth hereinabove shall be valid and enforceable as specifically set forth herein. Lessee further agrees that these restrictions are special, unique, extraordinary and reasonably necessary for the protection of Lessor and any Purchaser and that the violation of any such covenant by any of the Limited Parties would cause irreparable damage to Lessor and any Purchaser for which a legal remedy alone would not be sufficient to fully protect such parties. 78 Therefore, in addition to and without limiting any other remedies available at law or hereunder, in the event that any of the Limited Parties breaches any of the restrictive covenants hereunder or shall threaten breach of any of such covenants, then Lessor and any Purchaser shall be entitled to obtain equitable remedies, including specific performance and injunctive relief, to prevent or otherwise restrain a breach of this Section 11.5.4 (without the necessity of posting a bond) and to recover any and all costs and expenses (including, without limitation, attorneys' fees and expenses and court costs) reasonably incurred in enforcing the provisions of this Section 11.5.4. The existence of any claim or cause of action of any of the Limited Parties or any member of the Leasing Group against Lessor or any Purchaser, whether predicated on this Lease or otherwise, shall not constitute a defense to the enforcement by Lessor or any Purchaser of the foregoing restrictive covenants and the Limited Parties shall not defend on the basis that there is an adequate remedy at law. Without limiting any other provision of this Lease, the parties hereto acknowledge that the foregoing restrictive covenants are severable and separate. If at any time any of the foregoing restrictive covenants shall be deemed invalid or unenforceable by a court having jurisdiction over this Lease, by reason of being vague or unreasonable as to duration, or geographic scope or scope of activities restricted, or for any other reason, such covenants shall be considered divisible as to such portion and such covenants shall be immediately amended and reformed to include only such covenants as are deemed reasonable and enforceable by the court having jurisdiction over this Lease to the full duration, geographic scope and scope of restrictive activities deemed reasonable and thus enforceable by said court; and the parties agree that such covenants as so amended and reformed, shall be valid and binding as through the invalid or unenforceable portion has not been included therein. The provisions of this Section 11.5.4 shall survive the termination of the Lease and any satisfaction of the Lease Obligations in connection therewith or subsequent thereto. The parties hereto acknowledge and agree that any Purchaser may enforce the provisions of this Section 11.5.4 as a third party beneficiary. 11.5.5 NO DEFAULT. Lessee shall not commit any default or breach under any of the Lease Documents. 11.5.6 RESTRICTIONS RELATING TO THE GUARANTOR AND THE DEVELOPER. Except as may otherwise be expressly provided herein or in any of the other Lease Documents, neither the Guarantor nor the Developer shall, without the prior written consent of Lessor, in each instance, which consent may be withheld in the sole and absolute discretion of Lessor, convey, assign, donate, sell, mortgage or pledge any real or personal property or take any other action which would have a materially adverse effect upon the Tangible Net Worth or general financial condition of the Guarantor or the Developer, as the case may be. Notwithstanding the foregoing, but subject to the provisions of Section 11.3, the Guarantor may guaranty obligations of any of its present or future Affiliates. 79 11.5.7 [INTENTIONALLY DELETED]. 11.5.8 ERISA. Lessee shall not establish or permit any Sublessee to establish any new pension or defined benefit plan or modify any such existing plan for employees subject to ERISA, which plan provides any benefits based on past service without the advance consent of Lessor to the amount of the aggregate past service liability thereby created, which consent shall not be unreasonably withheld. 11.5.9 FORGIVENESS OF INDEBTEDNESS. Lessee will not waive, or permit any sublessee or Manager which is an Affiliate to waive any debt or claim, except in the ordinary course of its business. 11.5.10 VALUE OF ASSETS. Except as disclosed in the financial statements provided to Lessor as of the date hereof, Lessee will not write up (by creating an appraisal surplus or otherwise) the value of any assets of Lessee above their cost to Lessee, less the depreciation regularly allowable thereon. 11.5.11 CHANGES IN FISCAL YEAR AND ACCOUNTING PROCEDURES. Lessee shall not, without the prior written consent of Lessor, in each instance, which consent may be withheld in Lessor's reasonable discretion (a) change its fiscal year or capital structure (except as may be otherwise permitted by Lessor in connection with any transfer permitted under Section 19.4 and, even then, only after the complete satisfaction of all requirements of Lessor relating to such transfers) or (b) change, alter, amend or in any manner modify, except in accordance with GAAP, any of its current accounting procedures related to the method of revenue recognition, billing procedures or determinations of doubtful accounts or bad debt expenses nor will Lessee permit any of its Subsidiaries to change its fiscal year or suffer or permit any circumstance to exist in which any Subsidiary is not wholly-owned, directly or indirectly, by Lessee. 11.6 ACCESS TO RECORDS. To the extent required by applicable law, the Lessor shall (and, if the Lessor carries out any of the duties under this Lease, whether on the Lessor's or the Lessee's behalf, through a subcontract with a related organization and such subcontract has a value or cost of Ten Thousand Dollars ($10,000) or more during any twelve (12) month period, such subcontract shall contain a clause to the effect that the subcontractor shall) until the expiration of four (4) years after the furnishing of services pursuant to this Lease, make available, upon request by the Secretary of Health and Human Services or upon the request by the U.S. Comptroller General, or any duly authorized representative of either of them, the books, documents and records of the Lessor (or such subcontractor) that are necessary to verify the nature and extent of such costs in connection with said services. 80 ARTICLE 12 INSURANCE AND INDEMNITY 12.1 GENERAL INSURANCE REQUIREMENTS. During the Term of this Lease and thereafter until Lessee surrenders the Leased Property in the manner required by this Lease, Lessee shall at its sole cost and expense keep the Leased Property and the Tangible Personal Property located thereon and the business operations conducted on the Leased Property insured as set forth below. 12.1.1 TYPES AND AMOUNTS OF INSURANCE. Lessee's insurance shall include the following: (a) property loss and physical damage insurance on an all-risk basis (with only such exceptions as Lessor may in its reasonable discretion approve) covering the Leased Property (exclusive of Land) for its full replacement cost, which cost shall be reset once a year at Lessor's option, with an agreed-amount endorsement and a deductible not in excess of TEN THOUSAND DOLLARS ($10,000.00). Such insurance shall include, without limitation, the following coverages: (i) increased cost of construction, (ii) cost of demolition, (iii) the value of the undamaged portion of the Facility and (iv) contingent liability from the operation of building laws, less exclusions provided in the normal "All Risk" insurance policy. During any period of construction, such insurance shall be on a builder's-risk, completed value, non-reporting form with permission to occupy and may be maintained by the Developer as long as Lessor and Lessee are named as additional named insureds on any insurance policy maintained by the Developer and all other requirements set forth herein that are applicable to such insurance are met; (b) flood insurance (if the Leased Property or any portion thereof is situated in an area which is considered a flood risk area by the U.S. Department of Housing and Urban Development or any other Governmental Authority that may in the future have jurisdiction over flood risk analysis) in limits acceptable to Lessor; (c) boiler and machinery insurance (including related electrical apparatus and components) under a standard comprehensive form, providing coverage against loss or damage caused by explosion of steam boilers, pressure vessels or similar vessels, now or hereafter installed on the Leased Property, in limits acceptable to Lessor; (d) earthquake insurance (if deemed necessary by Lessor) in limits and with deductibles acceptable to Lessor; (e) environmental impairment liability insurance (if available) in limits and with deductibles acceptable to Lessor; 81 (f) business interruption and/or rent loss insurance in an amount equal to the annual Base Rent due hereunder plus the aggregate sum of the Impositions relating to the Leased Property due and payable during one year; (g) comprehensive general public liability insurance including coverages commonly found in the Broad Form Commercial Liability Endorsements with amounts not less than FIVE MILLION DOLLARS ($5,000,000) per occurrence with respect to bodily injury and death and THREE MILLION DOLLARS ($3,000,000) for property damage and with all limits based solely upon occurrences at the Leased Property without any other impairment; (h) professional liability insurance in an amount not less than TEN MILLION DOLLARS ($10,000,000) for each medical incident; (i) physical damage insurance on an all-risk basis (with only such exceptions as Lessor in its reasonable discretion shall approve) covering the Tangible Personal Property for the full replacement cost thereof and with a deductible not in excess of one percent (1%) of the full replacement cost thereof; (j) Workers' Compensation and Employers' Liability Insurance providing protection against all claims arising out of injuries to all employees of Lessee or of any Sublessee (employed on the Leased Property or any portion thereof) in amounts equal for Workers' Compensation, to the statutory benefits payable to employees in the State and for Employers' Liability, to limits of not less than ONE HUNDRED THOUSAND DOLLARS ($100,000) for injury by accident, ONE HUNDRED THOUSAND DOLLARS ($100,000) per employee for disease and FIVE HUNDRED THOUSAND DOLLARS ($500,000) disease policy limit; (k) subsidence insurance (if deemed necessary by Lessor) in limits acceptable to Lessor; and (l) such other insurance as Lessor from time to time may reasonably require and also, as may from time to time be required by applicable Legal Requirements and/or by any Fee Mortgagee. 12.1.2 INSURANCE COMPANY REQUIREMENTS. All such insurance required by this Lease or the other Lease Documents shall be issued and underwritten by insurance companies licensed to do insurance business by, and in good standing under the laws of, the State and which companies have and maintain a rating of A:X or better by A.M. Best Co. 82 12.1.3 POLICY REQUIREMENTS. Every policy of insurance from time to time required under this Lease or any of the other Lease Documents (other than worker's compensation) shall name Lessor as owner, loss payee, secured party (to the extent applicable) and additional named insured as its interests may appear. If an insurance policy covers properties other than the Leased Property, then Lessor shall be so named with respect only to the Leased Property. Each such policy, where applicable or appropriate, shall: (a) include an agreed amount endorsement and loss payee, additional named insured and secured party endorsements, in forms acceptable to Lessor in its sole and absolute discretion; (b) include mortgagee, secured party, loss payable and additional named insured endorsements reasonably acceptable to each Fee Mortgagee; (c) provide that the coverages may not be cancelled or materially modified except upon thirty (30) days' prior written notice to Lessor and any Fee Mortgagee; (d) be payable to Lessor and any Fee Mortgagee notwithstanding any defense or claim that the insurer may have to the payment of the same against any other Person holding any other interest in the Leased Property; (e) be endorsed with standard noncontributory clauses in favor of and in form reasonably acceptable to Lessor and any Fee Mortgagee; (f) expressly waive any right of subrogation on the part of the insurer against Lessor, any Fee Mortgagee or the Leasing Group; and (g) otherwise be in such forms as shall be reasonably acceptable to Lessor. 12.1.4 NOTICES; CERTIFICATES AND POLICIES. Lessee shall promptly provide to Lessor copies of any and all notices (including notice of non-renewal but excluding invoices for premiums due but not delinquent), claims and demands which Lessee receives from insurers of the Leased Property. At least ten (10) days prior to the expiration of any insurance policy required hereunder, Lessee shall deliver to Lessor certificates and evidence of insurance relating to all renewals and replacements thereof, together with evidence, satisfactory to Lessor, of payment of the premiums thereon. Lessee shall deliver to Lessor original counterparts or copies certified by the insurance company to be true and complete copies, of all insurance policies required hereunder not later than the earlier to occur of (a) thirty (30) days after the effective date of each such policy and (b) ten (10) days after receipt thereof by Lessee. 12.1.5 LESSOR'S RIGHT TO PLACE INSURANCE. If Lessee shall fail to obtain any insurance policy required hereunder by Lessor, or shall fail to deliver the 83 certificate and evidence of insurance relating to any such policy to Lessor, or if any insurance policy required hereunder (or any part thereof) shall expire or be cancelled or become void or voidable by reason of any breach of any condition thereof, or if Lessor determines that such insurance coverage is unsatisfactory by reason of the failure or impairment of the capital of any insurance company which wrote any such policy, upon demand by Lessor, Lessee shall promptly obtain new or additional insurance coverage on the Leased Property, or for those risks required to be insured by the provisions hereof, satisfactory to Lessor, and, at its option, Lessor may obtain such insurance and pay the premium or premiums therefor; in which event, any amount so paid or advanced by Lessor and all costs and expenses incurred in connection therewith (including, without limitation, attorneys' fees and expenses and court costs), shall be a demand obligation of Lessee to Lessor, payable as an Additional Charge. 12.1.6 PAYMENT OF PROCEEDS. All insurance policies required hereunder (except for general public liability, professional liability and workers' compensation and employers liability insurance) shall provide that in the event of loss, injury or damage, subject to the rights of any Fee Mortgagee, all proceeds shall be paid to Lessor alone (rather than jointly to Lessee and Lessor). Lessor is hereby authorized to adjust and compromise any such loss with the consent of Lessee or, following any Lease Default, whether or not cured, without the consent of Lessee, and to collect and receive such proceeds in the name of Lessor and Lessee, and Lessee appoints Lessor (or any agent designated by Lessor) as Lessee's attorney-in-fact with full power of substitution, to endorse Lessee's name upon any check in payment thereof. Subject to the provisions of Article 13, such insurance proceeds shall be applied first toward reimbursement of all costs and expenses reasonably incurred by Lessor in collecting said insurance proceeds, then toward payment of the Lease Obligations or any portion thereof, then due and payable, in such order as Lessor determines, and then in whole or in part toward restoration, repair or reconstruction of the Leased Property for which such insurance proceeds shall have been paid. 12.1.7 IRREVOCABLE POWER OF ATTORNEY. The power of attorney conferred on Lessor pursuant to the provisions of this Section 12.1, being coupled with an interest, shall be irrevocable for as long as this Lease is in effect or any Lease Obligations are outstanding, shall not be affected by any disability or incapacity which Lessee may suffer and shall survive the same. Such power of attorney, is provided solely to protect the interests of Lessor and shall not impose any duty on Lessor to exercise any such power, and neither Lessor nor such attorney-in-fact shall be liable for any act, omission, error in judgment or mistake of law, except as the same may result from its gross negligence or wilful misconduct. 12.1.8 BLANKET POLICIES. Notwithstanding anything to the contrary contained herein, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee and its Affiliates; provided, however, that the coverage afforded to Lessor shall not be reduced or diminished or 84 otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided, further that the requirements of this Section 12.1 are otherwise satisfied. 12.1.9 NO SEPARATE INSURANCE. Lessee shall not, on Lessee's own initiative or pursuant to the request or requirement of any other Person, take out separate insurance concurrent in form or contributing in the event of loss with the insurance required hereunder to be furnished by Lessee, or increase the amounts of any then existing insurance by securing an additional policy or additional policies, unless (a) all parties having an insurable interest in the subject matter of the insurance, including Lessor, are included therein as additional insureds and (b) losses are payable under said insurance in the same manner as losses are required to be payable under this Lease. Lessee shall immediately notify Lessor of the taking out of any such separate insurance or of the increasing of any of the amounts of the then existing insurance by securing an additional insurance policy or policies. 12.1.10 ASSIGNMENT OF UNEARNED PREMIUMS. Lessee hereby assigns to Lessor all rights of Lessee in and to any unearned premiums on any insurance policy required hereunder to be furnished by Lessee which may become payable or are refundable after the occurrence of an Event of Default hereunder, which amounts may be utilized by Lessor for any purposes allowed hereunder or credited against the Lease Obligations. In the event that this Lease is terminated for any reason (other than the purchase of the Leased Property by Lessee), the insurance policies required to be maintained hereunder, including all right, title and interest of Lessee thereunder, shall become the absolute property of Lessor. 85 12.2 INDEMNITY. 12.2.1 INDEMNIFICATION. Except with respect to the gross negligence or wilful misconduct of Lessor or any of the other Indemnified Parties, as to which no indemnity is provided, Lessee hereby agrees to defend with counsel acceptable to Lessor, indemnify and hold harmless Lessor and each of the other Indemnified Parties from and against all damages, losses, claims, liabilities, obligations, penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees, court costs and other expenses of litigation) suffered by, or claimed or asserted against, Lessor or any of the other Indemnified Parties, directly or indirectly, based on, arising out of or resulting from (a) the use and occupancy of the Leased Property or any business conducted therein, (b) any act, fault, omission to act or misconduct by (i) any member of the Leasing Group, (ii) any Affiliate of Lessee or (iii) any employee, agent, licensee, business invitee, guest, customer, contractor or sublessee of any of the foregoing parties, relating to, directly or indirectly, the Leased Property, (c) any accident, injury or damage whatsoever caused to any Person, including, without limitation, any claim of malpractice, or to the property of any Person in or about the Leased Property or outside of the Leased Property where such accident, injury or damage results or is claimed to have resulted from any act, fault, omission to act or misconduct by any member of the Leasing Group or any Affiliate of Lessee or any employee, agent, licensee, contractor or sublessee of any of the foregoing parties, (d) any Lease Default, (e) any claim brought or threatened against any of the Indemnified Parties by any member of the Leasing Group or by any other Person on account of (i) Lessor's relationship with any member of the Leasing Group pertaining in any way to the Leased Property and/or the transaction evidenced by the Lease Documents and/or (ii) Lessor's negotiation of, entering into and/or performing any of its obligations and/or exercising any of its right and remedies under any of the Lease Documents, (f) any attempt by any member of the Leasing Group or any Affiliate of Lessee to transfer or relocate any of the Permits to any location other than the Leased Property and/or (g) the enforcement of this indemnity. Any amounts which become payable by Lessee under this Section 12.2.1 shall be a demand obligation of Lessee to Lessor, payable as an Additional Charge. The indemnity provided for in this Section 12.2.1 shall survive any termination of this Lease. 12.2.2 INDEMNIFIED PARTIES. As used in this Lease the term "Indemnified Parties" shall mean the Meditrust Entities, any Fee Mortgagee and their respective successors, assigns, employees, servants, agents, attorneys, officers, directors, shareholders, partners and owners. 86 12.2.3 LIMITATION ON LESSOR LIABILITY. Neither Lessor nor any Affiliate of Lessor shall be liable to any member of the Leasing Group or any Affiliate of any member of the Leasing Group, or to any other Person whatsoever for any damage, injury, loss, compensation, or claim (including, but not limited to, any claim for the interruption of or loss to any business conducted on the Leased Property) based on, arising out of or resulting from any cause whatsoever, including, but not limited to, the following: (a) repairs to the Leased Property, (b) interruption in use of the Leased Property; (c) any accident or damage resulting from the use or operation of the Leased Property or any business conducted thereon; (d) the termination of this Lease by reason of Casualty or Condemnation, (e) any fire, theft or other casualty or crime, (f) the actions, omissions or misconduct of any other Person, (g) damage to any property, or (h) any damage from the flow or leaking of water, rain or snow. All Tangible Personal Property and the personal property of any other Person on the Leased Property shall be at the sole risk of Lessee and Lessor shall not in any manner be held responsible therefor. Notwithstanding the foregoing, Lessor shall not be released from liability for any injury, loss, damage or liability suffered directly by Lessee to the extent caused directly by the gross negligence or willful misconduct of Lessor, its servants, employees or agents acting within the scope of their authority on or about the Leased Property or in regards to the Lease; provided, however, that in no event shall Lessor, its servants, employees or agents have any liability based on any loss with respect to or interruption in the operation of any business at the Leased Property or for any indirect or consequential damages. 12.2.4 RISK OF LOSS. During the Term of this Lease, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequence of any damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, levies or executions of Liens (other than those created by Lessor in accordance with the provisions of Article 20) is assumed by Lessee and, in the absence of the gross negligence or willful misconduct as set forth in Section 12.2.3, Lessor shall in no event be answerable or accountable therefor (except for the obligation to account for insurance proceeds and Awards to the extent provided for in Articles 13 and 14) nor shall any of the events mentioned in this Section entitle Lessee to any abatement of Rent (except for an abatement, if any, as specifically provided for in Section 3.8). 87 ARTICLE 13 FIRE AND CASUALTY 13.1 RESTORATION FOLLOWING FIRE OR OTHER CASUALTY. 13.1.1 FOLLOWING FIRE OR CASUALTY. In the event of any damage or destruction to the Leased Property by reason of fire or other hazard or casualty (a "Casualty"), Lessee shall give immediate written notice thereof to Lessor and, subject to the terms of this Article 13, Lessee shall proceed with reasonable diligence, in full compliance with all applicable Legal Requirements, to perform such repairs, replacement and reconstruction work (referred to herein as the "Work") to restore the Leased Property to the condition it was in immediately prior to such damage or destruction and to a condition adequate to operate the Facility for the Primary Intended Use and in compliance with Legal Requirements. All Work shall be performed and completed in accordance with all Legal Requirements and the other requirements of this Lease within one hundred and eighty (180) days following the occurrence of the damage or destruction plus a reasonable time to compensate for Unavoidable Delays (including for the purposes of this Section, delays in obtaining Permits and in adjusting insurance losses), but in no event beyond three-hundred and sixty-five (365) days following the occurrence of the Casualty. 13.1.2 PROCEDURES. In the event that any Casualty results in non-structural damage to the Leased Property in excess of TWENTY-FIVE THOUSAND DOLLARS ($25,000) or in any structural damage to the Leased Property, regardless of the extent of such structural damage, prior to commencing the Work, Lessee shall comply with the following requirements: (a) Lessee shall furnish to Lessor complete plans and specifications for the Work (collectively, the "Plans and Specifications"), for Lessor's approval, in each instance, which approval shall not be unreasonably withheld. The Plans and Specifications shall bear the signed approval thereof by an architect, licensed to do business in the State, reasonably satisfactory to Lessor and shall be accompanied by a written estimate from the architect, bearing the architect's seal, of the entire cost of completing the Work, and to the extent feasible, the Plans and Specifications shall provide for Work of such nature, quality and extent, that, upon the completion thereof, the Leased Property shall be at least equal in value and general utility to its value and general utility prior to the Casualty and shall be adequate to operate the Leased Property for the Primary Intended Use; (b) Lessee shall furnish to Lessor certified or photostatic copies of all Permits and Contracts required by all applicable Legal Requirements in connection with the commencement and conduct of the Work; 88 (c) Lessee shall furnish to Lessor a cash deposit or a payment and performance bond sufficient to pay for completion of and payment for the Work in an amount not less than the architect's estimate of the entire cost of completing the Work, less the amount of property insurance proceeds, if any, then held by Lessor and which Lessor shall be required to apply toward restoration of the Leased Property as provided in Section 13.2; (d) Lessee shall furnish to Lessor such insurance with respect to the Work (in addition to the insurance required under Section 12.1 hereof) in such amounts and in such forms as is reasonably required by Lessee; and (e) Lessee shall not commence any of the Work until Lessee shall have complied with the requirements set forth in clauses (a) through (d) immediately above, as applicable, and, thereafter, Lessee shall perform the Work diligently, in a good and workmanlike fashion and in good faith in accordance with (i) the Plans and Specifications referred to in clause (a) immediately above, (ii) the Permits and Contracts referred to in clause (b) immediately above and (iii) all applicable Legal Requirements and other requirements of this Lease; provided, however, that in the event of a bona fide emergency during which Lessee is unable to contact the appropriate representatives of Lessor, Lessee may commence such Work as may be necessary in order to address such emergency without Lessor's prior approval, as long as Lessee immediately thereafter advises Lessor of such emergency and the nature and scope of the Work performed and obtains Lessor's approval of the remaining Work to be completed. 13.1.3 DISBURSEMENT OF INSURANCE PROCEEDS. If, as provided in Section 13.2, Lessor is required to apply any property insurance proceeds toward repair or restoration of the Leased Property, then as long as the Work is being diligently performed by Lessee in accordance with the terms and conditions of this Lease, Lessor shall disburse such insurance proceeds from time to time during the course of the Work in accordance with and subject to satisfaction of the following provisions and conditions. Lessor shall not be required to make disbursements more often than at thirty (30) day intervals. Lessee shall submit a written request for each disbursement at least ten (10) Business Days in advance and shall comply with the following requirements in connection with each disbursement: (a) Prior to the commencement of any Work, Lessee shall have received Lessor's written approval of the Plans and Specifications (which approval shall not be unreasonably withheld) and the Work shall be supervised by an experienced construction manager with the consultation of an architect or engineer qualified and licensed to do business in the State. (b) Each request for payment shall be accompanied by (x) a certificate of the architect or engineer, bearing the architect's or engineer's seal, and (y) a certificate of the general contractor, qualified and licensed to do business in the State, that is performing the Work (collectively, the 89 "Work Certificates"), each dated not more than ten (10) days prior to the application for withdrawal of funds, and each stating: (i) that all of the Work performed as of the date of the certificates has been completed in compliance with the approved Plans and Specifications, applicable Contracts and all applicable Legal Requirements; (ii) that the sum then requested to be withdrawn has been paid by Lessee or is justly due to contractors, subcontractors, materialmen, engineers, architects or other Persons, whose names and addresses shall be stated therein, who have rendered or furnished certain services or materials for the Work, and the certificate shall also include a brief description of such services and materials and the principal subdivisions or categories thereof and the respective amounts so paid or due to each of said Persons in respect thereof and stating the progress of the Work up to the date of said certificate; (iii) that the sum then requested to be withdrawn, plus all sums previously withdrawn, does not exceed the cost of the Work insofar as actually accomplished up to the date of such certificate; (iv) that the remainder of the funds held by Lessor will be sufficient to pay for the full completion of the Work in accordance with the Plans and Specifications; (v) that no part of the cost of the services and materials described in the applicable Work Certificate has been or is being made the basis of the withdrawal of any funds in any previous or then pending application; and (vi) that, except for the amounts, if any, specified in the applicable Work Certificate to be due for services and materials, there is no outstanding indebtedness known, after due inquiry, which is then due and payable for work, labor, services or materials in connection with the Work which, if unpaid, might become the basis of a vendor's, mechanic's, laborer's or materialman's statutory or other similar Lien upon the Leased Property. (c) Lessee shall deliver to Lessor satisfactory evidence that the Leased Property and all materials and all property described in the Work Certificates are free and clear of Liens, except (i) Liens, if any, securing indebtedness due to Persons (whose names and addresses and the several amounts due them shall be stated therein) specified in an applicable Work 90 Certificate, which Liens shall be discharged upon disbursement of the funds then being requested, (ii) any Fee Mortgage and (iii) the Permitted Encumbrances. Lessor shall accept as satisfactory evidence of the foregoing lien waivers in customary form from the general contractor and all subcontractors performing the Work, together with an endorsement of its title insurance policy (relating to the Leased Property) in form acceptable to Lessor, dated as of the date of the making of the then current disbursement, confirming the foregoing. (d) If the Work involves alteration or restoration of the exterior of any Leased Improvement that changes the footprint of any Leased Improvement, Lessee shall deliver to Lessor, upon the request of Lessor, an "as-built" survey of the Leased Property dated as of a date within ten (10) days prior to the making of the first and final advances (or revised to a date within ten (10) days prior to each such advance) showing no encroachments other than such encroachments, if any, by the Leased Improvements upon or over the Permitted Encumbrances as are in existence as of the date hereof. (e) Lessee shall deliver to Lessor (i) an opinion of counsel (satisfactory to Lessor both as to counsel and as to the form of opinion) prior to the first advance opining that all necessary Permits for the repair, replacement and/or restoration of the Leased Property have been obtained and that the Leased Property, if repaired, replaced or rebuilt in accordance, in all material respects, with the approved Plans and Specifications and such Permits, shall comply with all applicable Legal Requirements and (ii) an architect's certificate (satisfactory to Lessor both as to the architect and as to the form of the certificate) prior to the final advance, certifying that the Leased Property was repaired, replaced or rebuilt in accordance, in all material respects, with the approved Plans and Specifications and complies with all applicable Legal Requirements, including, without limitation, all Permits referenced in the foregoing clause (i). (f) There shall be no Lease Default or any state of facts or circumstance existing which, with the giving of notice and/or the passage of time, would constitute any Lease Default. Lessor, at its option, may waive any of the foregoing requirements in whole or in part in any instance. Upon compliance by Lessee with the foregoing requirements (except for such requirements, if any, as Lessor may have expressly elected to waive), and to the extent of (x) the insurance proceeds, if any, which Lessor may be required to apply to restoration of the Leased Property pursuant to the provisions of this Lease and (y) all other cash deposits made by Lessee, Lessor shall make available for payment to the Persons named in the Work Certificate the respective amounts stated in said certificate(s) to be due, subject to a retention of ten percent (10%) as to all hard costs of the Work (the "Retainage"). It is understood that the Retainage is intended to provide a contingency fund to assure Lessor that the Work 91 shall be fully completed in accordance with the Plans and Specifications and the requirements of Lessor. Upon the full and final completion of all of the Work in accordance with the provisions hereof, the Retainage shall be made available for payment to those Persons entitled thereto. Upon completion of the Work, and as a condition precedent to making any further advance, in addition to the requirements set forth above, Lessee shall promptly deliver to Lessor: (i) written certificates of the architect or engineer, bearing the architect's or engineer's seal, and the general contractor, certifying that the Work has been fully completed in a good and workmanlike manner in material compliance with the Plans and Specifications and all Legal Requirements; (ii) an endorsement of its title insurance policy (relating to the Leased Property) in form reasonably acceptable to Lessor insuring the Leased Property against all mechanic's and materialman's liens accompanied by the final lien waivers from the general contractor and all subcontractors; (iii) a certificate by Lessee in form and substance reasonably satisfactory to Lessor, listing all costs and expenses in connection with the completion of the Work and the amount paid by Lessee with respect to the Work; and (iv) a temporary certificate of occupancy (if obtainable) and all other applicable Permits and Contracts (that have not previously been delivered to Lessor) issued by or entered into with any Governmental Authority with respect to the Leased Property and the Primary Intended Use and by the appropriate Board of Fire Underwriters or other similar bodies acting in and for the locality in which the Leased Property is situated; provided, that within thirty (30) days after completion of the Work, Lessee shall obtain and deliver to Lessor a permanent certificate of occupancy for the Leased Property. Upon completion of the Work and delivery of the documents required pursuant to the provisions of this Section 13.1, Lessor shall pay the Retainage to Lessee or to those Persons entitled thereto and if there shall be insurance proceeds or cash deposits, other than the Retainage, held by Lessor in excess of the amounts disbursed pursuant to the foregoing provisions, then provided that no Lease Default has occurred and is continuing, nor any state of facts or circumstances which, with the giving of notice and/or the passage of time would constitute a Lease Default, Lessor shall pay over such proceeds or cash deposits to Lessee. No inspections or any approvals of the Work during or after construction shall constitute a warranty or representation by Lessor, or any of its agents or 92 Consultants, as to the technical sufficiency, adequacy or safety of any structure or any of its component parts, including, without limitation, any fixtures, equipment or furnishings, or as to the subsoil conditions or any other physical condition or feature pertaining to the Leased Property. All acts described in this paragraph, including any failure to act, relating to Lessor are performed solely for the benefit of Lessor to assure the payment and performance of the Lease Obligations and are not for the benefit of Lessee or the benefit of any other Person. 13.2 DISPOSITION OF INSURANCE PROCEEDS. 13.2.1 PROCEEDS TO BE RELEASED TO PAY FOR WORK. In the event of any Casualty, except as provided for in Section 13.2.2, Lessor shall release proceeds of property insurance held by it to pay for the Work in accordance with the provisions and procedures set forth in this Article 13, only if: (a) all of the terms, conditions and provisions of Sections 13.1 and 13.2.1 are satisfied; (b) there does not then exist any Lease Default or any state of facts or circumstance which, with the giving of notice and/or the passage of time, would constitute such a Lease Default; (c) Lessee demonstrates to Lessor's satisfaction that Lessee has the financial ability to satisfy the Lease Obligations during such repair or restoration; and (d) no Sublease (excluding Residence Agreements) material to the operation of the Facility immediately prior to such damage or taking shall have been cancelled or terminated, nor contain any still exercisable right to cancel or terminate, due to such Casualty if and to the extent that the income from such Sublease is necessary in order to avoid the violation of any of the financial covenants set forth in this Lease or otherwise to avoid the creation of an Event of Default. 13.2.2 PROCEEDS NOT TO BE RELEASED. If, as the result of any Casualty, the Leased Property is damaged to the extent it is rendered Unsuitable For Its Primary Intended Use and if either: (a) Lessee, after exercise of diligent efforts, cannot within a reasonable time (not in excess of ninety (90) days) obtain all necessary Permits in order to be able to perform all required Work and to again operate the Facility for its Primary Intended Use within three hundred and sixty-five (365) days from the occurrence of the damage or destruction in substantially the manner as immediately prior to such damage or destruction or (b) such Casualty occurs during the last twenty-four (24) months of the Term and would reasonably require more than nine (9) months to obtain all Permits and complete the Work, then Lessee may either (i) acquire the Leased Property from Lessor for a purchase price equal to the greater of (x) the Meditrust Investment or (y) the Fair Market Value of the Leased Property minus the Fair Market Added Value, with the Fair Market Value and the Fair Market Added Value to be determined as of 93 the day immediately prior to such Casualty and prior to any other Casualty which has not been fully repaired, restored or replaced, in which event, Lessee shall be entitled upon payment of the full purchase price to receive all property insurance proceeds (less any costs and expenses incurred by Lessor in collecting the same), or (ii) terminate this Lease, in which event (subject to the provisions of the last sentence of this Section 13.2.2) Lessor shall be entitled to receive and retain the insurance proceeds; provided, however, that Lessee shall only have such right of termination effective upon payment to Lessor of all Rent and other sums due under this Lease and the other Lease Documents through the date of termination plus an amount, which when added to the sum of (1) the Fair Market Value of the Leased Property as affected by all unrepaired or unrestored damage due to any Casualty (and giving due regard for delays, costs and expenses incident to completing all repair or restoration required to fully repair or restore the same) plus (2) the amount of insurance proceeds actually received by Lessor (net of costs and expenses incurred by Lessor in collecting the same) equals (3) the greater of the Meditrust Investment or the Fair Market Value of the Leased Property minus the Fair Market Added Value, with the Fair Market Value and the Fair Market Added Value to be determined as of the day immediately prior to such Casualty and prior to any other Casualty which has not been fully repaired. Any acquisition of the Leased Property pursuant to the terms of this Section 13.2.2 shall be consummated in accordance with the provisions of Article 18, mutatis, mutandis. If such termination becomes effective, Lessor shall assign to Lessee any outstanding insurance claims. 13.2.3 LESSEE RESPONSIBLE FOR SHORT-FALL. If the cost of the Work exceeds the amount of proceeds received by Lessor from the property insurance required under Article 12 (net of costs and expenses incurred by Lessor in collecting the same), Lessee shall be obligated to contribute any excess amount needed to repair or restore the Leased Property and pay for the Work. Such amount shall be paid by Lessee to Lessor together with any other property insurance proceeds for application to the cost of the Work. 13.3 TANGIBLE PERSONAL PROPERTY. All insurance proceeds payable by reason of any loss of or damage to any of the Tangible Personal Property shall be paid to Lessor as secured party, subject to the rights of the holders of any Permitted Prior Security Interests, and, thereafter, provided that no Lease Default, nor any fact or circumstance which with the giving of notice and/or the passage of time could constitute a Lease Default, has occurred and is continuing, Lessor shall pay such insurance proceeds to Lessee to reimburse Lessee for the cost of repairing or replacing the damaged Tangible Personal Property, subject to the terms and conditions set forth in the other provisions of this Article 13, mutatis mutandis. 13.4 RESTORATION OF CERTAIN IMPROVEMENTS AND THE TANGIBLE PERSONAL PROPERTY. If Lessee is required or elects to restore the Facility, Lessee shall either (a) restore (i) all alterations and improvements to the Leased Property made by Lessee and (ii) the Tangible Personal Property or (b) replace such alterations and improvements and the Tangible 94 Personal Property with improvements or items of the same or better quality and utility in the operation of the Leased Property. 13.5 NO ABATEMENT OF RENT. In no event shall any Rent abate as a result of any Casualty. 13.6 TERMINATION OF CERTAIN RIGHTS. Any termination of this Lease pursuant to this Article 13 shall cause any right of Lessee to extend the Term of this Lease, granted to Lessee herein and any right of Lessee to purchase the Leased Property contained in this Lease to be terminated and to be without further force or effect. 13.7 WAIVER. Lessee hereby waives any statutory rights of termination which may arise by reason of any damage or destruction to the Leased Property due to any Casualty which Lessee is obligated to restore or may restore under any of the provisions of this Lease. 13.8 APPLICATION OF RENT LOSS AND/OR BUSINESS INTERRUPTION INSURANCE. All proceeds of rent loss and/or business interruption insurance (collectively, "Rent Insurance Proceeds") shall be paid to Lessor and dealt with as follows: (a) if the Work has been promptly and diligently commenced by Lessee and is in the process of being completed in accordance with this Lease and no fact or condition exists which constitutes, or which with the giving of notice and/or the passage of time would constitute, a Lease Default, Lessor shall each month pay to Lessee out of the Rent Insurance Proceeds a sum equal to that amount, if any, of the Rent Insurance Proceeds paid by the insurer which is allocable to the rental loss and/or business interruption for the preceding month minus an amount equal to the sum of the Rent due hereunder for such month plus any Impositions relating to the Leased Property then due and payable; (b) if the Work has not been promptly and diligently commenced by Lessee or is not in the process of being completed in accordance with this Lease, the Rent Insurance Proceeds shall be applied to any Rent then due, and, to the extent sufficient therefor, an amount equal to Base Rent, Impositions and insurance premiums payable for the next twelve (12) months, as reasonably projected by Lessor, shall be held by Lessor as security for the Lease Obligations and applied to the payment of Rent as it becomes due; and (c) if such Rent Insurance Proceeds received by Lessor (net of costs and expenses incurred by Lessor in collecting the same) exceed the amounts required under clauses (a) and (b) above, the excess shall be paid to Lessee, provided no fact or circumstance exists which constitutes, or with notice, or passage of time, or both, would constitute, a Lease Default. Notwithstanding the foregoing, Lessor may at its option use or release the Rent Insurance Proceeds to pay for the Work and, if a Lease Default exists, Lessor may apply all such 95 insurance proceeds towards the Lease Obligations or hold such proceeds as security therefor. 13.9 OBLIGATION TO ACCOUNT. Upon Lessee's written request, which may not be made not more than once in any three (3) month period, Lessor shall provide Lessee with a written accounting of the application of all insurance proceeds received by Lessor. ARTICLE 14 CONDEMNATION 14.1 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any Taking of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of the parties shall be determined by this Article 14. 14.2 TOTAL TAKING. If there is a permanent Taking of all or substantially all of the Leased Property, this Lease shall terminate on the Date of Taking. 14.3 PARTIAL OR TEMPORARY TAKING. If there is a Permanent Taking of a portion of the Leased Property, or if there is a temporary Taking of all or a portion of the Leased Property, this Lease shall remain in effect so long as the Leased Property is not thereby rendered permanently Unsuitable For Its Primary Intended Use or, from and after the Conversion Date, temporarily Unsuitable For Its Primary Intended Use for a period not likely to, or which does not, exceed three hundred and sixty-five (365) days. If, however, the Leased Property is thereby so rendered permanently or temporarily Unsuitable For Its Primary Intended Use: (a) Lessee shall have the right to restore the Leased Property, at its own expense, (subject to the right under certain circumstances as provided for in Section 14.5 to receive the net proceeds of an Award for reimbursement) to the extent possible, to substantially the same condition as existed immediately before the partial or temporary Taking or (b) Lessee shall have the right to acquire the Leased Property from Lessor (i) upon payment of all Rent due through the date that the purchase price is paid, for a purchase price equal to the greater of (x) the Meditrust Investment or (y) the Fair Market Value of the Leased Property minus the Fair Market Added Value, with the Fair Market Value of the Leased Property and the Fair Market Added Value to be determined as of the day immediately prior to such partial or temporary Taking and (ii) in accordance with the terms and conditions set forth in Article 18; in which event, this Lease shall terminate upon payment of such purchase price and the consummation of such acquisition. Notwithstanding the foregoing, Lessor may overrule Lessee's election under clause (a) or (b) and instead either (1) terminate this Lease as of the date when Lessee is required to surrender possession of the portion of the Leased Property so taken or (2) compel Lessee to keep the Lease in full force and effect and to restore the Leased Property as provided in clause (a) above, but only if the Leased Property may be operated for at least eighty percent (80%) of the licensed bed capacity of the Facility if operated in accordance with its Primary Intended Use. Lessee shall exercise its election under this Section 14.3 by giving Lessor notice thereof ("Lessee's Election Notice") within sixty (60) days after Lessee receives notice of the Taking. Lessor shall exercise its option to overrule 96 Lessee's election under this Section 14.3 by giving Lessee notice of Lessor's exercise of its rights under Section 14.3 within thirty (30) days after Lessor receives Lessee's Election Notice. If, as the result of any such partial or temporary Taking, this Lease is not terminated as provided above, Lessee shall be entitled to an abatement of Rent, but only to the extent, if any, provided for in Section 3.7, effective as of the date upon which the Leased Property is rendered Unsuitable For Its Primary Intended Use. 14.4 RESTORATION. If there is a partial or temporary Taking of the Leased Property and this Lease remains in full force and effect pursuant to Section 14.3, Lessee shall accomplish all necessary restoration and Lessor shall release the net proceeds of such Award to reimburse Lessee for the actual reasonable costs and expenses thereof, subject to all of the conditions and provisions set forth in Article 13 as though the Taking was a Casualty and the Award was insurance proceeds. If the cost of the restoration exceeds the amount of the Award (net of costs and expenses incurred in obtaining the Award), Lessee shall be obligated to contribute any excess amount needed to restore the Facility or pay for such costs and expenses. To the extent that the cost of restoration is less than the amount of the Award (net of cost and expenses incurred in obtaining the Award), the remainder of the Award shall be retained by Lessor and Rent shall be abated as set forth in Section 3.7. 14.5 AWARD DISTRIBUTION. In the event Lessee completes the purchase of the Leased Property, as described in Section 14.3, the entire Award shall, upon payment of the purchase price and all Rent and other sums due under this Lease and the other Lease Documents, belong to Lessee and Lessor agrees to assign to Lessee all of Lessor's rights thereto. In any other event, the entire Award shall belong to and be paid to Lessor. 14.6 CONTROL OF PROCEEDINGS. Subject to the rights of any Fee Mortgagee, unless and until Lessee completes the purchase of the Leased Property as provided in Section 14.3, all proceedings involving any Taking and the prosecution of claims arising out of any Taking against the Condemnor shall be conducted, prosecuted and settled by Lessor; provided, however, that Lessor shall keep Lessee apprised of the progress of all such proceedings and shall solicit Lessee's advice with respect thereto and shall give due consideration to any such advice. In addition, Lessee shall reimburse Lessor (as an Additional Charge) for all costs and expenses, including reasonable attorneys' fees, appraisal fees, fees of expert witnesses and costs of litigation or dispute resolution, in relation to any Taking, whether or not this Lease is terminated; provided, however, if this Lease is terminated as a result of a Taking, Lessee's obligation to so reimburse Lessor shall be diminished by the amount of the Award, if any, received by Lessor which is in excess of the Meditrust Investment. 97 ARTICLE 15 PERMITTED CONTESTS 15.1 LESSEE'S RIGHT TO CONTEST. To the extent of the express references made to this Article 15 in other Sections of this Lease, Lessee, any Sublessee or any Manager on their own or on Lessor's behalf (or in Lessor's name), but at their sole cost and expense, may contest, by appropriate legal proceedings conducted in good faith and with due diligence (until the resolution thereof), the amount, validity or application, in whole or in part, of any Imposition, Legal Requirement, the decision of any Governmental Authority related to the operation of the Leased Property for its Primary Intended Use or any Lien or claim relating to the Leased Property not otherwise permitted by this Agreement; provided, that (a) prior written notice of such contest is given to Lessor, (b) in the case of an unpaid Imposition, Lien or claim, the commencement and continuation of such proceedings shall suspend the collection thereof from Lessor and/or compliance by any applicable member of the Leasing Group with the contested Legal Requirement or other matter may be legally delayed pending the prosecution of any such proceeding without the occurrence or creation of any Lien, charge or liability of any kind against the Leased Property, (c) neither the Leased Property nor any rent therefrom would be in any immediate danger of being sold, forfeited, attached or lost as a result of such proceeding, (d) in the case of a Legal Requirement, neither Lessor nor any member of the Leasing Group would be in any immediate danger of civil or criminal liability for failure to comply therewith pending the outcome of such proceedings, (e) in the event that any such contest shall involve a sum of money or potential loss in excess of TEN THOUSAND DOLLARS ($10,000), Lessee shall deliver to Lessor an Officer's Certificate and opinion of counsel, if Lessor deems the delivery of an opinion to be appropriate, certifying or opining, as the case may be, as to the validity of the statements set forth to the effect set forth in clauses (b), (c) and (d), to the extent applicable, (f) Lessee shall give such cash security (or letter of credit) as may be demanded in good faith by Lessor to insure ultimate payment of any fine, penalty, interest or cost and to prevent any sale or forfeiture of the affected portion of the Leased Property by reason of such non-payment or non-compliance, (g) if such contest is finally resolved against Lessor or any member of the Leasing Group, Lessee shall promptly pay, as Additional Charges due hereunder, the amount required to be paid, together with all interest and penalties accrued thereon and/or comply (and cause any Sublessee and any Manager to comply) with the applicable Legal Requirement, and (h) no state of facts or circumstance exists which constitutes, or with the passage of time and/or the giving of notice, could constitute a Lease Default; provided, however, the provisions of this Article 15 shall not be construed to permit Lessee to contest the payment of Rent or any other sums payable by Lessee to Lessor under any of the Lease Documents. 15.2 LESSOR'S COOPERATION. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in any such contest, so long as the same does not expose Lessor to any civil or criminal liability, and, if reasonably requested by Lessee or if Lessor so desires, Lessor shall join as a party therein. 98 15.3 LESSEE'S INDEMNITY. Lessee, as more particularly provided for in Section 12.2, shall indemnify, defend (with counsel acceptable to Lessor) and save Lessor harmless against any liability, cost or expense of any kind, including, without limitation, attorneys' fees and expenses that may be imposed upon Lessor in connection with any such contest and any loss resulting therefrom and in the enforcement of this indemnification. ARTICLE 16 DEFAULT 16.1 EVENTS OF DEFAULT. Each of the following shall constitute an "Event of Default" hereunder and shall entitle Lessor to exercise its remedies hereunder and under any of the other Lease Documents: (a) any failure of Lessee to pay any amount due hereunder or under any of the other Lease Documents within ten (10) days following the date when such payment was due; (b) any failure in the observance or performance of any other covenant, term, condition or warranty provided in this Lease or any of the other Lease Documents, other than the payment of any monetary obligation and other than as specified in subsections (c) through (x) below (a "Failure to Perform"), continuing for thirty (30) days after the giving of notice by Lessor to Lessee specifying the nature of the Failure to Perform; except as to matters not susceptible to cure within thirty (30) days, provided that with respect to such matters, (i) Lessee commences the cure thereof within thirty (30) days after the giving of such notice by Lessor to Lessee, (ii) Lessee continuously prosecutes such cure to completion, (iii) such cure is completed within ninety (90) days after the giving of such notice by Lessor to Lessee and (iv) such Failure to Perform does not impair the value of, or Lessor's rights with respect to, the Leased Property or otherwise impair the Collateral or Lessor's security interest therein; (c) the occurrence of any default or breach of condition continuing beyond the expiration of the applicable notice and grace periods, if any, under any of the other Lease Documents; (d) if any representation, warranty or statement contained herein or in any of the other Lease Documents proves to be untrue in any material respect as of the date when made or at any time during the Term if such representation or warranty, other than the representations and warranties contained in Section 10.1.16, is a continuing representation or warranty pursuant to Section 10.2; (e) if any representation or warranty contained in Section 10.1.16 proves to be untrue in any material respect at any time during the Term and remains 99 untrue for thirty (30) days after the date such representation or warranty proved to be untrue; except as to matters not susceptible to cure within such thirty (30) day period, provided that with respect to such matters, (i) Lessee commences the cure thereof within such thirty (30) day period, (ii) Lessee continuously prosecutes such cure to completion, (iii) such cure is completed within ninety (90) days after the date such representation or warranty proved to be untrue and (iv) the failure of such representation or warranty to remain true does not impair the value of, or Lessor's rights with respect to, the Leased Property or otherwise impair the Collateral or Lessor's security interest therein; (f) if any member of the Leasing Group shall (i) voluntarily be adjudicated a bankrupt or insolvent, (ii) seek or consent to the appointment of a receiver or trustee for itself or for the Leased Property, (iii) file a petition seeking relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, (iv) make a general assignment for the benefit of creditors, (v) make or offer a composition of its debts with its creditors or (vi) be unable to pay its debts as such debts mature; (g) if any court shall enter an order, judgment or decree appointing, without the consent of any member of the Leasing Group, a receiver or trustee for such member or for any of its property and such order, judgment or decree shall remain in force, undischarged or unstayed, sixty (60) days after it is entered; (h) if a petition is filed against any member of the Leasing Group which seeks relief under the bankruptcy or other similar laws of the United States, any state or any other jurisdiction, and such petition is not dismissed within sixty (60) days after it is filed; (i) in the event that, without the prior written consent of Lessor, in each instance, which consent may be withheld by Lessor in its sole and absolute discretion: i. except as expressly permitted under Sections 19.4 and 19.5 hereof, there shall be a change in the Person or Persons presently in control of any member of the Leasing Group (whether by operation of law or otherwise); ii. all or any portion of the interest of any partner or member of any member of the Leasing Group shall be, on any one or more occasions, directly or indirectly, sold, assigned, hypothecated or otherwise transferred (whether by operation of law or otherwise), if such member of the Leasing Group shall be a partnership, joint venture, syndicate or other group; iii. except as expressly permitted under Sections 19.4 and 19.5 hereof, the shares of the issued and outstanding capital stock of any member of the Leasing Group shall be, on any one or more occasions, directly or indirectly, sold, assigned, hypothecated or otherwise transferred 100 (whether by operation of law or otherwise), if such member of the Leasing Group shall be a corporation; or iv. all or any portion of the beneficial interest in any member of the Leasing Group shall be, directly or indirectly, sold or otherwise transferred (whether by operation of law or otherwise), if such member of the Leasing Group shall be a trust; (j) the death, incapacity, liquidation, dissolution or termination of existence of any member of the Leasing Group or, except as expressly permitted under Section 19.5, the merger or consolidation of any member of the Leasing Group with any other Person; (k) except as otherwise permitted pursuant to Section 11.5.2 and/or Section 19.2 and/or Section 19.4 hereof, if, without the prior written consent of Lessor, in each instance, which consent may be withheld by Lessor in its sole and absolute discretion, Lessee's or any Sublessee's interest in the Leased Property shall be, directly or indirectly, mortgaged, encumbered (by any voluntary or involuntary Lien other than the Permitted Encumbrances), subleased, sold, assigned, hypothecated or otherwise transferred (whether by operation of law or otherwise); (l) the occurrence of a default or breach of condition continuing beyond the expiration of the applicable notice and grace periods, if any, in connection with the payment or performance of any other material obligation of Lessee or any Sublessee, whether or not the applicable creditor or obligee elects to declare the obligations of Lessee or the applicable Sublessee under the applicable agreement due and payable or to exercise any other right or remedy available to such creditor or obligee, if such creditor's or obligee's rights and remedies may involve or result in (i) the taking of possession of the Leased Property or (ii) the assertion of any other right or remedy that, in Lessor's reasonable opinion, may impair Lessee's ability punctually to perform all of its obligations under this Lease and the other Lease Documents, may impair such Sublessee's ability punctually to perform all of its obligations under its Sublease or may materially impair Lessor's security for the Lease Obligations; provided, however, that in any event, the election by the applicable creditor or obligee to declare the obligations of Lessee under the applicable agreement due and payable or to exercise any other right or remedy available to such creditor or obligee shall be an Event of Default hereunder only if such obligations, individually or in the aggregate, are in excess of FIVE HUNDRED THOUSAND DOLLARS ($500,000); (m) the occurrence of a Related Party Default or a Third Party Default; (n) without limiting the provisions of 16.1(m), the occurrence of a Lease Default under any of the Related Leases, notwithstanding the consummation of the Stock Transfer as defined herein or as defined under any of the Related Leases; (o) the occurrence of any default or breach of condition continuing beyond the expiration of the applicable notice and grace periods, if any, under any credit agreement, loan agreement or other agreement establishing a major line of credit (or any documents executed in connection with such lines of credit) on behalf 101 of any member of the Leasing Group whether or not the applicable creditor has elected to declare the indebtedness due and payable under such line of credit or to exercise any other right or remedy available to it. For the purposes of this provision, a major line of credit shall mean and include any line of credit established in an amount equal to or greater than ONE MILLION DOLLARS ($1,000,000); (o) except as a result of Casualty or a partial or complete Condemnation, if Lessee or any Sublessee ceases operation of the Facility, from and after the Conversion Date, for a period in excess of thirty (30) days; (p) if one or more judgments against Lessee or any Sublessee or attachments against Lessee's interest or any Sublessee's interest in the Leased Property, which in the aggregate exceed ONE HUNDRED THOUSAND DOLLARS ($100,000) or which may materially and adversely interfere with the operation of the Facility, remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days; (q) if, from and after the Conversion Date, any malpractice award or judgment exceeding any applicable professional liability insurance coverage by more than FIVE HUNDRED THOUSAND DOLLARS ($500,000) shall be rendered against any member of the Leasing Group and either (i) enforcement proceedings shall have been commenced by any creditor upon such award or judgment or (ii) such award or judgment shall continue unsatisfied and in effect for a period of ten (10) consecutive days without an insurance company satisfactory to Lessor (in its sole and absolute discretion) having agreed to fund such award or judgment in a manner satisfactory to Lessor (in its sole and absolute discretion) and in either case such award or judgment shall, in the reasonable opinion of Lessor, have a material adverse affect on the ability of any member of the Leasing Group to operate the Facility; (r) if, from and after the Conversion Date, any Provider Agreement material to the operation or financial condition of any member of the Leasing Group shall be terminated prior to the expiration of the term thereof or, without the prior written consent of Lessor, in each instance, which consent may be withheld in Lessor's reasonable discretion, shall not be renewed or extended upon the expiration of the stated term thereof; (s) if, after Lessee or any Sublessee has obtained approval for participation in the Medicare and/or Medicaid programs with regard to the operation of the Facility, a final unappealable determination is made by the applicable Governmental Authority that Lessee or any Sublessee shall have failed to comply with applicable Medicare and/or Medicaid regulations in the operation of the Facility, as a result of which failure Lessee or such Sublessee is declared ineligible to continue its participation in the Medicare and/or Medicaid programs; 102 (t) if any member of the Leasing Group receives notice of a final unappealable determination by applicable Governmental Authorities of the revocation of any Permit required for the lawful construction or operation of the Facility in accordance with the Primary Intended Use or the loss of any Permit under any other circumstances under which any member of the Leasing Group is required to cease (i) the construction of the Project in excess of ten (10) days or (ii) after the Conversion Date, the operation of the Facility in accordance with the Primary Intended Use; and (u) any failure to maintain the insurance required pursuant to Section 12 of this Lease in force and effect at all times until the Lease Obligations are fully paid and performed; (v) the appointment of a temporary manager (or operator) for the Leased Property by any Governmental Authority; (w) the entry of an order by a court with jurisdiction over the Leased Property to close the Facility, to transfer one or more patients (or residents) from the Facility as a result of a finding or determination of abuse or neglect or to take any action to eliminate an emergency situation then existing at the Facility; or (x) any failure to deliver the Cash Collateral to Lessor when required under Section 1 of the Deposit Pledge Agreement. 16.2 REMEDIES. (a) If any Lease Default shall have occurred, Lessor may at its option terminate this Lease by giving Lessee not less than ten (10) days' notice of such termination, or exercise any one or more of its rights and remedies under this Lease or any of the other Lease Documents, or as available at law or in equity and upon the expiration of the time fixed in such notice, the Term shall terminate (but only if Lessor shall have specifically elected by a written notice to so terminate the Lease) and all rights of Lessee under this Lease shall cease. Notwithstanding the foregoing, in the event of Lessee's failure to pay Rent, if such Rent remains unpaid beyond ten (10) days from the due date thereof, Lessor shall not be obligated to give ten (10) days notice of such termination or exercise of any of its other rights and remedies under this Lease, or the other Lease Documents, or otherwise available at law or in equity, and Lessor shall be at liberty to pursue any one or more of such rights or remedies without further notice. No taking of possession of the Leased Property by or on behalf of Lessor, and no other act done by or on behalf of Lessor, shall constitute an acceptance of surrender of the Leased Property by Lessee or reduce Lessee's obligations under this Lease or the other Lease Documents, unless otherwise expressly agreed to in a written document signed by an authorized officer or agent of Lessor. (b) To the extent permitted under applicable law, Lessee shall pay as Additional Charges all costs and expenses (including, without limitation, attorneys' fee and expenses) reasonably incurred by or on behalf of Lessor as a result of any Lease Default. 103 (c) If any Lease Default shall have occurred, whether or not this Lease has been terminated pursuant to Paragraph (a) of this Section, Lessee shall, to the extent permitted under applicable law, if required by Lessor so to do, upon not less than ten (10) days' prior notice from Lessor, immediately surrender to Lessor the Leased Property pursuant to the provisions of Paragraph (a) of this Section and quit the same, and Lessor may enter upon and repossess the Leased Property by reasonable force, summary unlawful detainer proceedings, ejectment or otherwise, and may remove Lessee and all other Persons and any and all of the Tangible Personal Property from the Leased Property, subject to the rights of any residents or patients of the Facility and any Sublessees who are not Affiliates of any member of the Leasing Group and to any requirements of applicable law, or Lessor may claim ownership of the Tangible Personal Property as set forth in Section 5.2.3 hereof or Lessor may exercise its rights as secured party under the Security Agreement. Lessor shall use reasonable, good faith efforts to relet the Leased Property or otherwise mitigate damages suffered by Lessor as a result of Lessee's breach of this Lease. (d) In addition to all of the rights and remedies of Lessor set forth in this Lease and the other Lease Documents, if Lessee shall fail to pay any rental or other charge due hereunder (whether denominated as Base Rent, Additional Charges or otherwise) within ten (10) days after same shall have become due and payable, then and in such event Lessee shall also pay to Lessor (i) a late payment service charge (in order to partially defray Lessor's administrative and other overhead expenses) equal to two hundred-fifty ($250) dollars and (ii) to the extent permitted by applicable law, interest on such unpaid sum at the Overdue Rate; it being understood, however, that nothing herein shall be deemed to extend the due date for payment of any sums required to be paid by Lessee hereunder or to relieve Lessee of its obligation to pay such sums at the time or times required by this Lease. 16.3 DAMAGES. None of (a) the termination of this Lease pursuant to Section 16.2, (b) the eviction of Lessee or the repossession of the Leased Property, (c) the failure or inability of Lessor, notwithstanding reasonable good faith efforts, to relet the Leased Property, (d) the reletting of the Leased Property or (e) the failure of Lessor to collect or receive any rentals due upon any such reletting, shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. In any such event, Lessee shall forthwith pay to Lessor all Rent due and payable with respect to the Leased Property to and including the date of such termination, repossession or eviction. Thereafter, Lessee shall forthwith pay to Lessor, at Lessor's option, either: (i) the sum of: (x) all Rent that is due and unpaid at the later to occur of termination, repossession or eviction, together with interest thereon at the Overdue Rate to the date of payment, plus (y) the worth (calculated in the manner stated below) of the amount by which the unpaid Rent for the balance of the Term after the later to occur of the termination, repossession or eviction exceeds the fair market rental value of the Leased Property for the balance of the Term, plus (z) any other amount necessary to compensate Lessor for all damage proximately caused by Lessee's failure to perform 104 the Lease Obligations or which in the ordinary course would be likely to result therefrom; or (ii) each payment of Rent as the same would have become due and payable if Lessee's right of possession or other rights under this Lease had not been terminated, or if Lessee had not been evicted, or if the Leased Property had not been repossessed; which Rent, to the extent permitted by law, shall bear interest at the Overdue Rate from the date when due until the date paid, and Lessor may enforce, by action or otherwise, any other term or covenant of this Lease. There shall be credited against Lessee's obligation under this Clause (ii) amounts actually collected by Lessor from another tenant to whom the Leased Property may have actually been leased or, if Lessor is operating the Leased Property for its own account, the actual Cash Flow of the Leased Property. In making the determinations described in subparagraph (i) above, the "worth" of unpaid Rent shall be determined by a court having jurisdiction thereof using the lowest rate of capitalization (highest present worth) reasonably applicable at the time of such determination and allowed by applicable law. 16.4 LESSEE WAIVERS. If this Lease is terminated pursuant to Section 16.2, Lessee waives, to the extent not prohibited by applicable law, (a) any right of redemption, re-entry or repossession, (b) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article 16, and (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt. 16.5 APPLICATION OF FUNDS. Any payments otherwise payable to Lessee which are received by Lessor under any of the provisions of this Lease during the existence or continuance of any Lease Default shall be applied to the Lease Obligations in the order which Lessor may reasonably determine or as may be required by the laws of the State. 16.6 [INTENTIONALLY DELETED]. 16.7 LESSOR'S RIGHT TO CURE. If Lessee shall fail to make any payment, or to perform any act required to be made or performed under this Lease and to cure the same within the relevant time periods provided in Section 16.1, Lessor, after five (5) Business Days' prior notice to Lessee (except in an emergency when such shorter notice shall be given as is reasonable under the circumstances), and without waiving or releasing any obligation or Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and take all such action thereon as, in Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, in each case, to the extent permitted by law) so incurred shall be paid by Lessee to Lessor on demand as an Additional Charge. The obligations of 105 Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. 16.8 NO WAIVER BY LESSOR. Lessor shall not by any act, delay, omission or otherwise (including, without limitation, the exercise of any right or remedy hereunder) be deemed to have waived any of its right or remedies hereunder or under any of the other Lease Documents unless such waiver is in writing and signed by Lessor, and then, only to the extent specifically set forth therein. No waiver at any time of any of the terms, conditions, covenants, representations or warranties set forth in any of the Lease Documents (including, without limitation, any of the time periods set forth therein for the performance of the Lease Obligations) shall be construed as a waiver of any other term, condition, covenant, representation or warranty of any of the Lease Documents, nor shall such a waiver in any one instance or circumstances be construed as a waiver of the same term, condition, covenant, representation or warranty in any subsequent instance or circumstance. No such failure, delay or waiver shall be construed as creating a requirement that Lessor must thereafter, as a result of such failure, delay or waiver, give notice to Lessee or the Guarantor, the Developer or any other Person that Lessor does not intend to, or may not, give a further waiver or to refrain from insisting upon the strict performance of the terms, conditions, covenants, representations and warranties set forth in the Lease Documents before Lessor can exercise any of its rights or remedies under any of the Lease Documents or before any Lease Default can occur, or as establishing a course of dealing for interpreting the conduct of and agreements between Lessor and Lessee, the Guarantor, the Developer or any other Person. The acceptance by Lessor of any payment that is less than payment in full of all amounts then due under any of the Lease Documents at the time of the making of such payment shall not: (a) constitute a waiver of the right to exercise any of Lessor's remedies at that time or at any subsequent time, (b) constitute an accord and satisfaction or (v) nullify any prior exercise of any remedy, without the express written consent of Lessor. Any failure by Lessor to take any action under this Lease or any of the other Lease Documents by reason of a default hereunder or thereunder, any acceptance of a past due installment, or any indulgence granted from time to time shall not be construed (i) as a novation of this Lease or any of the other Lease Documents, (ii) as a waiver of any right of Lessor thereafter to insist upon strict compliance with the terms of this Lease or any of the other Lease Documents or (iii) to prevent the exercise of any right of acceleration or any other right granted hereunder or under applicable law; and to the maximum extent not prohibited by applicable law, Lessor hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. 16.9 RIGHT OF FORBEARANCE. Whether or not for consideration paid or payable to Lessor and, except as may be otherwise specifically agreed to by Lessor in writing, no forbearance on the part of Lessor, no extension of the time for the payment of the whole or any part of the Obligations, and no other indulgence given by Lessor to Lessee or any other Person, shall operate to release or in any manner affect the original liability of Lessee or such other Persons, or to limit, prejudice or impair any right of Lessor, including, without limitation, the right to realize upon any collateral, or any part thereof, 106 for any of the Obligations evidenced or secured by the Lease Documents; notice of any such extension, forbearance or indulgence being hereby waived by Lessee and all those claiming by, through or under Lessee. 16.10 CUMULATIVE REMEDIES. The rights and remedies set forth under this Lease are in addition to all other rights and remedies afforded to Lessor under any of the other Lease Documents or at law or in equity, all of which are hereby reserved by Lessor, and this Lease is made and accepted without prejudice to any such rights and remedies. All of the rights and remedies of Lessor under each of the Lease Documents shall be separate and cumulative and may be exercised concurrently or successively in Lessor's sole and absolute discretion. ARTICLE 17 SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING OVER 17.1 SURRENDER. Lessee shall, upon the expiration or prior termination of the Term (unless Lessee has concurrently purchased the Leased Property in accordance with the terms hereof), vacate and surrender the Leased Property to Lessor in good repair and condition, in compliance with all Legal Requirements, all Insurance Requirements, and in compliance with the provisions of Article 8, except for: (a) ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair during the entire Term of the Lease), (b) damage caused by the gross negligence or willful acts of Lessor, and (c) any damage or destruction resulting from a Casualty or Taking that Lessee is not required by the terms of this Lease to repair or restore. 17.2 TRANSFER OF PERMITS AND CONTRACTS. In connection with the expiration or any earlier termination of this Lease (unless Lessee has concurrently purchased the Leased Property in accordance with the terms hereof), upon any request made from time to time by Lessor, Lessee shall (a) promptly and diligently use its best efforts to (i) transfer and assign all Permits and Contracts necessary or desirable for the operation of the Leased Property in accordance with its Primary Intended Lease to Lessor or its designee and/or (ii) arrange for the transfer or assignment of such Permits and Contracts to Lessor or its designee, all to the extent the same may be transferred or assigned under applicable law and (b) cooperate in every respect (and to the fullest extent possible) and assist Lessor or its designee in obtaining such Permits and Contracts (whether by transfer, assignment or otherwise). Such efforts and cooperation on the part of Lessee shall include, without limitation, the execution, delivery and filing with appropriate Governmental Authorities and Third Party Payors of any applications, petitions, statements, notices, requests, assignments and other documents or instruments requested by Lessor. Furthermore, Lessee shall not take any action or refrain from taking any action which would defer, delay or jeopardize the process of Lessor or its designee obtaining said Permits and Contracts (whether by transfer, assignment or otherwise). Without limiting the foregoing, Lessee shall not seek to transfer or relocate any of said Permits or Contracts to any location other than the Leased Property. The provisions of this Section 17.2 shall survive the expiration or earlier termination of this Lease. 107 Lessee hereby appoints Lessor as its attorney-in-fact, with full power of substitution to take such actions, in the event that Lessee fails to comply with any request made by Lessor hereunder, as Lessor (in its sole absolute discretion) may deem necessary or desirable to effectuate the intent of this Section 17.2. The power of attorney conferred on Lessor by the provisions of this Section 17.2, being coupled with an interest, shall be irrevocable until the Obligations are fully paid and performed and shall not be affected by any disability or incapacity which Lessee may suffer and shall survive the same. Such power of attorney is provided solely to protect the interests of Lessor and shall not impose any duty on Lessor to exercise any such power and neither Lessor nor such attorney-in-fact shall be liable for any act, omission, error in judgment or mistake of law, except as the same may result from its gross negligence or willful misconduct. 17.3 NO ACCEPTANCE OF SURRENDER. Except at the expiration of the Term in the ordinary course, no surrender to Lessor of this Lease or of the Leased Property or any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender. 17.4 HOLDING OVER. If, for any reason, Lessee shall remain in possession of the Leased Property after the expiration or any earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month, one and one-half times the aggregate of (i) one-twelfth of the aggregate Base Rent payable at the time of such expiration or earlier termination of the Term; (ii) all Additional Charges accruing during the month and (iii) all other sums, if any, payable by Lessee pursuant to the provisions of this Lease with respect to the Leased Property. During such period of tenancy, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. 108 ARTICLE 18 PURCHASE OF THE LEASED PROPERTY 18.1 PURCHASE OF THE LEASED PROPERTY. In the event Lessee purchases the Leased Property from Lessor pursuant to any of the terms of this Lease, Lessor shall, upon receipt from Lessee of the applicable purchase price, together with full payment of any unpaid Rent due and payable with respect to any period ending on or before the date of the purchase, deliver to Lessee a deed with covenants only against acts of Lessor conveying the entire interest of Lessor in and to the Leased Property to Lessee subject to all Legal Requirements, all of the matters described in clauses (a), (b), (e) and (g) of Section 11.5.2, Impositions, any Liens created by Lessee, any Liens created in accordance with the terms of this Lease or consented to by Lessee, the claims of all Persons claiming by through or under Lessee, any other matters assented to by Lessee and all matters for which Lessee has responsibility under any of the Lease Documents, but otherwise not subject to any other Lien created by Lessor from and after the Commencement Date (other than an Encumbrance permitted under Article 20 which Lessee elects to assume). The applicable purchase price shall be paid in cash to Lessor, or as Lessor may direct, in federal or other immediately available funds except as otherwise mutually agreed by Lessor and Lessee. All expenses of such conveyance, including, without limitation, title examination costs, standard (and extended) coverage title insurance premiums, attorneys' fees incurred by Lessor in connection with such conveyance, recording and transfer taxes and recording fees and other similar charges shall be paid by Lessee. 18.2 APPRAISAL. 18.2.1 DESIGNATION OF APPRAISERS. In the event that it becomes necessary to determine the Fair Market Value of the Leased Property for any purpose of this Lease, the party required or permitted to give notice of such required determination shall include in the notice the name of a Person selected to act as appraiser on its behalf. Within ten (10) days after receipt of any such notice, Lessor (or Lessee, as the case may be) shall by notice to Lessee (or Lessor, as the case may be) appoint a second Person as appraiser on its behalf. 18.2.2 APPRAISAL PROCESS. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto), shall, within forty-five (45) days after the date of the notice appointing the first appraiser, proceed to appraise the Leased Property to determine the Fair Market Value of the Leased Property as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, or if two appraisers shall have been so appointed but only one such appraiser shall have made such determination within fifty (50) days after the making of Lessee's or Lessor's request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers shall have been appointed and shall have made their determinations within the respective requisite 109 periods set forth above and if the difference between the amounts so determined shall not exceed ten per cent (10%) of the lesser of such amounts, then the Fair Market Value of the Leased Property shall be an amount equal to fifty percent (50%) of the sum of the amounts so determined. If the difference between the amounts so determined shall exceed ten percent (10%) of the lesser of such amounts, then such two appraisers shall have twenty (20) days to appoint a third appraiser, but if such appraisers fail to do so, then either party may request the American Arbitration Association or any successor organization thereto to appoint an appraiser within twenty (20) days of such request, and both parties shall be bound by any appointment so made within such twenty (20) day period. If no such appraiser shall have been appointed within such twenty (20) days or within ninety (90) days of the original request for a determination of Fair Market Value of the Leased Property, whichever is earlier, either Lessor or Lessee may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers, by the American Arbitration Association or by such court shall be instructed to determine the Fair Market Value of the Leased Property within thirty (30) days after appointment of such Appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and fifty percent (50%) of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee as the Fair Market Value of the Leased Property. 18.2.3 SPECIFIC ENFORCEMENT AND COSTS. This provision for determination by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other cost and expenses incurred in connection with each appraisal. 18.3 LESSEE'S LIMITED RIGHT OF REFUSAL. At any time during the Term, as long as, at the time of exercise and on the date of closing, this Lease is then in full force and effect, and there exists no Lease Default, nor any state of facts or circumstances which would constitute a Lease Default, or which, with the passage of time and/or the giving of notice, would constitute a Lease Default, Lessee shall have a "Right of First Refusal" subject to the following terms and conditions: (a) if Lessor receives a bona fide written offer to purchase the Leased Property from a Person which is not a member of the Leasing Group or an Affiliate of any member of the Leasing Group (the "Offer"), acceptable to Lessor in Lessor's sole and absolute discretion and Lessor elects, in Lessor's sole and absolute discretion, to sell the Leased Property in accordance with the Offer, Lessee shall have thirty (30) days following notice of the Offer to elect to purchase the Leased Property on the same terms and conditions as specified in the Offer; (b) unless Lessor receives notice from Lessee within such thirty (30) day period setting forth Lessee's election to so purchase the Leased Property and unless thereafter Lessee completes the acquisition of the Leased Property exactly as provided for, and by the date specified, in the Offer, Lessor shall be at liberty, and shall have the absolute and unconditional right, to sell the Leased Property to any Person within the next twelve (12) months substantially on the 110 terms and conditions set forth in the Offer or on any other terms and conditions more favorable to Lessor; and (c) any such sale consummated in accordance with the provisions of the foregoing clause (b) shall extinguish all rights granted to Lessee under this Section 18.3. Lessee's Right of First Refusal shall not apply to and shall survive: (a) any sale or transfer of the Leased Property to any Affiliate of Lessor; (b) any sale or transfer of the Leased Property occasioned by the exercise of any rights or remedies of any Fee Mortgagee; or (c) a deed or transfer in lieu of foreclosure to any Fee Mortgagee or any Affiliate thereof. Lessee's Right of First Refusal shall in all events terminate upon the expiration or any earlier termination of this Lease. 18.4 LESSEE'S OPTION TO PURCHASE. 18.4.1 CONDITIONS TO OPTION. On the conditions (which conditions Lessor may waive, at its sole option, by notice to Lessee at any time) that (a) at the time of exercise of the Purchase Option and on the applicable Purchase Option Date, there then exists no Lease Default, nor any state of facts or circumstance which constitutes, or with the passage of time and/or the giving of notice, would constitute a Lease Default and (b) Lessee strictly complies with the provisions of this Section 18.4, then Lessee shall have the option to purchase the Leased Property, at the price and upon the terms hereinafter set forth (the "Purchase Option"). 18.4.2 EXERCISE OF OPTION. The Purchase Option shall permit Lessee to purchase the Leased Property (a) on the last day of the Initial Term or (b) on the last day of any Extended Term effectively exercised by Lessee (each of such dates are referred to herein as a "Purchase Option Date") and shall be exercised by notice given by Lessee to Lessor (the "Lessee's Purchase Option Notice") at least one hundred eighty (180) days (but not more than two hundred seventy (270) days) prior to the relevant Purchase Option Date. Notwithstanding anything to the contrary set forth in this Lease, Lessee's right to purchase the Leased Property is subject to the further conditions that (i) concurrently with the exercise of the option set forth under this Section 18.4, the Lessee shall have exercised its right to purchase the premises demised under each of the Related Leases in accordance with the provisions of Section 18.4 of each of the Related Leases and (ii) the conveyance of the Leased Property pursuant to the provisions of this Section 18.4 shall occur simultaneously with the conveyance of the premises demised under each of the Related Leases pursuant to Section 18.4 of each of the Related Leases and (iii) all of the conditions in the Agreement Regarding Related Lease Transactions pertaining to the Purchase Option are satisfied. Once given, Lessee shall have no right to rescind Lessee's Purchase Option Notice. 18.4.3 CONVEYANCE. If the Purchase Option is exercised by Lessee in accordance with the terms hereof, the Leased Property shall be conveyed by a good and sufficient deed with covenants only against acts of Lessor (the "Deed") running to Lessee or to such grantee as Lessee may designate by notice to Lessor at least seven (7) days before the Time of Closing. 111 18.4.4 CALCULATION OF PURCHASE PRICE. Subject to the terms of the Agreement Regarding Related Lease Transactions, the price to be paid by Lessee for the acquisition of the Leased Property pursuant to this Purchase Option (the "Purchase Price") shall be equal to the greater of (a) the Meditrust Investment or (b) an amount equal to the then Fair Market Value of the Leased Property minus the Fair Market Added Value. 18.4.5 PAYMENT OF PURCHASE PRICE. Subject to the terms of the Agreement Regarding Related Lease Transactions, the Purchase Price shall be paid by Lessee at the Time of Closing by certified, cashier's, treasurer's or bank check(s) or wire transfer pursuant to instructions received from Lessor. 18.4.6 PLACE AND TIME OF CLOSING. Subject to the terms of the Agreement Regarding Related Lease Transactions, if the Purchase Option is exercised, the closing shall occur and the Deed shall be delivered (the "Closing") at the office of Lessor at 12:00 o'clock noon (local time in Boston, Massachusetts) on the applicable Purchase Option Date (such time, as the same may be extended by mutual written agreement of Lessor and Lessee, being hereinafter referred to as the "Time of Closing"). It is agreed that time is of the essence of the Purchase Option. 18.4.7 CONDITION OF LEASED PROPERTY. The Leased Property is to be purchased "AS IS" and "WHERE IS" as of the Time of Closing. 18.4.8 QUALITY OF TITLE. If Lessor shall be unable to give title or to make conveyance, as stipulated in this Section 18.4, then, at Lessor's option, Lessor shall use reasonable efforts to remove all defects in title and the applicable Purchase Option Date and Time of Closing shall be extended for period of thirty (30) days. Lessor shall not be required to expend more than FIFTY THOUSAND DOLLARS ($50,000) (inclusive of attorney's fees) in order to have used "reasonable efforts." 18.4.9 LESSOR'S INABILITY TO PERFORM. If at the expiration of the extended time Lessor shall have failed so to remove any such defects in title, then all other obligations of all parties hereto under Section 18.4 shall cease and Section 18.4 shall be void and without recourse to the parties hereto. Notwithstanding the foregoing, Lessee shall have the election, at either the original or extended Purchase Option Date and Time of Closing, to accept such title as Lessor can deliver to the Leased Property in its then condition and to pay therefor the Purchase Price without reduction, in which case Lessor shall convey such title; provided, that, in the event of such conveyance, if any portion of the Leased Property shall have been taken by Condemnation prior to the applicable Purchase Option Date and Time of Closing, Lessor shall pay over or assign to Lessee at the Time of Closing, all Awards recovered on account of such Taking, less any amounts reasonably expended by Lessor in obtaining such Awards, or, to the extent such Awards have not been recovered as of the applicable Purchase Option Date and Time of Closing, Lessor shall assign to Lessee all its rights with respect to any claim therefor. 112 18.4.10 MERGER BY DEED. The acceptance of the Deed by Lessee or the grantee designated by Lessee, as the case may be, shall be deemed to be a full performance and discharge of every agreement and obligation to be performed by Lessor contained or expressed in this Lease. 18.4.11 USE OF PURCHASE PRICE TO CLEAR TITLE. To enable Lessor to make conveyance as provided in this Section, Lessor may, at the Time of Closing, use the Purchase Price or any portion thereof to clear the title of any Lien, provided that all instruments so procured are recorded contemporaneously with the Closing or reasonable arrangements are made for a recording subsequent to the Time of Closing in accordance with customary conveyancing practices. 18.4.12 LESSEE'S DEFAULT. If Lessee delivers Lessee's Purchase Option Notice and fails to consummate the purchase of the Leased Property in accordance with the terms hereof for any reason other than Lessor's willful and unexcused refusal to deliver the Deed, (a) Lessee shall thereafter have no further right to purchase the Leased Property pursuant to this Section, although this Lease shall otherwise continue in full force and effect and (b) Lessor shall have the right to sue for specific performance of Lessee's obligations to purchase the Leased Property provided such suit for specific performance is commenced within one (1) year after the applicable Purchase Option Date on which such sale was supposed to occur. ARTICLE 19 SUBLETTING AND ASSIGNMENT 19.1 SUBLETTING AND ASSIGNMENT. Except as specifically set forth in Section 19.2 and Section 19.4 below, Lessee may not, without the prior written consent of Lessor, which consent may be withheld in Lessor's sole and absolute discretion, assign or pledge all or any portion of its interest in this Lease or any of the other Lease Documents (whether by operation of law or otherwise) or sublet all or any part of the Leased Property. For purposes of this Section 19.1, the term "assign" shall be deemed to include, but not be limited to, any one or more sales, pledges, hypothecations or other transfers (including, without limitation, any transfer by operation of law) of any of the capital stock of or partnership interest in Lessee or sales, pledges, hypothecations or other transfers (including, without limitation, any transfer by operation of law) of the capital or the assets of Lessee. Any such assignment, pledge, sale, hypothecation or other transfer made without Lessor's consent shall be void and of no force and effect. 19.2 PERMITTED SUBLEASES. Notwithstanding the foregoing, Lessee shall have the right to enter into Residence Agreements without the prior consent of Lessor. 19.3 ATTORNMENT. Lessee shall insert in each Sublease approved by Lessor provisions to the effect that (a) such Sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) in the event this Lease shall terminate before the expiration of such Sublease, the Sublessee thereunder 113 will, at Lessor's option, attorn to Lessor and waive any right the Sublessee may have to terminate the Sublease or to surrender possession thereunder, as a result of the termination of this Lease and (c) in the event the Sublessee receives a written notice from Lessor stating that Lessee is in default under this Lease, the Sublessee shall thereafter be obligated to pay all rentals accruing under said Sublease directly to Lessor or as Lessor may direct. All rentals received from the Sublessee by Lessor shall be credited against the amounts owing by Lessee under this Lease. 19.4 PERMITTED ASSIGNMENTS. Notwithstanding the provisions of Section 19.1, the current holders of all of the issued and outstanding capital stock of the Lessee may transfer such capital stock of Lessee to the Guarantor (or, at the option of the Guarantor, to a wholly-owned Subsidiary of the Guarantor), subject to the Liens created by the Stock Pledge Agreement, pursuant to the terms and conditions of the BCC Option Agreement (the "Stock Transfer"); provided that: (a) at the time of the consummation of the Stock Transfer, no Lease Default shall have occurred (excluding any Lease Default which has been waived, in writing, by Lessor), nor any event which, with the giving of notice and/or the passage of time, could result in a Lease Default and (b) prior to or simultaneously with the consummation of the Stock Transfer, the Guarantor shall have delivered to Lessor (i) a guaranty of the Lease Obligations executed by the Guarantor (the "BCC Guaranty"), in form and substance acceptable to Lessor (and, without limiting the foregoing, the BCC Guaranty shall include the financial covenants set forth in Section 10.9 of the Working Capital Assurance Agreement), (ii) a fully-executed Stock Pledge Agreement, in a form substantially similar to the Pledge Agreement, executed by the Guarantor (or, if applicable, the wholly-owned Subsidiary of the Guarantor to which the issued and outstanding stock of the Lessee is to be transferred) granting to Lessor a first priority security interest in all of the issued and outstanding shares of capital stock of Lessee (the "BCC Stock Pledge"), (iii) the stock certificate(s) evidencing such pledged shares, along with stock power(s) (in a form acceptable to Lessor) duly endorsed in blank and (iv) a legal opinion, in form and substance satisfactory to Lessor (1) evidencing the authority of the Guarantor to execute and deliver the BCC Stock Pledge, the BCC Guaranty and such stock powers and the enforceability of such documents and (2) stating whether any notices to and/or approvals from any Governmental Authority (or other Person) are required for such transfer and, if so, that such notices and approvals have been sent and/or obtained, as the case may be. From and after the consummation of the Stock Transfer, in accordance with the terms hereof and the terms of the Working Capital Loan Agreement, and the satisfaction of the conditions set forth in this Section 19.4, the Related Party Obligations shall include all "Related Party Obligations" as defined under the State College Lease; provided, however, that, except as otherwise provided within the definition of the term "Related Parties" in Article 2 hereof, the consummation of the Stock Transfer shall have no effect whatsoever on the Related Leases, the Tenant Parties or any terms, conditions or other provisions set forth herein or in any of the other Lease Documents relating thereto. In connection with the consummation the Stock Transfer, the Lessee shall have the option, exercisable by written notice to the Lessor ten (10) Business Days prior to the Stock Transfer, to request that the Lessor advance, under the Leasehold Improvement Agreement, a lump sum payment (the "Working Capital Payoff") equal to the total 114 outstanding principal amount and all accrued interest and other sums payable under the Note. The Working Capital Payoff shall be used to pay the entire principal balance then remaining unpaid, together with accrued and unpaid interest thereon and any costs, charges and other amounts due under the Note (without any penalty or premium) and, upon any such advance of the Working Capital Payoff by Lessor, Base Rent shall be adjusted accordingly and the Cash Collateral held under the Deposit Pledge Agreement shall also be adjusted to reflect the adjusted Base Rent hereunder (i.e., so that the Cash Collateral then held under the Deposit Pledge Agreement equals 3 monthly payments of Base Rent as adjusted). The Working Capital Payoff shall be due and payable simultaneously with the consummation of the Stock Transfer. In the event the Lessee does not elect to request Lessor to advance the Working Capital Payoff under the Leasehold Improvement Agreement, the Working Capital Payoff shall nevertheless be due and payable simultaneously with the consummation of the Stock Transfer (from other funds of Pledgor) so that the outstanding obligations under the Note may be paid in full (without penalty or premium), it being understood and agreed that all obligations under the Note are due and payable as of the date of the consummation of the Stock Transfer. If Lessor does not advance the Working Capital Payoff to satisfy the outstanding obligations under the Note, there shall be no adjustment to Base Rent in connection with the satisfaction of the outstanding obligations under the Note. 19.5 OTHER PERMITTED TRANSFERS. Notwithstanding anything to the contrary set forth herein, from and after the date of the consummation of the Guarantor's initial public offering of shares of common stock, (i) subject to the provisions of the paragraph immediately following this paragraph, any transfer (whether by operation of law or otherwise) of any shares of the common stock of the Guarantor shall not constitute a Lease Default and (ii) any merger of the Guarantor with any other Person shall not constitute a Lease Default, provided, that, the Guarantor is the surviving entity and remains in compliance with all of the conditions, covenants and agreements set forth in the Lease Documents pertaining to the Guarantor (including, without limitation, any financial covenants). Notwithstanding anything to the contrary set forth herein, from and after the date of the consummation of the Guarantor's initial public offering of common stock, the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended), at any time, by any Person and its Affiliates, either individually or as a group, of an aggregate of fifty percent (50%) or more of the common stock of the Guarantor shall constitute a Lease Default. 115 ARTICLE 20 TITLE TRANSFERS AND LIENS GRANTED BY LESSOR 20.1 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby with the fee estate in the Leased Property by reason of the fact that the same Person may acquire, own or hold, directly or indirectly (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property. 20.2 TRANSFERS BY LESSOR. If the original Lessor named herein or any successor in interest shall convey the Leased Property in accordance with the terms hereof, other than as security for a debt, and the grantee or transferee of the Leased Property shall expressly assume all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, the original Lessor named herein or the applicable successor in interest so conveying the Leased Property shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner. 20.3 LESSOR MAY GRANT LIENS. Without the consent of Lessee, but subject to the terms and conditions set forth below in this Section 20.3, Lessor may, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement upon the Leased Property or any interest therein ("Encumbrance"), whether to secure any borrowing or other means of financing or refinancing, provided that Lessee shall have no obligation to make payments under such Encumbrances. Lessee shall subordinate this Lease to the lien of any such Encumbrance, on the condition that the beneficiary or holder of such Encumbrance executes a non-disturbance agreement in conformity with the provisions of Section 20.4. To the extent that any such Encumbrance consists of a mortgage or deed of trust on Lessor's interest in the Leased Property the same shall be referred to herein as a "Fee Mortgage" and the holder thereof shall be referred to herein as a "Fee Mortgagee". 116 20.4 SUBORDINATION AND NON-DISTURBANCE. Concurrently with the execution and delivery of any Fee Mortgage entered into after the date hereof, provided that the Lessee executes and delivers an agreement of the type described in the following paragraph, Lessor shall obtain and deliver to Lessee an agreement by the holder of such Fee Mortgage, pursuant to which, (a) the applicable Fee Mortgagee consents to this Lease and (b) agrees that, notwithstanding the terms of the applicable Fee Mortgage held by such Fee Mortgagee, or any default, expiration, termination, foreclosure, sale, entry or other act or omission under or pursuant to such Fee Mortgage or a transfer in lieu of foreclosure, (i) Lessee's rights under this Lease shall not be disturbed nor shall this Lease be terminated or cancelled at any time, except in the event that Lessor shall have the right to terminate this Lease under the terms and provisions expressly set forth herein, (ii) Lessee's option to purchase the Leased Property shall remain in force and effect pursuant to the terms hereof and (iii) in the event that Lessee elects its option to purchase the Leased Property and performs all of its obligations hereunder in connection with any such election, the holder of the Fee Mortgage shall release its Fee Mortgage upon payment by Lessee of the purchase price required hereunder, provided, that (1) such purchase price is paid to the holder of the Fee Mortgage, in the event that the Indebtedness secured by the applicable Fee Mortgage is equal to or greater than the purchase price or (2) in the event that the purchase price is greater than the Indebtedness secured by the Fee Mortgage, a portion of the purchase price equal to the Indebtedness secured by the Fee Mortgage is paid to the Fee Mortgagee and the remainder of the purchase price is paid to Lessor. At the request from time to time by any Fee Mortgagee, Lessee shall (a) subordinate this Lease and all of Lessee's rights and estate hereunder to the Fee Mortgage held by such Fee Mortgagee and (b) agree that Lessee will attorn to and recognize such Fee Mortgagee or the purchaser at any foreclosure sale or any sale under a power of sale contained in any such Fee Mortgage as Lessor under this Lease for the balance of the Term then remaining. To effect the intent and purpose of the immediately preceding sentence, Lessee agrees to execute and deliver such instruments in recordable form as are reasonably requested by Lessor or the applicable Fee Mortgagee; provided, however, that such Fee Mortgagee simultaneously executes, delivers and records a written agreement of the type described in the preceding paragraph. 117 ARTICLE 21 LESSOR OBLIGATIONS 21.1 QUIET ENJOYMENT. As long as Lessee shall pay all Rent and all other sums due under any of the Lease Documents as the same become due and shall fully comply with all of the terms of this Lease and the other Lease Documents and fully perform its obligations thereunder, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property throughout the Term, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to the Permitted Encumbrances and such Liens as may hereafter be consented to by Lessee. No failure by Lessor to comply with the foregoing covenant shall give Lessee any right to cancel or terminate this Lease, or to fail to perform any other sum payable under this Lease, or to fail to perform any other obligation of Lessee hereunder. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Article 21. 21.2 MEMORANDUM OF LEASE. Lessor and Lessee shall, promptly upon the request of either, enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State, in which reference to this Lease and all options and the Right of First Refusal contained herein shall be made. Lessee shall pay all recording costs and taxes associated therewith. 21.3 DEFAULT BY LESSOR. Lessor shall be in default of its obligations under this Lease only if Lessor shall fail to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure shall continue for a period of thirty (30) days after notice thereof from Lessee (or, from and after the Conversion Date, such shorter time as may be necessary in order to protect the health or welfare of any residents of the Facility or to insure the continuing compliance of the Facility with the applicable Legal Requirements), unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to continue if Lessor, within said thirty (30) day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof. The time within which Lessor shall be obligated to cure any such failure shall also be subject to extension of time due to the occurrence of any Unavoidable Delay. 118 ARTICLE 22 NOTICES Any notice, request, demand, statement or consent made hereunder or under any of the other Lease Documents shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provision for a receipt, postage or delivery charges prepaid, and shall be deemed given when so personally delivered or postmarked or placed in the possession of such mail or delivery service and addressed as follows: If to Lessee: ______________________________ 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Bruce A. Rendina With a copy to: Lawrence B. Juran, P.A. 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Lawrence B. Juran, Esq. If to the Guarantor: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President With copies to: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart, LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven Adelkoff, Esq. If to Lessor: Meditrust Company LLC 197 First Avenue Needham Heights, Massachusetts 02494 Attn: President 119 With copies to: Meditrust Company LLC 197 First Avenue Needham Heights, Massachusetts 02494 Attn: General Counsel and Nutter, McClennen & Fish, LLP One International Place Boston, Massachusetts 02110-2699 Attn: Marianne Ajemian, Esq. or such other address as Lessor, Lessee or the Guarantor shall hereinafter from time to time designate by a written notice to the others given in such manner. Any notice given to Lessee or the Guarantor by Lessor at any time shall not imply that such notice or any further or similar notice was or is required. ARTICLE 23 LIMITATION OF LIABILITY In no event shall Lessor ever be liable to Lessee or any other Person for any indirect or consequential damages incurred by Lessee or such other Person resulting from any cause whatsoever. Notwithstanding the foregoing, Lessee hereby acknowledges and agrees that Lessee shall look only to the assets of Lessor for the payment of any sum or performance of any obligation due by or from Lessor pursuant to the terms and provisions of the Lease Documents. 120 ARTICLE 24 MISCELLANEOUS PROVISIONS 24.1 BROKER'S FEE INDEMNIFICATION. Lessee shall and hereby agrees to indemnify, defend (with counsel acceptable to Lessor) and hold Lessor harmless from and against any and all claims for premiums or other charges, finder's fees, taxes, brokerage fees or commissions and other similar compensation due in connection with any of the transactions contemplated by the Lease Documents, except such claims by any Person with whom Lessor has dealt without Lessee's knowledge in connection with the transactions contemplated by the Lease Documents. Notwithstanding the foregoing, Lessor shall have the option of conducting its own defense against any such claims with counsel of Lessor's choice, but at the expense of Lessee, as aforesaid. This indemnification shall include all attorneys' fees and expenses and court costs reasonably incurred by Lessor in connection with the defense against any such claims and the enforcement of this indemnification agreement and shall survive the termination of this Lease. 24.2 NO JOINT VENTURE OR PARTNERSHIP. Neither anything contained in any of the Lease Documents, nor the acts of the parties hereto, shall create, or be construed to create, a partnership or joint venture between Lessor and Lessee. Lessee is not the agent or representative of Lessor and nothing contained herein or in any of the other Lease Documents shall make, or be construed to make, Lessor liable to any Person for goods delivered to Lessee, services performed with respect to the Leased Property at the direction of Lessee or for debts or claims accruing against Lessee. 24.3 AMENDMENTS, WAIVERS AND MODIFICATIONS. Except as otherwise expressly provided for herein or in any other Lease Document, none of the terms, covenants, conditions, warranties or representations contained in this Lease or in any of the other Lease Documents may be renewed, replaced, amended, modified, extended, substituted, revised, waived, consolidated or terminated except by an agreement in writing signed by (a) all parties to this Lease or the other applicable Lease Document, as the case may be, with regard to any such renewal, replacement, amendment, modification, extension, substitution, revision, consolidation or termination and (b) the Person against whom enforcement is sought with regard to any waiver. The provisions of this Lease and the other Lease Documents shall extend and be applicable to all renewals, replacements, amendments, extensions, substitutions, revisions, consolidations and modifications of any of the Lease Documents, the Management Agreements, the Related Party Agreements, the Working Capital Loan Documents, the Permits and/or the Contracts. References herein and in the other Lease Documents to any of the Lease Documents, the Management Agreements, the Related Party Agreements, the Working Capital Loan Documents, the Permits and/or the Contracts shall be deemed to include any renewals, replacements, amendments, extensions, substitutions, revisions, consolidations or modifications thereof. 121 Notwithstanding the foregoing, any reference contained in any of the Lease Documents, whether express or implied, to any renewal, replacement, amendment, extension, substitution, revisions, consolidation or modification of any of the Lease Documents or any Management Agreement, Related Party Agreement, Working Capital Loan Documents, Permit and/or the Contract is not intended to constitute an agreement or consent by Lessor to any such renewal, replacement, amendment, substitution, revision, consolidation or modification; but, rather as a reference only to those instances where Lessor may give, agree or consent to any such renewal, replacement, amendment, extension, substitution, revision, consolidation or modification as the same may be required pursuant to the terms, covenants and conditions of any of the Lease Documents. 24.4 CAPTIONS AND HEADINGS. The captions and headings set forth in this Lease and each of the other Lease Documents are included for convenience and reference only, and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of, or the scope or intent of, this Lease, any of the other Lease Documents or any parts hereof or thereof. 24.5 TIME IS OF THE ESSENCE. Time is of essence of each and every term, condition, covenant and warranty set forth herein and in the other Lease Documents. 24.6 COUNTERPARTS. This Lease and the other Lease Documents may be executed in one or more counterparts, each of which taken together shall constitute an original and all of which shall constitute one in the same instrument. 24.7 ENTIRE AGREEMENT. This Lease and the other Lease Documents set forth the entire agreement of the parties with respect to the subject matter and shall supersede in all respects those provisions of the letter of intent dated September 12, 1997 (and all prior iterations thereof), from Meditrust to the Guarantor, accepted by the Guarantor on September 15, 1997 relating to the Project. 24.8 WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, LESSOR AND LESSEE HEREBY MUTUALLY, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT WHICH ANY PARTY HERETO MAY NOW OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE LEASE OR ANY OF THE LEASE DOCUMENTS. Lessee hereby certifies that neither Lessor nor any of Lessor's representatives, agents or counsel has represented expressly or otherwise that Lessor would not, in the event of any such suit, action or proceeding seek to enforce this waiver to the right of trial by jury and acknowledges that Lessor has been induced by this waiver (among other things) to enter into the transactions evidenced by this Lease and the other Lease Documents and further acknowledges that Lessee (a) has read the provisions of this Lease, and in particular, the paragraph containing this waiver, (b) has consulted legal counsel, (c) understands the rights that it is granting in this Lease and the rights that it waiving in this paragraph in 122 particular and (d) makes the waivers set forth herein knowingly, voluntarily and intentionally. 24.9 SUCCESSORS AND ASSIGNS. This Lease and the other Lease Documents shall be binding and inure to the benefit of (a) upon Lessee and Lessee's legal representatives and permitted successors and assigns and (b) Lessor and any other Person who may now or hereafter hold the interest of Lessor under this Lease and their respective successors and assigns. Notwithstanding the foregoing, Lessee shall not assign any of its rights or obligations hereunder or under any of the other Lease Documents without the prior written consent of Lessor, in each instance, which consent may be withheld in Lessor's sole and absolute discretion. 24.10 NO THIRD PARTY BENEFICIARIES. This Lease and the other Lease Documents are solely for the benefit of Lessor, its successors, assigns and participants (if any), the Meditrust Entities, the Indemnified Parties, Lessee, the Guarantor, the other members of the Leasing Group and their respective permitted successors and assigns, and, except as otherwise expressly set forth in any of the Lease Documents, nothing contained therein shall confer upon any Person other than such parties any right to insist upon or to enforce the performance or observance of any of the obligations contained therein. All conditions to the obligations of Lessor to advance or make available proceeds of insurance or Awards, or to release any deposits held for Impositions or insurance premiums are imposed solely and exclusively for the benefit of Lessor, its successors and assigns. No other Person shall have standing to require satisfaction of such conditions in accordance with their terms, and no other Person shall, under any circumstances, be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lessor at any time, if, in Lessor's sole and absolute discretion, Lessor deems it advisable or desirable to do so. 24.11 GOVERNING LAW. This Lease shall be construed, and the rights and obligations of Lessor and Lessee shall be determined, in accordance with the laws of the Commonwealth of Massachusetts, except (a) that the laws of the State shall govern this Lease to the extent necessary to obtain the benefit of and/or enforce the rights and remedies set forth herein with respect to the Leased Property and (b) for procedural requirements relating to the Leased Property which must be governed by the laws of the State. To the maximum extent permitted by applicable law, Lessee hereby submits to the jurisdiction of the courts of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceeding arising out of, or with respect to any of the Lease Documents, the negotiation and/or consummation of the transactions evidenced by the Lease Documents, Lessor's relationship with any member of the Leasing Group in connection with the transactions evidenced by the Lease Documents and/or the performance of any obligation or the exercise of any remedy under any of the Lease 123 Documents and expressly waives any and all objections Lessee may have as to venue in any of such courts. 24.12 GENERAL. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease or any of the other Lease Documents shall survive such termination. If any provision of this Lease or any of the other Lease Documents or any application thereof shall be invalid or unenforceable, the remainder of this Lease or the other applicable Lease Document, as the case may be, and any other application of such term or provision shall not be affected thereby. Notwithstanding the foregoing, it is the intention of the parties hereto that if any provision of any of this Lease is capable of two (2) constructions, one of which would render the provision void and the other of which would render the provision valid, then such provision shall be construed in accordance with the construction which renders such provision valid. If any late charges provided for in any provision of this Lease or any of the other Lease Documents are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Lessee waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as to all of the foregoing as expressly provided for herein. 124 ARTICLE 25 SUBSTITUTION OF PROPERTY 25.1 SUBSTITUTION OF PROPERTY FOR THE LEASED PROPERTY. Provided that no default has occurred under this Lease (excluding any default which has been cured in accordance with the terms hereof or which has been waived, in writing, by the Lessor), nor any event which, with the giving of notice or the passage of time or both, would constitute such a default, Lessee shall have the right from time to time (referred to herein as the "Substitution Right"), exercisable upon not less than ninety (90) days' prior written notice to Lessor (referred to herein as a "Substitution Notice") to substitute, on a date specified in such Substitution Notice (such date, as the same may be extended by express written agreement of Lessor, shall be referred to herein as a "Substitution Date"), the Leased Property with a Comparable Facility. As used herein, the term "Comparable Facility" shall be defined as an adult care residence, assisted living facility or other similar senior housing facility which Lessor determines (a) has an appraised Fair Market Value greater than or equal to the greater of (i) the appraised Fair Market Value of the Leased Property at the Commencement Date or (ii) the appraised Fair Market Value of the Leased Property at the time that the applicable Substitution Notice is furnished to Lessor (based on appraisal criteria then in effect), (b) has a Rent Coverage Ratio greater than or equal to the greater of (i) the Rent Coverage Ratio of the Leased Property as of the Commencement Date or (ii) the Rent Coverage Ratio of the Leased Property at the time that the applicable Substitution Notice is furnished to Lessor, (c) provides a mix of services similar to the Leased Property and (d) is otherwise reasonably acceptable, in all respects, to Lessor (based on Lessor's usual and customary property evaluation criteria then in effect). Lessee may not exercise its Substitution Right more than once in any calendar year. 25.2 CONDITIONS TO SUBSTITUTION. Without limiting the foregoing, as conditions precedent to the consummation of any proposed substitution: (a) as of the applicable Substitution Date, no Lease Default shall have occurred (excluding any Lease Default which has been waived, in writing, by Lessor), nor any event which with the giving of notice and/or the passage of time would constitute such a default; (b) Lessor shall have received engineering and inspection reports relating to the medical office building identified by Lessee in the applicable Substitution Notice (referred to herein as a "Proposed Facility"), reasonably satisfactory in all respects to Lessor; (c) Lessee shall have delivered to Lessor (i) an MAI appraisal of the Proposed Facility (prepared by an appraiser selected by Lessee and approved by Lessor), in form and substance reasonably satisfactory to Lessor and (ii) an 125 instrument survey of the premises upon which the Proposed Facility is located acceptable to Lessor and the Title Company; (d) Lessor shall be satisfied as to compliance of Lessee, the Proposed Facility, the owner of the Proposed Facility (to the extent such owner is not Lessee as provided in subsection (l) below) and/or the proposed substitution, as the case may be, with (i) all applicable land use, zoning, subdivision and environmental laws and regulations, (ii) all applicable health-care and/or adult care, assisted living or other similar senior housing licensure laws and regulations and (III) such other matters as Lessor reasonably deems relevant (including, without limitation, whether the conveyance of the property to Lessor in connection with the proposed substitution may be avoided under the Bankruptcy Code); (e) Lessee shall have delivered to Lessor a valid and binding owner's or lessee's (as applicable) title insurance commitment issued by a title insurer reasonably acceptable to Lessor (the "Title Company"), in an amount equal to the Fair Market Value of the Proposed Facility, with such endorsements and affirmative coverages, and in such form, as Lessor may reasonably require insuring Lessor's fee title or leasehold title to the Proposed Facility, subject to no Liens except those approved or assumed by Lessor and arrangements satisfactory to Lessor shall have been made for the issuance of a title insurance policy on the Substitution Date in accordance with such title insurance commitment; (f) Lessee shall have delivered an environmental site assessment report relating to the Proposed Facility, in form and substance reasonably acceptable to Lessor and prepared by an environmental consultant reasonably acceptable to Lessor; (g) Lessor shall have obtained, at Lessee's cost, an opinion of Lessor's counsel, in form and substance acceptable to Lessor, confirming that (i) the substitution of the Proposed Facility for the Leased Property will qualify as an exchange solely of property of a like-kind under Section 1031 of the Code, in which, generally, except for "boot" such as cash needed to equalize exchange values or discharge indebtedness, no gain or loss is recognized to Lessor, (ii) the substitution or sale will not result in ordinary recapture income to Lessor pursuant to Code Section 1250(d)(4) or any other Code provision, (iii) the substitution or sale will result in income, if any, to Lessor of a type described in Code Section 856(c)(2) or (3) and will not result in income of the types described in Code Section 856(c)(4) or result in the tax imposed under Code Section 857(b)(6) and (iv) the substitution or sale, together with all other substitutions and sales made or requested by Lessee or any Affiliate of Lessee or of any Guarantor pursuant to any other leases with Lessor (or any of its Affiliates) or any other transfers of the Leased Property or the properties leased under other such leases, during the relevant time period, will not jeopardize the qualification of Lessor as a real estate investment trust under Code Sections 856-860; 126 (h) Lessor shall have received opinions of Lessee's counsel as to (i) the compliance of the Proposed Facility with land use, zoning, subdivision and environmental laws and regulations, (ii) the compliance of Lessee, the owner of the Proposed Facility (to the extent such owner is not Lessee as provided in subsection (l) below), the proposed substitution and the Proposed Facility with applicable health care, adult care, assisted living and/or other similar senior housing laws and regulations, (iii) the due authorization, execution and enforceability of the Substitution Documents and (iv) such other matters as are reasonably requested; in form and substance reasonably acceptable to Lessor; (i) Lessee and the Guarantor shall have executed and delivered, or caused to be executed and delivered, such documents as are reasonably required by Lessor to effectuate the substitution (collectively, the "Substitution Documents"), including, without limitation, (i) a deed with full warranties or assignment of a leasehold estate with full warranties (as applicable) conveying to Lessor title to the Proposed Facility free and clear of all Liens, except those approved or assumed by Lessor, (ii) a facility lease (the "Substitution Lease") duly executed, acknowledged and delivered by Lessee, containing the same terms and conditions as are contained herein except that (1) the legal description of the land shall refer to the Proposed Facility, (2) the Meditrust Investment in the Proposed Facility shall be an amount equal to the Meditrust Investment in the Leased Property increased by any Cash Adjustment paid by Lessor, (3) the Rent under the Substitution Lease in all respects shall provide Lessor with a substantially equivalent yield at the time of the substitution (i.e., annual return on its equity in such Proposed Facility) to that received (and reasonably expected to be received thereafter) from the Leased Property, taking into account the Cash Adjustment, if any, paid by Lessor and any other relevant factors and (4) such other changes therein as may be necessary or appropriate under the circumstances shall be made; (iii) a collateral assignment of permits, licenses, approvals and contracts relating to the Proposed Facility, substantially in the form of the Lessee Permits Assignment; (iv) UCC financing statements and (v) an affiliated party subordination agreement, substantially in the form of Affiliated Party Subordination Agreement, shall be executed by the parties to the Affiliated Party Subordination Agreement and such other Persons as are deemed necessary or appropriate by the Lessor. The Substitution Documents shall be based upon and contain the same terms and conditions as are set forth in Lessee Documents in effect prior to the substitution, except that such changes shall be made as may be necessary or reasonably appropriate under the circumstances to effectuate the substitution and secure the protection and priority of the property and security interests conveyed and/or granted to Lessor; (j) without limiting any other provision contained herein, Lessee shall have delivered to Lessor such other information and materials relating to Lessee, the owner of the Proposed Facility (to the extent that such owner is not Lessee as provided in subsection (l) below) and the Proposed Facility as Lessor may reasonably request, including, without limitation, leases, receipted bills, management agreements and other Contracts, Provider Agreements, cost reports, 127 Permits, evidence of legal and actual access to the Proposed Facility, evidence of the availability and sufficiency of utilities servicing the Proposed Facility, historical and current operating statements, detailed budgets and financial statements and Lessor shall have found the same to be satisfactory in all respects; (k) without limiting Lessee's obligations to pay the Substitution Closing Costs in accordance with the provisions of Section 25.4, Lessee shall also pay to Lessor a fee equal to one percent (1%) of the Meditrust Investment; (l) the Proposed Facility shall be owned or leased by Lessee or an Affiliate of Lessee that is acceptable to Lessor; provided, however, that in the event that the Proposed Facility is owned by any such Affiliate, (i) said Affiliate shall execute and deliver to Lessor such Substitution Documents as may be reasonably required by Lessor and (ii) Lessor shall be provided with such evidence as it may require to determine that the conveyance of the Proposed Facility (or a leasehold interest therein) to Lessor does not constitute a fraudulent conveyance (under applicable federal or state law); (m) Lessee shall have delivered to Lessor an insurance certificate evidencing compliance with all of the insurance requirements set forth in the Substitution Documents; (n) Lessee shall have delivered to Lessor an Officer's Certificate certifying as of the Substitution Date that (i) the Proposed Facility has been accepted by Lessee for all purposes of the Substitution Lease and there has been no material damage to the improvements located on the Proposed Facility, nor is any condemnation or eminent domain proceeding pending with respect thereto; (ii) all Permits (including, but not limited to, a permanent, unconditional certificate of occupancy) which are necessary to permit the use of the Proposed Facility in accordance with the provisions of the Substitution Lease have been obtained and are in full force and effect; (iii) under applicable zoning and use laws, ordinances, rules and regulations, the Proposed Facility may be used for the purposes contemplated by Substitution Documents and all necessary subdivision approvals have been obtained; (iv) to the best knowledge of Lessee, there exists no Lease Default under this Lease, and no defense, offset or claim exists with respect to any sums to be paid by Lessee hereunder, and (v) any exceptions to Lessor's title to the Proposed Facility do not materially interfere with the intended use of the Proposed Facility by Lessee; (o) Lessor shall have determined that the Proposed Facility constitutes a Comparable Facility; and (P) Lessor shall have received all Rent due and payable hereunder through the Substitution Date. 128 In the event that the equity value of the Proposed Facility (i.e., the Fair Market Value of the Proposed Facility minus the Liens to which Lessor will take the Proposed Facility subject) as of the Substitution Date is greater than the equity value of the Leased Property (i.e., the Fair Market Value of the Leased Property minus the Liens to which Lessee will take the Leased Property subject other than those Liens which Lessee is obligated to pay or discharge pursuant to the terms of this Lease) as of the Substitution Date, subject to the limitation set forth below, Lessor shall pay an amount equal to the difference to Lessee; provided, however, that Lessor shall not be obligated to consummate such substitution if Lessor would be required to make a payment to Lessee of an amount equal to or in excess of fifteen percent (15%) of said Fair Market Value of the Leased Property (the amount of cash paid by Lessor to Lessee being referred to herein as the "Cash Adjustment"). Without limiting the generality or effect of the preceding sentence, in the event that, on the Substitution Date, Lessor is obligated to pay a Cash Adjustment to Lessee and Lessor does not have sufficient funds available, or elects not to make such payment in cash, Lessor shall provide Lessee with (and Lessee shall accept) a purchase money note and mortgage for a term not to exceed eighteen (18) months from the Substitution Date and bearing interest, payable monthly, at a rate of interest equal to one hundred ten percent (100%) of the applicable federal rate (determined at the time of execution of such note pursuant to Section 1274 of the Code or any successor section thereto), compounded semi-annually, or, if no such rate exists or such rate is in excess of that permitted under applicable law, at the Prime Rate, which interest shall be payable monthly in arrears. 25.3 CONVEYANCE TO LESSEE. If the Lessor shall have determined that the Proposed Facility constitutes a Comparable Facility, on the Substitution Date, after the consummation of a substitution in accordance with the terms hereof, Lessor will convey the Leased Property to Lessee in accordance with the provisions of Article 18 (except as to payment of any expenses in connection therewith which shall be governed by Section 25.4 below) and this Lease shall thereupon terminate as to the Leased Property. Upon completion of the purchase of the Leased Property, no Rent shall thereafter accrue with respect thereto. 25.4 EXPENSES. Whether or not any proposed substitution is consummated, Lessee shall pay all of the out-of-pocket expenses and other costs incurred or expended by Lessor in connection with any proposed substitution (collectively referred to herein as "Substitution Closing Costs"), including, without limitation, reasonable attorneys' fees and expenses, engineering costs, consultants' fees, appraisal costs, audit and tax review costs, out-of-pocket travel expenses, inspection fees, title insurance premiums and other title fees, survey expenses, mortgage taxes, transfer, documentary stamp and other taxes, search charges of any nature, recording, registration and filing costs, broker's fees and commissions, if any, escrow fees, fees and expenses, if any, incurred in qualifying Lessor and maintaining its right to do business in the state where the Proposed Facility is located, the cost of obtaining, preparing and recording a release of the Leased Property from the lien of any Fee Mortgage (other than the amount necessary to payoff such Fee Mortgage) and any other costs expended or incurred by Lessor in connection with the preparation for and the documentation and/or the closing of the proposed substitution. The 129 Substitution Closing Costs shall be a demand obligation of Lessee to Lessor and, if not paid within ten (10) days after demand, shall thereafter (to the extent permitted by applicable law) bear interest at the Overdue Rate until the date of payment. [SIGNATURES BEGIN ON NEXT PAGE] 130 IN WITNESS WHEREOF, the parties have caused this Lease to be executed and attested by their respective officers thereunto duly authorized. WITNESS: LESSEE: ___________________________________ By: Name: Name: Title: WITNESS: LESSOR: MEDITRUST COMPANY LLC, a Delaware limited liability company By: Name: Name: Title: EX-10.3 3 BALANCED CARE CORPORATION 1 Exhibit 10.3 SCHEDULE TO FORM OF MEDITRUST FACILITY LEASE FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Facility Lessee Current Facility Note Location Manager - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Hendersonville, TC Realty of Balanced Care at 66 beds located in 60 $857,000 TN Hendersonville, Inc. Hendersonville, Inc. units to be known as Balanced Care, Hendersonville - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Knoxville, TC Realty of Balanced Care at 106 beds located in $1,984,000 TN Knoxville, Inc. Knoxville, Inc. 106 units to be known as Outlook Pointe at Knoxville - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Kingsport, TC Realty of Balanced Care at 66 beds located in 60 $824,000 TN Kingsport, Inc. Kingsport, Inc. units to be known as Balanced Care, Kingsport - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Chesterfield, TC Realty of Balanced Care at 80 beds located in 80 $1,167,000 VA Chesterfield, Inc. Chesterfield, Inc. units to be known as Outlook Pointe at Chesterfield - ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- Option Agreement Original Working Facility Meditrust Capital Reserve Location Investment - ------------------------ ---------------------- ---------------------- ----------------------- Hendersonville, Dated as of January $483,623.09 $857,000.00 TN 14, 1998 by and between the Guarantor and The Blue Grass Yacht and Country Club, Inc., and others - ------------------------ ---------------------- ---------------------- ----------------------- Knoxville, Dated as of November $478,640.01 $1,984,000.00 TN 18, 1997 by and between the Guarantor and Mitchell L. Robinson and Natalie L. Robinson - ------------------------ ---------------------- ---------------------- ----------------------- Kingsport, Dated as of December $333,598.10 $824,000.00 TN 8, 1997 by and between the Guarantor and R. Mack Slaughter and Michael L. Hartgrove - ------------------------ ---------------------- ---------------------- ----------------------- Chesterfield, Dated as of August $437,069.26 $1,167,000.00 VA 29, 1997 by and between the Guarantor and James R. Sowers, Jr. and W.J. Rowe, Jr. - ------------------------ ---------------------- ---------------------- -----------------------
EX-10.4 4 BALANCED CARE CORPORATION 1 Exhibit 10.4 FORM OF LEASEHOLD IMPROVEMENT AGREEMENT AMONG MEDITRUST COMPANY LLC AND BCC DEVELOPMENT AND MANAGEMENT CO. AND TC REALTY OF ____________, INC. DATED AS OF JUNE 30, 1998 (____________) 2 LEASEHOLD IMPROVEMENT AGREEMENT AMONG MEDITRUST COMPANY LLC AND BCC DEVELOPMENT AND MANAGEMENT CO. AND ______________________________ SUMMARY OF TABLE OF CONTENTS 1. BACKGROUND 1.1 The Parties 1.1 The Land and Existing Improvements 1.3 The Facility Lease 1.4 Project 1.5 Lessor's Agreement to Fund the Project and Developer's Agreement to Supervise the Project 1.6 Plans; the Architect and Architect's Contract 1.7 Construction Contracts 1.8 Schedule of Work and Completion Date; Schedule of Draws 1.9 Project Budget 1.10 Use of Project Funds 1.11 Lessee's Agreement to Pay Rent 1.12 Guarantees, Indemnities and Other Agreements 1.13 Access to the Leased Property 2. DEFINITIONS 3. FEES 3.1 Leasehold Improvement Fee 3.2 Development Fee 4. LEASE DOCUMENTS AND DEVELOPMENT DOCUMENTS; COLLATERAL SECURITY 4.1 Lease Documents 4.2 Lease Obligations and Development Obligations 4.3 Collateral Security 5. REPRESENTATIONS AND WARRANTIES 5.1 Architect's Contract 5.2 Project Plans 5.3 Prior Construction Work 5.4 Suitability of Project Plans 5.5 Compliance with Legal Requirements and Applicable Agreements 5.6 Permits and Contracts 5.7 First Advance 5.8 Prior Services 6. COVENANTS 6.1 Collection and Enforcement Costs 3 6.2 Agreements to Perform Certain Obligations 6.3 Continuing Effect of Representation and Warranties 6.4 Construction Covenants 6.4.01 Commencement of Construction 6.4.02 Quality of Materials and Workmanship 6.4.03 Project Budget 6.4.04 Architect Certificates 6.4.05 Subcontractors 6.4.06 The Lessor's Consultant 6.4.07 Title To Materials and Security Interest Granted to Lessor 6.4.08 Compliance With Legal Requirements And Applicable Agreements 6.4.09 Liens 6.4.10 Books And Records 6.4.11 Inspection Of Construction 6.4.12 Notice Of Delay 6.4.13 Bonds 6.4.14 Use of Project Funds 6.4.15 Occupancy of the Project 7. ADVANCES OF PROJECT FUNDS 7.1 Conditions Precedent to First Advance of Project Funds 7.2 The Lessor's Right to Advance 7.3 Submission of Requests for Advances 7.4 Advances by Wire Transfer 7.5 Conditions Precedent to All Advances 7.6 Completion of the Project 7.7 Condition of the Project 8. THE LESSOR'S RIGHT TO MAKE PAYMENTS AND TAKE OTHER ACTION 9. INSURANCE; CASUALTY; TAKING 9.1 General Insurance Requirements 9.2 Fire or Other Casualty or Condemnation 10. EVENTS OF DEFAULT 11. REMEDIES IN EVENT OF DEFAULT 12. GENERAL 13. TERM EXHIBIT A DESCRIPTION OF THE LAND EXHIBIT B PLANS AND SPECIFICATIONS EXHIBIT C SCHEDULE OF CONSTRUCTION EXHIBIT D PROJECT BUDGET EXHIBIT E DEFINITIONS EXHIBIT F FUTURE PERMITS AND CONTRACTS REQUIRED FOR COMPLETION OF CONSTRUCTION AND COMMENCEMENT OF OPERATION EXHIBIT G SURVEY EXHIBIT H SURVEYOR'S CERTIFICATE EXHIBIT I ARCHITECT'S CERTIFICATE AND CIVIL ENGINEER'S CERTIFICATE EXHIBIT J BCC DEVELOPMENT AND MANAGEMENT CO. REQUISITION CERTIFICATE EXHIBIT K GENERAL CONTRACTOR'S REQUISITION CERTIFICATE EXHIBIT L ARCHITECT'S REQUISITION CERTIFICATE 4 LEASEHOLD IMPROVEMENT AGREEMENT (____________) THIS LEASEHOLD IMPROVEMENT AGREEMENT is made as of June 30, 1998 by and among BCC DEVELOPMENT AND MANAGEMENT CO., a Delaware corporation (the "Developer"), TC REALTY OF ____________ INC., a Delaware corporation (the "Lessee"), and MEDITRUST COMPANY LLC, a Delaware limited liability company (the "Lessor"). 1. BACKGROUND 1.1. THE PARTIES. The Lessee is a Delaware corporation. The Developer is (a) a Delaware corporation with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, Pennsylvania 17055 and (b) a wholly-owned subsidiary of the Guarantor (as hereinafter defined). The Guarantor is a Delaware corporation with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, Pennsylvania 17055. 1.2. THE LAND AND EXISTING IMPROVEMENTS. The Lessor is the owner of a certain parcel of land located in _____________________________ and more particularly described on EXHIBIT A (the "Land"), together with the existing buildings and other improvements, if any, located thereon (collectively, the "Existing Improvements") 1.3. THE FACILITY LEASE. The Lessor and the Lessee have entered into that certain Facility Lease Agreement of even date herewith (the "Facility Lease") relating to the Land and the Improvements (as hereinafter defined), a notice of which is to be recorded with the Clerk of Circuit Court in and for _____________________________. 1.4. PROJECT. The Lessor proposes to cause the Developer to construct an adult care residence with ______ (__) licensed beds (located in ______ (__) units) and certain other 5 improvements more particularly described on the Project Plans (as hereinafter defined), including, without limitation, accessory parking and landscaping on the Land (collectively, the "Improvements"). The Land, the Existing Improvements and the Improvements are collectively referred to herein as the "Project". 1.5. LESSOR'S AGREEMENT TO FUND THE PROJECT AND DEVELOPER'S AGREEMENT TO SUPERVISE THE PROJECT. The Lessee and the Lessor have agreed that the Project will be a benefit to the premises demised under the Facility Lease and to the Lessee's and the Lessor's respective interests therein. The Lessor and the Lessee have further agreed that, pursuant to, and in accordance with, the terms and conditions of this Agreement, the Lessor shall fund to the Developer an amount not to exceed _____________________________________________________ DOLLARS ($_________.00) of the cost of the Project (the "Project Funds") and, in accordance with the terms hereof, the Developer has agreed to supervise and manage, the construction of the Project. Subject to the terms and conditions hereof, the Lessor hereby agrees to advance to the Developer an amount not to exceed the Project Funds to pay for the cost of the construction of the Project and the Developer hereby agrees to supervise and manage the construction of the Project; all pursuant to the terms and conditions of this Agreement. 1.6. PLANS; THE ARCHITECT AND ARCHITECT'S CONTRACT. The Project is to be constructed and equipped in accordance with the plans and specifications (collectively, the "Project Plans"), listed on EXHIBIT B prepared by __________________________________ (the "Architect") pursuant to the contract dated ________________, by and between the Developer and the Architect (the "Architect's Contract"), as the same may be revised in accordance with the terms hereof. 1.7. CONSTRUCTION CONTRACT. All of the Improvements are to be constructed pursuant to a stipulated sum contract (the "Construction Contract") dated ______________ by and between the Developer and __________________________ (the "General Contractor"), as the same may be revised in accordance with the terms hereof. 1.8. SCHEDULE OF WORK AND COMPLETION DATE; SCHEDULE OF DRAWS. 6 The work necessary to complete and fully equip the Project is to be (a) undertaken and completed in accordance with the schedule which is annexed hereto as EXHIBIT C and (b) substantially completed by December 31, 1999 (the "Completion Date"). 1.9. PROJECT BUDGET. The Developer has submitted to the Lessor and the Lessee a line item budget (the "Project Budget"), a copy of which is annexed hereto as EXHIBIT D, setting forth a total cost of ___________________________________ DOLLARS ($_________.00) for the acquisition cost of the Land and the design and construction of the Project, including (a) the cost of the Land, (b) a breakdown of construction costs (itemized as to trade category, subdivision of the work to be performed and the names of each contractor), (c) a breakdown of all soft costs in connection with the construction of the Project, including, without limitation, costs for such items as real estate taxes, legal and accounting fees, survey costs, permits and inspection fees, insurance premiums, architect's and engineer's fees, marketing, management, leasing and advertising expenses, and all amounts due in connection with the advance of Project Funds pursuant to this Agreement, (d) the Working Capital Reserve (as hereinafter defined) in an amount equal to the original principal balance of the Note (as hereinafter defined), (e) a projected draw schedule and (f) a projected progress schedule for the construction of the Project. 1.10. USE OF PROJECT FUNDS. The Project Funds are to be used, to the extent sufficient therefore, solely for the payment of Project costs set forth in the Project Budget. Without limiting any other provision set forth herein, in the event that the total amount of the Project Funds is not sufficient for the payment of the Project costs set forth in the Project Budget (or the actual costs incurred in connection with the completion of construction of the Project), the Developer shall, nevertheless, remain obligated, at its sole cost and expense, to complete the construction of the Project in accordance with the terms hereof. 7 1.11. LESSEE'S AGREEMENT TO PAY RENT. Subject to all of the terms, conditions and provisions of this Agreement, and of the agreements and instruments referred to herein, the Lessee, in consideration of the Lessor (a) arranging for the construction of the Project, which shall inure to the benefit of the Lessee, and (b) advancing sums hereunder to fund such construction, agrees to pay the Rent (as hereinafter defined) due under the Facility Lease (as the same may from time to time be adjusted pursuant to the terms and conditions set forth therein); it being understood that the Lessee shall be liable for the payment of Rent regarding all such sums as shall have been advanced by the Lessor from time to time under this Agreement, including, without limitations, all amounts which the Lessor may, but, is not obligated to advance, in excess of the Project Funds, pursuant to the provisions of Section 6.1, Section 6.4.06, Section 8 and/or Section 11 hereof. 1.12. GUARANTIES, INDEMNITIES AND OTHER AGREEMENTS. As an inducement to the Lessor to acquire the Land, enter into this Agreement, advance the Project Funds and enter into the Facility Lease, (i) the Guarantor has agreed to furnish certain guaranties as hereinafter described and certain working capital loans as more particularly described in the Working Capital Assurance Agreement (as hereinafter defined) and (ii) the Pledgor (as hereinafter defined) has agreed to make equity contributions to the Lessee, in amounts equal to the advances from time to time made to the Pledgor by the Lessor under the Note, to provide the Lessee with funds to fulfill its working capital obligations. 1.13. ACCESS TO THE LEASED PROPERTY. Without limiting any provisions set forth in this Agreement or any of the other Lease Documents with respect to the Lessor's rights of access to the Leased Property, the Lessee shall allow the Developer and the Developer's agents, contractors, subcontractors, employees, representatives, consultants and invitees to have such access to the Leased Property as the Developer deems necessary in order to allow the Developer to complete the construction of the Project in accordance with the terms hereof and to perform all of its obligations hereunder. 8 2. DEFINITIONS In this Agreement, except as otherwise expressly provided in the text of this Agreement or unless the context otherwise requires, all capitalized terms shall have the meaning ascribed to them in EXHIBIT E. 3. FEES. 3.1. LEASEHOLD IMPROVEMENT FEE. The Lessee shall pay the Leasehold Improvement Fee to the Lessor simultaneously with the execution of this Agreement (which Leasehold Improvement Fee shall be included in the Project Budget and shall be advanced hereunder in connection with the initial advance of the Project Funds); provided, however, that, at the Lessor's option, the Leasehold Improvement Fee shall be held in an escrow account established with a Person designated by the Lessor pursuant to an escrow arrangement satisfactory to the Lessor, with interest thereon benefiting the Lessor. If the Lessor exercises its option to require that the Leasehold Improvement Fee be held in such an escrow account (a) the Leasehold Improvement Fee shall be disbursed from said escrow account only upon the joint instructions of the Lessee and the Lessor (which instructions from the Lessee shall be immediately given upon the request of the Lessor) and in no event shall the Leasehold Improvement Fee be disbursed therefrom, in whole or in part, unless and until so requested by the Lessor and (b) the Lessor shall bear the risk of loss of or misappropriation of the Leasehold Improvement Fee by such escrow agent. 3.2. DEVELOPMENT FEE. As compensation for the performance of the Developer's obligations hereunder, the Lessor agrees that the Development Fee shall be included within the Project Budget and shall be payable to the Developer, subject to the Lessor's right to set-off any amounts owed to the Lessor by the Developer hereunder or under any of the other Development Documents, as follows: (a) ___________________________ DOLLARS ($_______.00) upon the first advance of Project Funds hereunder and (b) from and after the completion of seventy-five percent (75%) of the Project, the remainder of the Development Fee shall be disbursed in equal installments in connection with the monthly advances of Project Funds. Notwithstanding the foregoing, the Lessee acknowledges and agrees that any amounts that are set-off by the Lessor against the sums that are due hereunder from the Developer to the Lessor, shall nevertheless, for all purposes of this Agreement, be deemed to have been advanced hereunder (even if the aggregate amount of 9 such sums so advanced and all amounts previously advanced hereunder exceed the amount of the Project Funds which the Lessor has agreed to advance hereunder) and the Lessee agrees to pay to the Lessor Rent under the Facility Lease, calculated, in part, thereunder based upon all sums advanced hereunder. 4. LEASE DOCUMENTS; COLLATERAL SECURITY 4.1. LEASE DOCUMENTS AND DEVELOPMENT DOCUMENTS. The Project Funds shall be advanced, evidenced and administered, in accordance with the terms of this Agreement and shall be secured and governed by all of the terms, conditions and provisions of each of the following: A. this Agreement; B. a Collateral Assignment of Permits, Approvals, Licenses, and Contracts of even date granted by the Developer to the Lessor (the "Developer Permits Assignment") and related UCC Financing Statements; C. an Environmental Indemnity Agreement of even date by and among the Lessee, the Developer, and the Lessor (the "Environmental Indemnity Agreement"); D. a Guaranty of even date executed by the Guarantor for the benefit of the Lessor guarantying the completion of the Project and the satisfaction of the other Guarantied Obligations (the "Guaranty"); E. an Assignment of Construction Contract granted by the Developer to the Lessor and containing the consent of the General Contractor (the "Construction Assignment"); F. an Assignment of Architect's Contract of even date granted by the Developer to the Lessor and containing the consent of the Architect (the "Architect's Assignment"); and G. all other documents, instruments, or agreements now or hereafter evidencing or securing the obligations of the Developer under this Agreement. Items (A) through (G) above, as the same from time to time may be hereinafter amended, modified or supplemented, are referred to herein as the "Development Documents". 10 The Lessee's obligations with respect to the Land and the Project shall be evidenced, administered, secured and governed by all of the terms, conditions and provisions of each of the following: i. this Agreement; ii. the Facility Lease; iii. a Collateral Assignment of Permits, Approvals, Licenses, and Contracts of even date granted by the Lessee to the Lessor (the "Lessee Permits Assignment") and related UCC Financing Statements; iv. a Security Agreement of even date by and between the Lessee and the Lessor (the "Security Agreement"); v. the Environmental Indemnity Agreement; vi. a Deposit Pledge Agreement of even date by and between the Lessee and the Lessor (the "Deposit Pledge Agreement"); vii. a Pledge Agreement of even date by and among the Lessee, the Lessor and TC Realty Holding Company (the "Pledgor"), pursuant to which the Pledgor granted the Lessor a security interest in all of the outstanding capital stock of the Lessee (the "Pledge Agreement") and related stock powers; viii. an Affiliated Party Subordination Agreement of even date by and among the Lessee, the Guarantor, the Current Manager, the TC Realty Parties (as hereinafter defined) and the Lessor (the "Affiliated Party Subordination Agreement"); ix. the Amended and Restated Agreement Regarding Related Lease Transactions of even date by and among the Lessee, the Tenant Parties and the Lessor (the "Agreement Regarding Related Lease Transactions"); and x. all other documents, instruments, or agreements now or hereafter evidencing or securing the obligations of the Lessee under this Agreement and/or the Facility Lease, including, without limitation, the First Leasehold Mortgage (as hereinafter defined) and the Lessee's Guaranty (as hereinafter defined). Items (i) through (x) above, as the same from time to time may be hereinafter amended, modified or supplemented, are referred to herein as the "Lease Documents". 11 4.2. LEASE OBLIGATIONS AND DEVELOPMENT OBLIGATIONS. The Lessee agrees to pay and perform all of its indebtedness, covenants, liabilities, obligations, agreements and undertakings under this Agreement and all of the other Lease Documents (collectively, the "Lease Obligations"). The Developer agrees to pay and perform all of its indebtedness, covenants, liabilities, obligations, agreements and undertakings under this Agreement and all of the other Development Documents (collectively, the "Development Obligations"). 4.3. COLLATERAL SECURITY. The Lease Obligations shall be secured by the following: A. a perfected first priority security interest in the Lessee's interest in all Permits and Contracts pursuant to the Lessee Permits Assignment; B. a perfected first priority security interest in Tangible Personal Property, Receivables and certain other Collateral pursuant to the Security Agreement; C. the Environmental Indemnity Agreement; D. a perfected first priority security interest in all of the outstanding capital stock of the Lessee pursuant to the Pledge Agreement; E. a perfected first priority interest in the Cash Collateral pursuant to the Deposit Pledge Agreement; F. all other security interests in such other property for which provision is made in the Lease Documents or at law or in equity; and G. certain other Related Party Agreements. All of the property in which security interests are granted (i) as described in items (A) through (G) above and (ii) pursuant to any other Lease Document is collectively referred to herein as the "Lessee Collateral". The Development Obligations shall be secured by the following: 1. a perfected first security interest in the Developer's interest in all Permits and Contracts pursuant to the Developer Permits Assignment; 12 2. the Guaranty; 3. the Environmental Indemnity Agreement; and 4. all other security interests in such other property for which provision is made in the Development Documents or at law or in equity. All of the property in which security interests are granted (i) as described in items (1) through (4) above and (ii) pursuant to any other Development Document is collectively referred to herein as the "Developer Collateral." 5. REPRESENTATIONS AND WARRANTIES In order to induce (a) the Lessor to advance the Project Funds pursuant to the terms and conditions of this Agreement and (b) the Lessee to agree to be liable for the payment of Rent regarding such sums as shall have been advanced from time to time under this Agreement, the Developer represents and warrants to the Lessor and the Lessee that: 5.1. ARCHITECT'S CONTRACT. The Architect's Contract has been validly executed by and is binding upon the parties thereto and is in full force and effect in accordance with the terms thereof. All of the parties to the Architect's Contract have faithfully performed all of their respective obligations thereunder to the extent accrued as of the date hereof, and none of the parties to the Architect's Contract has asserted any claim of default thereunder. 13 5.2. PROJECT PLANS. The two (2) copies of the Project Plans delivered to the Lessor and the Lessee by the Developer (a) are true and correct and satisfactory to the Developer and (b) have been filed with and approved by all appropriate Governmental Authorities. All necessary Permits relating to the Project Plans to be issued or granted by any applicable Governmental Authority having or claiming jurisdiction over the Leased Property have been obtained and all such Permits are in full force and effect, are not subject to any unexpired appeal periods or any appeals or challenges which have not been fully resolved in favor of the Leased Property, the Project or Developer, as the case may be, and do not contain any conditions or terms relating to the Leased Property which have not been fully satisfied or which will not be fully satisfied by the completion of the construction of the Project (in accordance with the Project Plans and the terms and provisions of this Agreement). Furthermore, the Project Plans have been approved in writing by the Lessor and the Lessee, any construction heretofore performed on the Project has been performed in accordance with the Project Plans and all future construction on the Project shall be performed in accordance with the Project Plans and the terms and conditions of this Agreement. There are no structural defects in the Project of which the Developer has been advised or of which the Developer has notice or knowledge. The Developer has not received any notice claiming that, and the Developer has no knowledge that, the Project Plans violate any Legal Requirement. 5.3. PRIOR CONSTRUCTION WORK. No Person has commenced or performed any construction work or furnished any services in connection with any construction carried on or to be carried on at the Leased Property meaning, without limitation, that no lumber, brick, pipe, tile or other building material has been delivered to the Leased Property, there has been no grading or excavating of the Leased Property, no lines or grade stakes have been laid out, and no existing structure has been demolished, and no Person will commence or perform any such construction work or services or furnish such materials on the Leased Property until after this Agreement, the Facility Lease and the other Lease Documents have been executed by all parties thereto and a memorandum or notice of the Facility Lease has been filed of record in the office of the Clerk of the Circuit Court in the county in which the Leased Property is situated. 5.4. SUITABILITY OF PROJECT PLANS. The Project Plans provide (a) for the construction and renovation of all buildings and related improvements necessary, both legally and practically, for the proper and 14 efficient construction of the Project in accordance with the terms of this Agreement and (b) after the completion of the construction of the Project, for the operation of the Project for its Primary Intended Use. 5.5. COMPLIANCE WITH LEGAL REQUIREMENTS AND APPLICABLE AGREEMENTS. Upon the completion of construction of the Project, which shall be constructed in accordance with the Project Plans and the terms and provisions of this Agreement, the Project shall be in compliance with (a) all Legal Requirements; (b) all Permits and Contracts and (c) all applicable by-laws, codes, rules, regulations and restrictions of the Board of Fire Underwriters or other insurance underwriters or similar bodies. 5.6. PERMITS AND CONTRACTS. All Permits and Contracts required by or entered into with any Governmental Authority or quasi-governmental authority or agency for, or in connection with, the construction of the Project that can be obtained in the ordinary course as of the date hereof have been obtained or executed, as the case may be. All such Permits and Contracts are in full force and effect, are not subject to any unexpired appeal periods or any appeals or challenges which have not been conclusively resolved in favor of any member of the Leasing Group, and do not contain any conditions or terms which have not been fully satisfied or which will not be fully satisfied by the completion of the construction of the Project (if constructed in accordance with the Project Plans and the terms and provisions of this Agreement). There is no action pending, or, to the best knowledge and belief of the Developer, recommended by the applicable Governmental Authority having jurisdiction thereof, either to revoke, repeal, cancel, modify, withdraw or suspend any such Permit or Contract relating to the construction of the Project, or any other action of any other type which would have a material adverse effect on the Project. All other Permits and Contracts required for the completion of the construction of the Project and the commencement of the operation of the Facility are described on EXHIBIT F and the Developer knows of no impediment to the future issuance or execution of such Permits and Contracts and has no reason to believe that such Permits and Contracts will not be obtained as and when needed. 5.7. FIRST ADVANCE. As of the date of the first advance of Project Funds to the Developer pursuant to this Agreement, the amount of the money expended by the Developer on account of the construction of the Project in accordance with the Project Plans and the items listed on Project Budget will not be less than the amount of such first advance. 15 5.8. PRIOR SERVICES. Prior to the date of this Agreement, the Developer has performed the following services in connection with the Project: (a) completing a market analysis to confirm bed need; (b) finding a suitable site and obtaining rights thereto; (c) obtaining the Project Plans; (d) retaining and supervising engineers, architects, land planners, surveyors, consultants, independent contractors, subcontractors, attorneys, service agents, suppliers and other providers of materials or services; (e) pursuing with the appropriate Governmental Authorities obtaining any necessary Permits to allow the use and development of the Project in a manner reflected in the Project Plans and as required hereunder; (f) negotiating and/or entering into contracts for labor, materials and services; (g) coordinating with all applicable Governmental Authorities and securing all necessary Permits to allow the use of the Project in accordance with its Primary Intended Use; (h) negotiating for the provision of utilities to serve the Leased Property and the Project; (i) creating and filing and, where required, arranging for the execution of any easements, plats, maps, plans, declarations of covenants and restrictions, right-of-way deeds and other similar instruments necessary to the development of the Project. 16 6. COVENANTS 6.1. COLLECTION AND ENFORCEMENT COSTS. Upon demand, the Developer and the Lessee shall reimburse the Lessor for all costs and expenses, including, without limitation, attorneys' fees and expenses and court costs, paid or reasonably incurred by the Lessor in connection with the collection of any sum due hereunder, or in connection with the enforcement of (a) any of the Lessor's rights under this Agreement and/or any of the other Development Documents and/or (b) the obligations of the Developer and/or any other member of the Leasing Group under this Agreement or any of the other Development Documents. Any amount due and payable to the Lessor pursuant to the provisions of this Section shall be a demand obligation and, to the extent permitted by law, shall be added to the Development Obligations and the Lease Obligations and shall be secured by the Liens created by the Development Documents and the Lease Documents as fully and effectively and with the same priority as every other obligation of the Developer and/or the Lessee, as the case may be, secured thereby and, if not paid within ten (10) days after demand, shall thereafter, to the extent permitted by applicable law, bear interest at the Overdue Rate until the date of payment. The obligations of the Developer and the Lessee to pay all costs, charges and sums due hereunder shall continue in full force and effect and in no way shall be impaired, until the actual payment thereof to the Lessor. In the event of (a) a sale, conveyance, transfer or other disposition of the Leased Property, (b) any further agreement given to secure the payment of the obligations set forth herein or (c) any agreement or stipulation extending the time or modifying the terms of payment set forth herein; the Developer and the Lessee shall nevertheless remain obligated to pay their respective indebtedness evidenced by this Agreement, as extended or modified by any such agreement or stipulation, unless the Developer and/or the Lessee, as the case may be, are released and discharged from such obligation by a written agreement executed by the Lessor. Notwithstanding the foregoing, and without limiting any other provision set forth in this Agreement, at the Lessor's option, all amounts due and payable hereunder may be advanced by Lessor (even if the aggregate amount of such sums expended and all amounts previously advanced hereunder exceed the amount of the Project Funds which the Lessor has agreed to advance hereunder) and the Lessee agrees to pay to the Lessor Rent under the Facility Lease, calculated, in part, thereunder based upon all sums advanced hereunder. 6.2. AGREEMENTS TO PERFORM CERTAIN OBLIGATIONS. (a) The Developer agrees faithfully to perform, pay and observe all agreements, covenants, indebtedness, obligations and liabilities of the Developer to the Lessor, whether such agreements, covenants, indebtedness, obligations and liabilities are direct or indirect, absolute or contingent, due or to become due, existing or hereafter arising, including, 17 without limitation, all of the Developer's obligations under all of the Development Documents. The payment of all obligations and the performance of all covenants of and agreements by the Developer under the Development Documents shall be absolute and unconditional, irrespective of any defense or any rights or set-off, recoupment or counterclaim the Developer might otherwise have against the Lessor, and the Developer shall pay absolutely net during the Term all payments to be made as prescribed in all of the Development Documents, free of any deductions and without abatement, diminution or set-off. (b) The Lessee agrees faithfully to perform, pay and observe all agreements, covenants, indebtedness, obligations and liabilities of the Lessee to the Lessor, whether such agreements, covenants, indebtedness, obligations and liabilities are direct or indirect, absolute or contingent, due or to become due, existing or hereafter arising, including, without limitation, all of the Lessee's obligations under all of the Lease Documents. The payment of all obligations and the performance of all covenants of and agreements by the Lessee under the Lease Documents shall be absolute and unconditional, irrespective of any defense or any rights or set-off, recoupment or counterclaim the Lessee might otherwise have against the Lessor, and the Lessee shall pay absolutely net during the Term all payments to be made as prescribed in the all of the Lease Documents, free of any deductions and without abatement, diminution or set-off. 6.3. CONTINUING EFFECT OF REPRESENTATION AND WARRANTIES. All representations and warranties contained in this Agreement shall constitute continuing representations and warranties which shall remain true, correct and complete throughout the Term and shall survive the expiration of the Term. 18 6.4. CONSTRUCTION COVENANTS. 6.4.1. COMMENCEMENT OF CONSTRUCTION. The Developer shall commence construction of the Project immediately upon the execution and delivery of this Agreement. The Developer shall diligently and continuously cause the Project to be constructed and completed and made ready for occupancy and use in accordance with the Project Plans all in a manner satisfactory to the Lessor on or before the Completion Date. Notwithstanding anything to the contrary contained herein, the Developer shall be and shall remain unconditionally liable to the Lessor for (a) the complete construction of the Project in accordance with the Project Plans on or before the Completion Date and whether or not proceeds of the Project Funds remaining to be disbursed hereunder, if any, are sufficient to cover all costs of construction and (b) the complete performance of all other obligations, covenants, agreements and liabilities of the Developer hereunder. 19 6.4.2. QUALITY OF MATERIALS AND WORKMANSHIP. The materials used in the Project shall be of the quality called for by the Project Plans, and the workmanship shall be in conformity with the Construction Contract and this Agreement, and both the quality of such materials and such workmanship shall be satisfactory to the Lessor. The Developer shall not make any changes in, and shall not permit the General Contractor or the Architect to make any changes in, the quality of such materials, the Project Plans or the Project Budget, whether by change order or otherwise, without the prior written consent of the Lessor, in each instance (which consent may be withheld in the Lessor's sole and absolute discretion); provided, however, that such consent shall not be required for any individual change (necessitated by job conditions) which has been approved by the Architect, which does not materially affect the structure or exterior of the Project, and the cost of which does not exceed TWENTY-FIVE THOUSAND DOLLARS ($25,000) or which changes, in the aggregate, do not exceed TWO HUNDRED THOUSAND DOLLARS ($200,000) in cost. Notwithstanding the foregoing, prior to making any change in the Project Plans, copies of all change orders shall be submitted by the Developer to the Lessor and the Lessee, and the Developer shall also deliver to the Lessor and the Lessee evidence satisfactory to the Lessor, in its reasonable discretion, that all necessary Permits and/or Contracts required by any Governmental Authority in connection therewith have been obtained or entered into, as the case may be. The Lessee acknowledges and agrees that the Developer may make any changes in, and may permit the General Contractor and the Architect to make any changes in, the quality of the materials for the Project, the Project Plans or the Project Budget without the Lessee's consent provided that (a) the Lessor's consent to any such change is not required hereunder or (b) the Developer has obtained the Lessor's consent to any such change. 6.4.3. PROJECT BUDGET. Upon the request of the Lessor, the Developer shall furnish the Lessor and the Lessee with revisions for the Project Budget to reflect (a) any changes approved by the Lessor to the Project Budget, (b) the total cost of the construction of the Project completed through any specific date and (c) the remaining cost to complete the construction of the Project in accordance with the Project Plans and the terms and provisions of this Agreement. The Lessee acknowledges that any such revisions to the Project Budget that are provided to it pursuant to the terms hereof shall be furnished to the Lessee for informational purposes only. 20 6.4.4. ARCHITECT CERTIFICATES. The Developer agrees to cause the Architect to furnish to the Lessor and the Lessee such statements as to progress and certificates of completion as the Lessor may reasonably require from time to time during such period as this Agreement may be in effect, all without expense to the Lessor or the Lessee. The Lessee acknowledges that any such statements and certificates that are provided to it pursuant to the terms hereof shall be furnished to the Lessee for informational purposes only. The Developer agrees to cause the Architect to make the Project Plans available to the Lessor without expense to the Lessor, and to agree that, in the event that the Lessor shall take over the Project by reason of an occurrence of an Event of Default, the Lessor shall be entitled to use said Project Plans without any additional compensation to the Architect above what is required (and was not previously paid) under the Architect's Contract. 6.4.5. SUBCONTRACTORS. Within sixty (60) days after the date of the execution of this Agreement, the Developer agrees to provide the Lessor with a list of the major subcontractors working on the Project, including an identification by trade and the amount of each subcontract. The Lessor reserves the right of reasonable approval of all subcontractors (collectively, the "Major Subcontractors") under any subcontract the aggregate amount due under which is equal to or greater than ONE HUNDRED THOUSAND DOLLARS ($100,000). The Lessee acknowledges that the Lessee shall have no rights of approval with respect to any subcontractor. The Developer further agrees that the Developer shall not permit any Major Subcontractors working on the Project to change without the Lessor's prior written consent, in each instance, which consent shall not be unreasonably withheld. 6.4.6. THE LESSOR'S CONSULTANT. The Developer agrees to pay, from the Project Funds to be advanced hereunder, the costs and expenses reasonably incurred by the Lessor to retain the Consultants to perform various services to the Lessor in connection with the construction of the Project and the advances of Project Funds contemplated hereunder (or, to pay the Lessor to perform the services that would otherwise be performed by the Consultants), including, without limitation, the following: A. to review and analyze the Project Plans and advise the Lessor whether the same are satisfactory for the intended purposes thereof; 21 B. to make periodic inspections of the Leased Property for the purpose of assuring that construction performed in connection with the Project prior to the date of such inspection has been completed in accordance with the Project Plans and this Agreement; C. to review the Developer's then current requisition to determine whether it is consistent with the obligations of the Developer under this Agreement, and to advise the Lessor of the anticipated costs of, and the time for, the completion of the Project in accordance with the Project Plans, and the adequacy of reserves and contingencies related thereto; D. to review and analyze any proposed changes to the Project Plans and advise the Lessor regarding the same; E. to review and analyze the Project Budget and advise the Lessor as to the sufficiency thereof; and F. to review and analyze the Architect's Contract, Construction Contract and all subcontracts entered into by the Developer or the General Contractor in connection with the construction of the Project and advise the Lessor regarding the same. Except as otherwise expressly provided herein, the Developer agrees promptly to make such changes or corrections, or to cause the General Contractor to make such changes or corrections, in the construction of the Project as may be required by the Lessor, based on the recommendation of any of the Consultants, unless the Developer demonstrates to the Lessor's satisfaction that such corrective work is inconsistent with the Project Plans. 6.4.7. TITLE TO MATERIALS AND SECURITY INTEREST GRANTED TO LESSOR. Except as otherwise expressly provided herein, the Developer shall not suffer or permit the use in connection with any construction relating to the Project of any materials, fixtures or equipment intended to become part of the Project which are purchased upon lease or conditional bill of sale or to which the Developer does not have absolute and unencumbered title. The Developer covenants to cause to be paid punctually all sums becoming due for labor, materials, fixtures or equipment used or purchased in connection with any such construction and, in recognition of the fact that it is intended that the Project Funds be used to pay for the cost of the construction of the Project on behalf of the Lessor, the Developer agrees that title to all materials, fixtures and equipment that are incorporated into the Improvements shall automatically pass to the Lessor 22 upon such incorporation without the need for the execution or delivery of any further instrument of conveyance. Notwithstanding the foregoing, in order to more fully secure the Lessor with reference to all advances of Project Funds made hereunder, the Developer hereby conveys to the Lessor a security interest in all of the Developer's right, title and interest in materials on the Leased Property which are not at any relevant time incorporated into the Project and materials, wherever located, intended for incorporation into the Project. The Developer agrees: A. that the Lessor shall have all the rights, with reference to such security, as a secured party is entitled to hold with reference to any security interest under the UCC; B. that such security interest shall cover cash and non-cash proceeds of such materials; C. that such materials will not be held for sale to others or disposed of by the Developer without the prior written consent of the Lessor and, if at any time located on the Leased Property shall be suitably stored, secured and insured and furthermore, shall not be removed from the Leased Property; and D. that such security interest shall be prior to the rights of any other Person. The undertakings of the Developer in this Section shall also be applicable to any personal property owned by the Developer and used (or to be used) in connection with the Project, whether or not the purchase thereof was financed by advances of Project Funds made by the Lessor. The Developer agrees to execute such instruments as the Lessor may from time to time request to perfect the security interest of the Lessor in any and all rights under this Agreement and the other Development Documents, and any and all property of the Developer which, under applicable provisions of this Agreement and/or any of the other Developer Documents, may or shall stand as security for advances of Project Funds under this Agreement and for the complete payment and performance of the Development Obligations. 23 6.4.8. COMPLIANCE WITH LEGAL REQUIREMENTS AND APPLICABLE AGREEMENTS. The Developer, the Lessee, the Project Plans and the Leased Property and all uses thereof (including, without limitation, the construction of the Project) shall comply with (a) all Legal Requirements, (b) all Permits and Contracts, (c) all applicable by-laws, codes, rules, regulations and restrictions of the Board of Fire Underwriters or other insurance underwriters or similar body, (d) the Development Documents and (e) the Lease Documents. 6.4.9. LIENS. The Leased Property shall at all times be free from any attachment, encumbrance, lis pendens, mechanic's or materialmen's lien or notice arising from the furnishing of materials or labor and, with the exception of the Permitted Encumbrances, all other Liens of any kind, except to the extent that any such Liens are being duly contested in accordance with the terms of the Facility Lease or the terms hereof. The Developer shall not permit the recording of any notice of contract or mechanic's or materialmen's lien relating to construction of the Project. Notwithstanding the foregoing provisions of this Section 6.4.09, the existence of an attachment or lis pendens for a period not in excess of thirty (30) days shall not be deemed to be a default hereunder provided that (a) there shall be no cessation of construction of the Project, (b) an Event of Default has not occurred and (c) the Developer shall proceed promptly to cause such attachment or lis pendens to be removed, but the Lessor shall not be obliged to make any further advance under this Agreement while such attachment or lis pendens remains outstanding, unless a bond, satisfactory to the Lessor, has been posted as security for such attachment or lis pendens. 24 6.4.10. BOOKS AND RECORDS. The Developer shall cause to be kept and maintained, and shall permit the Lessor and its representatives to inspect at all reasonable times, accurate books of accounts in which complete entries will be made in accordance with GAAP reflecting all financial transactions of the Developer (showing, without limitation, all materials ordered and received and all disbursements, accounts payable and accounts receivable in connection with the construction of the Project of the Leased Property). Such books and records must accurately reflect that all funds advanced hereunder for construction of the Project have been used solely for the payment of obligations and expenses properly incurred in connection with said construction in accordance with the terms of the Project Budget. 6.4.11. INSPECTION OF CONSTRUCTION. The Lessor and its representatives including, without limitation, the Consultants, shall, at all times as long as this Agreement remains in effect, have the right to enter the Leased Property, upon reasonable notice to the Developer and at reasonable times (except in the event of an emergency) for the purpose of inspecting the Project and the progress of the work and materials thereon, and if any such inspection reveals that the Developer is not in compliance herewith (in its sole and absolute discretion), then the Lessor shall not be obligated to make any further advances under this Agreement to the Developer. 6.4.12. NOTICE OF DELAY. The Developer shall give to the Lessor and the Lessee prompt written notice of any fire, explosion, accident, flood, storm, earthquake or other casualty or strike, lock out, act of God or interruption of the construction of the Project which is reasonably anticipated to interfere with the ability of the Developer to complete the Project by the Completion Date. 25 6.14.13. BONDS. Within thirty (30) days after the execution of this Agreement, performance, payment and lien bonds, in form and substance and guaranteed by sureties satisfactory to the Lessor (in its sole and absolute discretion), shall be obtained by the Developer in connection with the Construction Contract in an amount at least equivalent to the contract sum due under the Construction Contract, naming the Lessor as a dual obligee and shall be furnished to the Lessor. 6.14.14. USE OF PROJECT FUNDS. The Developer shall utilize all advances by the Lessor pursuant to the terms of this Agreement only for those items for which requisitions are permitted under this Agreement or for reimbursement of expenditures already made for items for which requisitions are so permitted. The Developer agrees to hold all advances by the Lessor hereunder as a trust fund for the purpose of payment of the costs and expenses permitted under this Agreement. 6.4.15. OCCUPANCY OF THE PROJECT. The Developer and the Lessee shall not permit any occupancy of the Project (other than such occupancy as is required in connection with the construction thereto) prior to (a) the substantial completion of that portion of the Project being occupied and (b) the issuance by the appropriate Governmental Authorities of a Certificate of Occupancy (or its equivalent) permitting the occupancy of the Project for its Primary Intended Use. The Project shall not be deemed to have been completed unless and until constructed in accordance with this Agreement and a Certificate of Occupancy (or its equivalent) permitting the occupancy of the Project for its Primary Intended Use has been issued by the applicable Governmental Authorities. 6.5 CONSTRUCTION CONTRACT. The Construction Contract is binding upon the parties thereto in accordance with the terms thereof and shall remain in full force and effect. All of the parties to the Construction Contract shall faithfully perform all of their obligations thereunder. 26 7. ADVANCES OF PROJECT FUNDS 7.1. CONDITIONS PRECEDENT TO FIRST ADVANCE OF PROJECT FUNDS. Prior to the first advance of Project Funds contemplated by this Agreement, and as a condition of the Developer's right to receive any of the proceeds of the Project Funds, the following items shall have been furnished to the Lessor at the Developer's sole cost and expense (which may be paid from the initial advance of the Project Funds as long as such costs are included in the Project Budget): A. An owner's title insurance policy in form and substance satisfactory to the Lessor, in its sole and absolute discretion, issued by a title insurance company or companies satisfactory to the Lessor (the "Title Company") with such endorsements, reinsurance and/or co-insurance as the Lessor may require, insuring the Lessor's fee title to the Leased Property free from all Liens and without exception for (i) filed or unfiled mechanics' liens, (ii) survey matters, (iii) rights of parties in possession, (iv) environmental liens and (v) any other matters of any kind or nature whatsoever other than the Permitted Encumbrances (the "Title Policy"); B. Such evidence as the Lessor may require that the use contemplated for the Project, and all of the improvements and construction contemplated by the Project Plans, comply with all applicable Legal Requirements, to the extent in force and applicable; C. Insurance policies and/or Certificates of Insurance required pursuant to the terms and provisions of the Facility Lease and this Agreement; D. Such evidence as the Lessor may require to determine that the total cost of completion of the Project in all respects, including all related direct and indirect costs as previously approved by the Lessor, will not exceed the total amount set forth in the Project Budget; E. Such evidence as the Lessor may require that the Developer's representations and warranties contained herein and in all of the other Development Documents are true and correct in every material respect and such evidence as the Lessor may require that the Lessee's representations and warranties set forth in the Lease Documents are true and correct in every material respect; 27 F. Such evidence as the Lessor may require as to the satisfaction of such of the terms and conditions of this Agreement and of the other Development Documents as may by their nature be satisfied prior to the making of such advance; G. Such evidence as the Lessor may require that all outstanding Impositions pertaining to the Leased Property have been paid in full; H. A current instrument survey, satisfactory in form and content to the Lessor, prepared in accordance with the requirements set forth in EXHIBIT G (the "Survey") and a certificate substantially in the form of EXHIBIT H (the "Surveyor's Certificate"), prepared and signed by a surveyor licensed to do business in the state where the Leased Property is located with his or her seal affixed thereto; I. True and correct copies of the executed Architect's Contract, all major subcontracts in effect with respect to the Project and the executed Construction Contract, as well as all receipted bills paid by the Developer to the General Contractor and the Architect for goods and/or services rendered with respect to the Project prior to the date hereof; J. True and correct copies of (i) the Project Budget and (ii) the Project Plans, each of which shall be in form and content satisfactory to the Lessor (in its sole and absolute discretion); K. Certificates from engineers and an architect, registered as such in the state where the Leased Property is located, substantially in the forms attached hereto as EXHIBIT I, certifying as to the (i) compliance of the Leased Property with all applicable Legal Requirements, (ii) the availability and adequacy of access/egress to and from the Leased Property and (iii) the availability and adequacy of sewer, drainage, water, electric and other utility services to the lot line of the Leased Property; together with such other assurances concerning the design of the Project as the Lessor may require; L. Opinions, in forms satisfactory to the Lessor (in its sole and absolute discretion), addressed to the Lessor and the Lessee from the Developer's counsel, the Lessee's counsel and the Guarantor's counsel, regarding (i) the due execution, authority and enforceability of the Development Documents and the Lease Documents; (ii) the valid issuance of all Permits required for the construction of the Project, the continuing effectiveness of said Permits and the Developer's and Project's compliance therewith and (iii) such other matters as the Lessor may reasonably request (collectively, the "Opinions"); 28 M. Payment of the Leasehold Improvement Fee (subject, however, to the provisions of Section 3.1 hereof); N. True and correct copies of all Permits and Contracts relating to the construction and operation of the Project (including, without limitation, an unconditional building permit or a building permit that is subject only to such conditions as will be fully satisfied by the completion of the construction of the Project in accordance with the Project Plans and this Agreement); O. Such evidence as the Lessor may require that there has been no material adverse change in the financial condition and strength of the Lessee, the Guarantor and the Developer, and that the Leased Property shall have sustained no impairment, reduction, loss or damage which has not been fully restored and repaired, and that no Condemnation proceedings or other governmental action is or shall be pending against or with respect thereto; P. Such evidence as the Lessor may require that the General Contractor and the Architect maintain adequate insurance, as determined in the Lessor's reasonable discretion; Q. A fully-executed and authorized Architect's Assignment, in form and substance satisfactory to the Lessor; and R. A fully-executed and authorized Construction Assignment, in form and substance satisfactory to the Lessor. 7.2. THE LESSOR'S RIGHT TO ADVANCE THE PROJECT FUNDS. Without at any time waiving any of the Lessor's rights hereunder, the Lessor shall have the right to make the first advance of a portion of the Project Funds hereunder without the satisfaction of each and every condition precedent to the Lessor's obligation to make such advance, and the Developer agrees to accept such advance as the Lessor may elect to make. The making of any advance hereunder shall not constitute an approval or acceptance by the Lessor of any work on the Project theretofore completed. 7.3. SUBMISSION OF REQUESTS FOR ADVANCES OF THE PROJECT FUNDS. Advances under this Agreement shall be made not more than once each month and at least ten (10) Business Days before the date upon which an advance is requested, the Developer shall give notice to the Lessor, specifying the total advance which will be desired, accompanied by: 29 A. Itemized requisitions for advances or, at the Developer's option, for reimbursements to the Developer for prepaid items, signed by the Developer, the Architect and the General Contractor on A.I.A. Forms G702, G702A or G703 or such other form(s) as the Lessor may reasonably require (together with copies of invoices or receipted bills relating to items covered by such requisitions when so requested by the Lessor). All such requisitions shall include an indemnification of the Lessor by the Developer and the General Contractor, jointly and severally, to the extent such indemnification is available from the General Contractor upon the Developer's best efforts to obtain such indemnification, against any and all claims of any subcontractors, laborers and suppliers; B. A certificate executed by the Developer substantially in the form attached hereto as EXHIBIT J; C. A certificate executed by the General Contractor substantially in the form attached hereto as EXHIBIT K; D. A certificate executed by the Architect substantially in the form attached hereto as EXHIBIT L; E. At the Lessor's request, certificates executed by the Consultants in such form as the Lessor may reasonably require; F. An endorsement of the Title Policy issued by the Title Company, satisfactory in form and substance to the Lessor, redating the Title Policy to the date that the then current advance will be made, increasing the coverage afforded by the Title Policy so that the same shall constitute insurance in an amount at least equal to the sum of the amount of the insurance then existing under the Title Policy plus the amount of the then current advance of Project Funds to be disbursed under this Agreement and subject to no additional exceptions other than the Permitted Encumbrances; G. If and when reasonably requested by the Lessor, satisfactory assurance that the construction of the Project has been performed in accordance with the requirements of the Construction Contract, the Project Plans, this Agreement and all of the other Lease Documents and has been inspected and found satisfactory by the parties hereto; H. If and when reasonably requested by the Lessor, an updated Surveyor's Certificate substantially in the form attached hereto as EXHIBIT H and/or updated Engineer's/Architect's Certificates substantially in the forms attached hereto as EXHIBIT I; 30 I. If and when reasonably requested by the Lessor, updated Opinions from the Developer's counsel and the Guarantor's counsel (in form and substance satisfactory to the Lessor in its sole and absolute discretion); J. If and when requested by the Lessor, satisfactory evidence that the Project Funds remaining unadvanced under this Agreement are sufficient for the payment of all related direct and indirect costs for the completion of the Project in accordance with the terms and provisions hereof. If the evidence furnished shall not be reasonably satisfactory to the Lessor, in its sole and absolute discretion, it shall be a condition to the making of any further advance hereunder that the Developer will provide the Lessor with such financial guaranties (whether in the form of a bond, cash deposit, letter of credit or otherwise) as are acceptable to the Lessor, in its sole and absolute discretion, to assure the completion of the construction of the Project in accordance with the Project Plans and the terms and conditions of this Agreement. In the event that the Lessor requires a cash deposit from the Developer, the Developer shall deposit with the Lessor such funds, to be held in an interest bearing account with the interest accruing thereon to the benefit of the Developer, which, together with such unadvanced Project Funds, shall be sufficient to pay all of the aforesaid costs. All funds so deposited with the Lessor, along with the proceeds thereof, shall be disbursed prior to any further advance hereunder; K. A certification of work completed by any Major Subcontractor working on the Project, together with a statement of the payment due therefor; L. Partial lien waivers from the General Contractor, all other contractors and all subcontractors and suppliers for all work theretofore performed; M. If and when reasonably requested, the Developer shall deliver to the Lessor an updated Survey of the Leased Property, acceptable to the Lessor (in its reasonable discretion); and N. Such evidence as the Lessor may require that there has been no material adverse change in the financial condition and strength of the Lessee, the Developer and the Guarantor, and that the Leased Property shall have sustained no impairment, reduction, loss or damage which has not been fully restored and repaired and that no condemnation is or shall be pending against or with respect thereto. The Developer hereby designates David Barber with authority to approve requisitions and to execute certificates to be delivered pursuant to Section 7.3B on behalf of the Developer. 31 7.4. ADVANCES BY WIRE TRANSFER. All advances hereunder shall be made by wire transfer of funds into a bank account maintained by either the Developer or an authorized agent of the Developer. 7.5. CONDITIONS PRECEDENT TO ALL ADVANCES. A. Advances hereunder shall be made solely for the payment of the costs and expenses incurred by the Developer directly in connection with the construction of the Project, consistent with the Project Budget, which are required to be paid out-of-pocket to all other Persons and no advances of Project Funds may be used to refund any part of expenditures from the Developer's own resources on the Project, except to the extent that any Project Funds are used to reimburse the Developer for out-of-pocket expenses incurred by it in accordance with the terms of the Project Budget. No funds advanced by the Lessor shall be utilized for any purpose other than as specified herein and none of the Project Funds shall be paid over to any officer, partner, stockholder or employee of any member of the Leasing Group or to any of the Persons collectively constituting any member of the Leasing Group or those holding a beneficial interest in any member of the Leasing Group, or any employee thereof, except to the extent that Project Funds are used to pay compensation to an employee for and with respect to activity of such employee in construction of the Project. B. The amount of each requisition shall represent (i) the cost of the work completed on the Project as of the date of such requisition which has not been covered by prior requisitions, (ii) the cost of all equipment, fixtures and furnishings included within the Project Budget, but not incorporated into any contract approved by the Lessor, which have been delivered to the Leased Property for incorporation into the Project and have not been covered by prior requisitions; provided, that, in the Lessor's judgment, such materials are suitably stored, secured and insured and that the Developer can furnish the Lessor with evidence satisfactory to the Lessor of the Developer's unencumbered title thereto and (iii) approved soft costs, which have not been covered by prior requisitions. C. All requisitions shall be subject to a ten percent (10%) retainage for the completion of the Project. It is understood that such retainage is intended to provide a contingency fund to assure that the construction of the Project shall be fully completed in accordance with the Project Plans and the terms and provisions of this Agreement. All amounts so withheld shall 32 be disbursed after (i) construction of the Project has been fully completed in accordance with the Project Plans and the terms and provisions of this Agreement, (ii) all of the items set forth in Section 7.6 hereof have been delivered to the Lessor and (iii) the expiration of the period during which liens may be perfected with respect to any work performed or labor or materials supplied in connection with the construction of the Project or the receipt of such evidence as may be required to assure the Lessor that no claim may thereafter arise with respect to any work performed or labor or materials supplied in connection with the construction of the Project. D. At the time of each advance, no event which constitutes, or which, with notice or lapse of time, or both, could constitute, an Event of Default or a Lease Default shall have occurred and be continuing. E. Without at any time waiving any of the Lessor's rights under this Agreement, the Lessor shall always have the right to make an advance hereunder without satisfaction of each and every condition upon the Lessor's obligation to make an advance under this Agreement, and (i) the Developer and the Lessee, as the case may be, agree to accept any advance which the Lessor may elect to make under this Agreement and (ii) the Lessee agrees to be liable for the payment of Rent regarding all such sums as the Lessor may elect to advance under this Agreement. Notwithstanding the foregoing, the Lessor shall have the right, notwithstanding a waiver relative to the first advance or any subsequent advance hereunder, to refuse to make any and all subsequent advances under this Agreement until each and every condition set forth in this Section has been satisfied. The making of any advance hereunder shall not constitute an approval or acceptance by the Lessor of any work on the Project theretofore completed. F. If, while this Agreement is in effect, a claim is made that the Project does not comply with any Legal Requirement or an action is instituted before any Governmental Authority with jurisdiction over the Leased Property or the Developer in which a claim is made as to whether the Project does so comply, the Lessor shall have the right to defer any advance of Project Funds which the Lessor would otherwise be obligated to make until such time as any such claim is finally disposed of favorably to the position of the Developer (or any other member of the Leasing Group), without any obligation on the part of the Lessor to make a determination of, or judgment on, the merits of any such claim. For the purposes of the foregoing sentence, the term "claim" shall mean an assertion by any Governmental Authority or Person as to which, in each case, the Lessor has made a good faith determination that the assertion may properly be made by the party asserting the same, that the assertion, on its face, is not without foundation and that the interests of the Lessor require that the assertion be 33 treated as presenting a bona fide risk of liability or adverse effect on the Project. If any such proceeding is not favorably resolved within thirty (30) days after the commencement thereof, the Lessor shall also have the right, at its option, to treat the commencement of such action as an Event of Default, for which the Lessor shall have all rights herein specified for an Event of Default. As aforesaid, the Lessor shall have no obligation to make a determination with reference to the merits of any such claim. No waiver of the foregoing right shall be implied from any forbearance by the Lessor in making such election or any continuation by the Lessor in making advances under this Agreement. In all events, the Developer agrees to notify the Lessor and the Lessee forthwith upon learning of the assertion of any such claim or the commencement of any such proceedings. G. It is contemplated, except with respect to the Leasehold Improvement Fee and advances made under Sections 6.1, 6.4.06, 8 and/or 11 hereof, that all advances of the Project Funds will be made by the Lessor to the Developer pursuant to this Agreement. 7.6. COMPLETION OF THE PROJECT. Upon the completion of the construction of the Project in accordance with the Project Plans and the terms and provisions of this Agreement, the Developer shall provide the Lessor with (a) true, correct and complete copies of (i) a final unconditional Certificate of Occupancy (or its equivalent) issued by the appropriate Governmental Authorities, permitting the occupancy and use of the Project for its Primary Intended Use and (ii) all Permits issued by the appropriate Governmental Authorities which are necessary in order to operate the Project as an adult care residence with eighty (80) licensed beds (located in eighty (80) units), (b) a certification from the Architect or the Consultants stating that the Project was completed in accordance with the Project Plans, (c) an updated Survey of the Leased Property, acceptable to the Lessor (in its sole and absolute discretion), (d) updated Opinions and (e) such other items relating to the operation and/or construction of the Project as may be reasonably requested by the Lessor. 34 7.7. CONDITION OF THE PROJECT. The Developer and the Lessee each acknowledge and agree that: (a) no inspections or any approvals of the Project during or after construction shall constitute a warranty or representation by the Lessor or any of the Consultants as to the technical sufficiency, adequacy or safety of any structure or any of its component parts, including, without limitation, any fixtures, equipment or furnishings, or as to the subsoil conditions or any other physical condition or feature pertaining to the Leased Property and (b) all acts, including any failure to act, relating to the Leased Property by any agent, representative or designee of the Lessor (including, without limitation, the Consultants) are performed solely for the benefit of the Lessor to assure the payment and performance of the Development Obligations and are not for the benefit of the Lessee or the benefit of any other Person. WITHOUT LIMITING THE FOREGOING, THE LESSOR MAKES NO WARRANTY OR REPRESENTATION TO THE LESSEE OR THE DEVELOPER, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASED PROPERTY OR THE PROJECT, EITHER AS TO ITS FITNESS FOR ANY PARTICULAR PURPOSE OR USE, ITS DESIGN OR CONDITION OR OTHERWISE, OR AS TO DEFECTS IN THE QUALITY OF THE MATERIAL OR WORKMANSHIP NOW OR HEREAFTER, LATENT OR PATENT; IT BEING AGREED BY AND BETWEEN THE LESSOR AND THE LESSEE, THAT ALL RISKS RELATING TO THE DESIGN, CONDITION AND/OR USE OF THE LEASED PROPERTY AND THE PROJECT ARE, AS BETWEEN THE LESSOR AND THE LESSEE, TO BE BORNE BY LESSEE. IN ADDITION, AS BETWEEN THE LESSOR AND THE LESSEE, THE LESSEE HEREBY ASSUMES ALL RISK OF THE PHYSICAL CONDITION OF THE LEASED PROPERTY AND THE PROJECT, THE SUITABILITY OF THE LEASED PROPERTY AND THE PROJECT FOR LESSEE'S PURPOSES, AND THE COMPLIANCE OR NON-COMPLIANCE OF THE LEASED PROPERTY AND THE PROJECT WITH ALL APPLICABLE REQUIREMENTS OF LAW, INCLUDING BUT NOT LIMITED TO ENVIRONMENTAL LAWS AND ZONING OR LAND USE LAWS. Nothing set forth in this Section 7.7 shall, however, limit in any manner whatsoever (i) any of the Developer's obligations hereunder or any of the other Development Documents, including, without limitation, the Developer's obligations to construct the Project in accordance with the terms hereof and (ii) any claims that the Lessor and/or the Lessee may now or hereafter have against the Developer hereunder or at law or in equity as a result of any acts or omissions by the Developer. 35 8. THE LESSOR'S RIGHT TO MAKE PAYMENTS AND TAKE OTHER ACTION The Developer and the Lessee acknowledge and agree that the Lessor may, after ten (10) Business Days' prior notice to the Developer and Lessee of its intention so to do (except in an emergency when such shorter notice shall be given as is reasonable under the circumstances), pay any sums due or claimed to be due for labor or materials furnished in connection with the ownership, construction, development, maintenance, management, repair, use or operation of the Leased Property, and any other sums which in the reasonable opinion of the Lessor, or its attorneys, it is expedient to pay, and may take such other and further action which in the reasonable opinion of the Lessor is necessary in order to secure (A) the completion of the Project in accordance with the Project Plans and the terms and conditions of this Agreement, (B) the protection and priority of the security interests granted to the Lessor pursuant to the Lease Documents and the Development Documents and (C) the performance of all obligations under the Lease Documents and the Development Documents. The Lessor, in its sole and absolute discretion, may charge any such payments against any advance that may otherwise be due hereunder to the Developer or may otherwise collect such amounts from the Developer, and the Lessee agrees to be liable for the payment of Rent regarding all such amounts advanced hereunder, notwithstanding that the aggregate amount that may be advanced hereunder may exceed the aggregate amount the Lessor has agreed to advance hereunder as the Project Funds. Any amount which is not so charged against advances due hereunder and all costs and expenses reasonably incurred by the Lessor in connection therewith (including, without limitation, attorneys' fees and expenses and court costs) shall be a demand obligation of the Developer and, to the extent permitted by applicable law, shall be added to the Development Obligations and secured by the Liens created by the Development Documents, as fully and effectively and with the same priority as every other obligation of the Developer thereunder and, if not paid within ten (10) days after demand, shall thereafter, to the extent permitted under applicable law, bear interest at the Overdue Rate until the date of payment. If the Developer fails to observe or cause to be observed any of the provisions of this Agreement and such failure continues beyond any applicable notice or cure period provided for under this Agreement, the Lessor or a lawfully appointed receiver of the Leased Property, at their respective options, from time to time may perform, or cause to be performed, any and all repairs and such other work as they deem necessary to bring the Leased Property into compliance with the provisions of this Agreement and may enter upon the Leased Property for any of the foregoing purposes, and the Lessee hereby waives any claim against the Lessor or such receiver arising out of such entry or out of any other act carried out pursuant to this Section. All amounts so expended or incurred by the Lessor and by such receiver and all costs and expenses reasonably incurred in connection therewith (including, without limitation, attorneys' fees and expenses and court costs), 36 shall be, at the option of the Lessor, which may be exercised from time to time (i) a demand obligation of the Developer to the Lessor or such receiver, and, to the extent permitted by law, shall be added to the Development Obligations and shall be secured by the Liens created by the Development Documents as fully and effectively and with the same priority as every other obligation of the Lessee secured thereunder and, if not paid within ten (10) days after demand, shall thereafter, to the extent permitted by applicable law, bear interest at the Overdue Rate until the date of payment or (ii) may be advanced hereunder (even if the aggregate amount of such sums so advanced and all amounts previously advanced hereunder exceed the amount of the Project Funds which the Lessor has agreed to advance hereunder) and the Lessee agrees to pay to the Lessor Rent under the Facility Lease, calculated, in part, thereunder based upon all sums advanced hereunder. 9. INSURANCE; CASUALTY; TAKING 9.1. GENERAL INSURANCE REQUIREMENTS. The Lessee, at its sole cost and expense, shall keep the Leased Property and the business operations conducted thereon insured as required under the Facility Lease. 9.2. FIRE OR OTHER CASUALTY OR CONDEMNATION. In the event of any damage or destruction to the Leased Property by reason of fire or other hazard or casualty (a "Casualty") or a taking by power of eminent domain or conveyance in lieu thereof of all or any portion of the Leased Property (a "Condemnation"), the Developer shall give immediate written notice thereof to the Lessor and the Lessee and the Lessee and the Developer shall comply with the provisions of the Facility Lease governing Casualties and Condemnations, mutatis, mutandis. Notwithstanding the foregoing, in no event shall the Completion Date be extended as a result of any Casualty or Condemnation. 10. EVENTS OF DEFAULT Each of the following shall constitute an "Event of Default" hereunder and shall entitle the Lessor to exercise its remedies hereunder and under any of the other Development Documents and/or Lease Documents: A. any failure of the Developer to pay any amount due hereunder or under any of the other Development Documents or any failure of the Lessee to pay any amount due under any of the Lease Documents within ten (10) days following the date when such payment was due; 37 B. any failure in the observance or performance of any other covenant, term, condition or warranty provided in this Agreement, any of the other Development Documents or any of the Lease Documents, other than the payment of any monetary obligation and other than as specified in subsections (C) through (G) below (referred to herein as a "Failure to Perform"), continuing for thirty (30) days after the giving of notice by the Lessor to the Developer and/or the Lessee, as the case may be, specifying the nature of the Failure to Perform; except as to matters not susceptible to cure within thirty (30) days, provided that with respect to such matters, (I) the Developer and/or the Lessee, as the case may be, commences the cure thereof within thirty (30) days after the giving of such notice by the Lessor to the Developer and/or the Lessee, as the case may be, (II) the Developer and/or the Lessee, as the case may be, continuously prosecutes such cure to completion, (III) such cure is completed within ninety (90) days after the giving of such notice by the Lessor to the Developer and/or the Lessee, as the case may be, and (IV) such Failure to Perform does not impair the Lessor's rights with respect to the Leased Property or otherwise impair any of the Collateral or the Lessor's security interest therein; C. the occurrence of any default or breach of condition continuing beyond the expiration of the applicable notice and grace periods, if any, under any of the Development Documents or any of the Lease Documents; D. if any representation, warranty or statement contained herein proves to be untrue in any material respect as of the date when made or at any time during the Term if such representation or warranty, other than those contained in Sections 5.2, 5.5 and in the third sentence of Section 5.6, is a continuing representation or warranty pursuant to Section 6.3; E. without limiting any of the terms of the other Development Documents or the Lease Documents, if any representation, warranty or statement contained in Section 5.2, 5.5 or in the third sentence of Section 5.6 proves to be untrue in any material respect at any time during the Term after the date when made, beyond the notice and grace periods set forth in Section 10(B); F. except as a result of any Casualty or a partial or complete Condemnation, if a suspension of any work in connection with the construction of the Project occurs for a period in excess of ten (10) Business Days, irrespective of the cause thereof, provided that the Developer shall not be deemed to be in default under this Subsection if such suspension is for circumstances not reasonably within its control, but only if the Lessor, in its sole and absolute discretion, shall determine that such suspension shall not create any risk that the construction of the Project will not be completed (in 38 accordance with the Project Plans and the terms and conditions of this Agreement) on or before the Completion Date; and G. if construction of the Project shall not be completed in accordance with the Project Plans and this Agreement (including, without limitation, satisfaction of the conditions set forth in Section 7.6) on or before the Completion Date. 11. REMEDIES IN EVENT OF DEFAULT Upon the occurrence of an Event of Default, at the option of the Lessor, which may be exercised at any time after an Event of Default shall have occurred, the Lessor shall have all rights and remedies available to it, at law or in equity, including, without limitation, all of the rights and remedies under the Development Documents and the Lease Documents. Subject to the requirements of applicable law, all materials at that time on or near the Leased Property which are the property of the Developer and which are to be used in connection with the completion of the Project shall be subject to the Liens created by the Development Documents. In addition to, and without limitation of, the foregoing, the Lessor is authorized, at the Lessor's option, which may be exercised from time to time, (a) to offset all amounts expended hereunder by the Lessor to complete the construction of the Project and/or exercise any of its other remedies hereunder against any portion of the Development Fee due hereunder and (b) to charge all money expended for completion of the Project against sums hereunder which have not already been advanced (even if the aggregate amount of such sums expended and all amounts previously advanced hereunder exceed the amount of the Project Funds which the Lessor has agreed to advance hereunder); and the Lessee agrees to pay to the Lessor Rent under the Facility Lease, calculated, in part, thereunder based upon all sums advanced hereunder (including, without limitation, all sums expended in good faith by the Lessor in connection with the completion of the Project), and, in addition thereto, the Lessee agrees to pay to the Lessor (as Rent under the Facility Lease), for services in connection with said completion of the Project, such additional sums as shall compensate the Lessor for the time and effort the Lessor and its employees shall have expended in connection therewith. The Lessor is authorized, but not obligated in any event, to do all such things in connection with the construction of the Project as the Lessor, in its sole and absolute discretion, may deem advisable, including, without limitation, the right to make any payments with respect to any obligation of the Developer to the Lessor or to any other Person in connection with the completion of construction of the Project and to make additions and changes in the Project Plans to employ contractors, subcontractors and agents and to take any and all such action, either in the Lessor's own name or in the name of the Developer, and the Developer hereby grants the Lessor an irrevocable power of attorney to act in its name in connection with the foregoing. This power of attorney, being coupled with an interest, shall be irrevocable until all of the 39 Development Obligations are fully paid and performed and shall not be affected by any disability or incapacity which the Developer may suffer and shall survive the same. The power of attorney conferred on the Lessor by the provisions of this Section 11 is provided solely to protect the interests of the Lessor and shall not impose any duty on the Lessor to exercise any such power and neither the Lessor nor such attorney-in-fact shall be liable for any act, omission, error in judgment or mistake of law, except as the same may result from its gross negligence or wilful misconduct. Notwithstanding the foregoing, the Lessee and the Developer acknowledge and agree that, in the event that the Lessor takes possession of the Leased Property and assumes control of the Project as aforesaid, the Lessor shall not be obligated to continue the construction of the Project for any period of time longer than the Lessor shall see fit (in its sole and absolute discretion), and the Lessor may thereafter, at any time, abandon its efforts and refuse to make further payments for the account of the Project, whether or not the Project has been completed. In addition, at the Lessor's option and without demand, notice or protest, the occurrence of any Event of Default shall also constitute a default under any one or more of the Related Party Agreements. 12. GENERAL The provisions set forth in Articles 22 and 23 and Sections 2.2, 16.8 through 16.10, 24.2 through 24.6, and 24.8 through 24.12 of the Facility Lease are hereby incorporated herein by reference, mutatis, mutandis, and shall be applicable to this Agreement as if set forth in full herein. 13. TERM This Agreement shall remain in force and effect until such time as the Project is constructed in accordance with the terms hereof and, without limiting the foregoing, the obligations set forth under Section 7.6 have been satisfied. The period from the date hereof until such time as the construction of the Project shall have been completed as aforesaid shall be referred to herein as the "Term." 40 EXECUTED as a sealed instrument as of the day and year first above mentioned. WITNESS: LESSOR: MEDITRUST COMPANY LLC, a Delaware limited liability company ________________________ By: Name: Name: DEVELOPER: WITNESS: BCC DEVELOPMENT AND MANAGEMENT CO., a Delaware corporation _________________________ By: Name: Name: WITNESS: LESSEE: __________________________________ _________________________ By: Name: Name: Title: 41 EXHIBIT E DEFINITIONS AFFILIATE: As defined in the Facility Lease. AFFILIATED PARTY SUBORDINATION AGREEMENT: As defined in Section 4.1. AGREEMENT REGARDING RELATED LEASE TRANSACTIONS: As defined in Section 4.1. ARCHITECT: As defined in Section 1.6. ARCHITECT'S ASSIGNMENT: As defined in Section 4.1. ARCHITECT'S CONTRACT: As defined in Section 1.6. ASSIGNMENT AND AMENDMENT AGREEMENT: As defined in the Facility Lease. BUSINESS DAY: As defined in the Facility Lease. CASH COLLATERAL: As defined in the Deposit Pledge Agreement. CASUALTY: As defined in Section 9.2. COLLATERAL: Collectively, the Developer Collateral and the Lessee Collateral. COMPLETION DATE: As defined in Section 1.8. CONDEMNATION: As defined in Section 9.2. CONSTRUCTION ASSIGNMENT: As defined in Section 4.1. CONSTRUCTION CONTRACT: As defined in Section 1.7. CONSULTANTS: Collectively, the architects, engineers, inspectors, surveyors and other consultants that are engaged, from time to time, by the Lessor to perform services for the Lessor in connection with the construction of the Project contemplated under this Agreement. CONTRACTS: As defined in the Facility Lease. CURRENT MANAGER: As defined in the Facility Lease. DEPOSIT PLEDGE AGREEMENT: As defined in Section 4.1. 42 DEVELOPER: As defined in the Preamble to Section 1 and its successors and assigns. DEVELOPER COLLATERAL: As defined in Section 4.3. DEVELOPER PERMITS ASSIGNMENT: As defined in Section 4.1. DEVELOPMENT DOCUMENTS: As defined in Section 4.1 DEVELOPMENT FEE: FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($400,000.00) DEVELOPMENT OBLIGATIONS: As defined in Section 4.2 and, including, without limitation, the Guarantied Obligations. DOLLARS: Lawful money of the United States of America. ENVIRONMENTAL INDEMNITY AGREEMENT: As defined in Section 4.1. EVENT OF DEFAULT: As defined in Section 10. EXISTING IMPROVEMENTS: As defined in Section 1.2. FACILITY LEASE: As defined in Section 1.3. FAILURE TO PERFORM: As defined in Section 10. FINANCING STATEMENTS: Collectively, the Uniform Commercial Code financing statements evidencing the security interests granted to the Lessor in connection with the Lease Documents and the Development Documents. FIRST LEASEHOLD MORTGAGE: As defined in the Facility Lease. GENERAL CONTRACTOR: As defined in Section 1.7. GOVERNMENTAL AUTHORITIES: As defined in the Facility Lease. GUARANTOR: Balanced Care Corporation, a Delaware corporation, and its successors and assigns. GUARANTIED OBLIGATIONS: As defined in the Guaranty. GUARANTY: As defined in Section 4.1. IMPOSITIONS: As defined in the Facility Lease. 43 IMPROVEMENTS: As defined in Section 1.4. INSURANCE REQUIREMENTS: As defined in the Facility Lease. LAND: As defined in Section 1.2. LEASE DEFAULT: As defined in the Facility Lease. LEASE DOCUMENTS: As defined in Section 4.1. LEASE OBLIGATIONS: As defined in Section 4.2. LEASED PROPERTY: As defined in the Facility Lease. LEASEHOLD IMPROVEMENT FEE: ____________________________________________________ LEASING GROUP: As defined in the Facility Lease. LEGAL REQUIREMENTS: As defined in the Facility Lease. LESSEE: As defined in the preamble of this Agreement and its successors and assigns. LESSEE COLLATERAL: As defined in Section 4.3. LESSEE'S GUARANTY: As defined in the Facility Lease. LESSEE PERMITS ASSIGNMENT: As defined in Section 4.1. LESSOR: As defined in the preamble of this Agreement and its successors and assigns. LESSOR'S ADDRESS: 197 First Avenue, Needham Heights, MA 02494 or such other address as the Lessor shall designate in writing. LIEN: With respect to any real or personal property, any mortgage, easement, restriction, lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property, whether or not choate, vested or perfected. MAJOR SUBCONTRACTORS: As defined in Section 6.4.05. NOTE: As defined in the Facility Lease. OPINIONS: As defined in Section 7.1. OVERDUE RATE: As defined in the Facility Lease. 44 PERMITS: As defined in the Facility Lease. PERMITS ASSIGNMENTS: Collectively, the Lessee Permits Assignment and the Developer Permits Assignment. PERMITTED ENCUMBRANCES: As defined in the Facility Lease. PERSON: As defined in the Facility Lease. PLEDGE AGREEMENT: As defined in Section 4.1. PLEDGOR: As defined in section 4.1. PRIMARY INTENDED USE: The use of the Project an adult care residence with eighty (80) licensed beds (located in eighty (80) units) and such ancillary uses as are permitted by applicable law and may be necessary in connection therewith or incidental thereto. PROJECT: As defined in Section 1.4. PROJECT BUDGET: As defined in Section 1.7. PROJECT FUNDS: As defined in Section 1.5. PROJECT PLANS: As defined in Section 1.6. RECEIVABLES: As defined in the Security Agreement. RELATED PARTY AGREEMENT: As defined in the Facility Lease. RENT: As defined in the Facility Lease. SECURITY AGREEMENT: As defined in Section 4.1 SUBSIDIARY: As defined in the Facility Lease. SURVEY: As defined in Section 17.1. SURVEYOR'S CERTIFICATE: As defined in Section 17.1. TANGIBLE PERSONAL PROPERTY: As defined in the Facility Lease. TC REALTY PARTIES: As defined in the Facility Lease. TENANT PARTIES: As defined in the Facility Lease. 45 TERM: As defined in Section 13. TITLE COMPANY: As defined in Section 7.1. TITLE POLICY: As defined in Section 7.1. UCC: Uniform Commercial Code as adopted in the ______________________ . WORKING CAPITAL ASSURANCE AGREEMENT: As defined in the Facility Lease. WORKING CAPITAL RESERVE: As defined in the Facility Lease. EX-10.5 5 BALANCED CARE CORPORATION 1 Exhibit 10.5 SCHEDULE TO FORM OF MEDITRUST LEASEHOLD IMPROVEMENT AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Facility Location Lessee Location Of Land Project Funding By Lessor - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Hendersonville, TC Realty of Hendersonville, 66 beds located in 60 $5,996,331.00 TN Hendersonville, Inc. Sumner County, units Tennessee - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Knoxville, TC Realty of Knoxville, Knox 106 beds located in $8,267,597.00 TN Knoxville, Inc. County, Tennessee 106 units - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Kingsport, TC Realty of Kingsport, Sullivan 66 beds located in 60 $3,840,931.00 TN Kingsport, Inc. County, Tennessee units - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Chesterfield, TC Realty of Chesterfield County, 80 beds located in 80 $4,370,259.00 VA Chesterfield, Inc. Virginia units - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Architect Architect's Contractor Construction Contract Dated Contract Dated Facility Location As Of As Of - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Hendersonville, KWM Group, Inc. April 29, 1998 May Construction June 19, 1998 TN Company - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Knoxville, KWM Group, Inc. December 17, 1997 Westra Construction, June 19, 1998 TN Inc. - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Kingsport, Ken Ross Architects, January 2, 1998 J. A. Street and June 8, 1998 TN Inc. Associates - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- Chesterfield, Charles D. Foster, November 6, 1997 CCI/Ortenzio Company, June 24, 1998 VA Architect, P.A. Inc. - ------------------------ ---------------------- ---------------------- ----------------------- ---------------------- - ------------------------ ---------------------- ---------------------- Project Budget Amount Of First Installment Of Facility Location Development Fee - ------------------------ ---------------------- ---------------------- Hendersonville, $4,370,259.00 $225,000.00 TN - ------------------------ ---------------------- ---------------------- Knoxville, $8,267,597.00 $337,500.00 TN - ------------------------ ---------------------- ---------------------- Kingsport, $3,840,931.00 $225,000.00 TN - ------------------------ ---------------------- ---------------------- Chesterfield, $5,996,331.00 $300,000.00 VA - ------------------------ ---------------------- ----------------------
EX-10.6 6 BALANCED CARE CORPORATION 1 Exhibit 10.6 FORM OF OPTION AGREEMENT THIS OPTION AGREEMENT (THE "AGREEMENT") is made and entered into as of the 30th day of June, 1998 by and between TC Realty Holding Company, a Delaware Corporation ("OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). WITNESSETH: WHEREAS, Optionor is the owner of 100 shares (THE "EQUITY INTERESTS") of _______________________________, a Delaware corporation (THE "COMPANY"), which Equity Interests are evidenced by stock certificate number 1 of the Company, and represent 100% of the equity ownership in the Company; and WHEREAS, the Company is the Lessee under that certain Facility Lease Agreement dated as of the date hereof (THE "LEASE") between MEDITRUST COMPANY LLC, a Delaware limited liability company (THE "LESSOR") and the Company for property located in _____________________________, as more fully described in the Lease (THE "PROPERTY"); and WHEREAS, the Company has entered into that certain Management Agreement dated as of the date hereof (THE "MANAGEMENT AGREEMENT") with ________ __________________________, a Delaware Corporation (THE "MANAGER") whereby the Manager shall operate for the benefit of the Company an adult care residence on the Property (THE "PROJECT"); and WHEREAS, the Optionor, the Lessor and the Company have entered into that certain Stock Pledge Agreement dated as of the date hereof (the "STOCK PLEDGE AGREEMENT"), whereby Optionor has pledged to the Lessor a first lien security interest in the Equity Interests; and, if and when the Equity Interests are purchased from Optionor pursuant to this Agreement, such purchaser shall expressly assume all obligations of Optionor under the Stock Pledge Agreement; and WHEREAS, the Company, the Lessor, the Optionor and BCC have entered into that certain Working Capital Assurance Agreement dated as of the date hereof (THE "WORKING CAPITAL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls (as defined in the Working Capital Agreement) by making loans to the Company, as more fully described in the Working Capital Agreement; and WHEREAS, BCC and the Company have entered into a Shortfall Funding Agreement dated as of the date hereof (THE "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC, the Lessor and the Company have entered into that certain Subordination and Standstill Agreement dated as of the date hereof (the "SUBORDINATION AGREEMENT") whereby BCC has agreed, on the terms and conditions provided in the Subordination Agreement, to subordinate certain interests of BCC to the interests of the Lessor; and WHEREAS, pursuant to the Management Agreement, Notes (as defined in the Shortfall Agreement) and Shortfall Agreement, in no event shall the directors or officers of the 2 Lessee or the shareholders, directors or officers of the Parent ever be personally liable to BCC or any affiliate of BCC or any third party for the payment and/or performance of any obligations or liabilities thereunder. WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents (as defined in the Shortfall Agreement) of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, the parties hereto do hereby agree as follows: 1. DEFINED TERMS/INTERPRETATIONS. As used herein, unless the context otherwise requires: (a) the terms defined herein shall have the meaning set forth herein for all purposes; (b) references to "Section" are to a section hereof; (c) "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such word or words of like import; (d) "writing", "written" and comparable terms refer to printing, typing, lithography and other means of reproducing words in a visible form; (e) "hereof", "herein", "hereunder" and comparable terms refer to the entirety of this Agreement and not to any particular section hereof; (f) references to any gender include references to all genders; (g) references to an agreement or other instrument or statute or regulation are referred to as amended and supplemented from time to time and, in the case of a statute or regulation, any successor provisions thereof; (h) the headings of the various Sections hereof are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof; and (i) initially capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Shortfall Agreement. 2 GRANT OF OPTION/CONSIDERATION. (a) Subject to the terms of the Stock Pledge Agreement and Section 19.4 of the Lease, Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price (as defined below) for the Equity Interests shall be paid to Optionor on the Closing Date (as hereinafter defined) in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the tenth anniversary after the date of this Agreement (the "OPTION TERM"); provided, however, in no event shall BCC be entitled to exercise its Option so long as any amounts are outstanding under that certain Demand Promissory Note of even date herewith in the original principal amount of ________ made by Bruce A Rendina to the order of Lessor. (b) In consideration of the grant of the Option, BCC shall pay to Optionor the following sums (the "OPTION PAYMENTS"), as follows: (i) on or before December 1, 1998, BCC shall pay the sum of $75,000 to Optionor, (ii) on or before June 1, 1999, BCC shall pay the sum of $25,000 to Optionor and (iii) on or before June 1, 2000 and on or before June 1 of each successive year thereafter until the expiration of the Option Term, BCC shall pay to Optionor the sum of $50,000 per annum. Option Payments shall be made to Optionor without demand or notice. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with the purchase of the Equity Interests. 2 3 (d) The "Purchase Price" as used herein shall mean an amount equal to (A) the total amount funded into the Working Capital Reserve as Borrowings (as defined in Section 3(b) below), plus (B) an amount which, when combined with all Option Payments made under Section 2(b) above, equals $250,000, plus (C) the outstanding principal balance, together with all accrued but unpaid interest, with respect to Advances made under the Shortfall Agreement, together with all other sums then due and owing to BCC or an affiliate of BCC under the Shortfall Agreement and the other Transaction Documents (such amounts stated in Subsection (C) being referred to herein as the "BCC PAY-OFF AMOUNT"). It is the intent of the parties hereto that the Purchase Price shall include all amounts referred to in (B) of this Section 2(d), all amounts owing to BCC in connection with the BCC Pay-Off Amount and all amounts owing in connection with Borrowings. 3. CLOSING. (a) Subject to the satisfaction of the conditions set forth in Section 19.4 of the Lease, the closing of the purchase of the Equity Interests (the "Closing") shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "Closing Date"). At the Closing (i) BCC shall deliver (A) the Purchase Price and (B) an agreement in form and substance reasonably satisfactory to Optionor and Lessor whereby the purchaser of the Equity Interests expressly assumes all obligations of Optionor under the Stock Pledge Agreement and (ii) Optionor shall deliver to BCC (A) the certificate representing the original Equity Interests, together with such powers and other instruments as BCC may request, (B) such pay-off letters or other evidence of the outstanding amounts due the Lessor in connection with Borrowings and (C) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably request. At the Closing, BCC and Optionor shall deliver a mutual release agreement in form and substance acceptable to Optionor and BCC pursuant to which Optionor and BCC shall release each other from claims under the Transaction Documents (the "MUTUAL RELEASE"). Provided, however, that such Mutual Release shall not encompass those claims of BCC relating to (i) liens, encumbrances and restrictions (except Permitted Liens and the security interest granted to the Lessor pursuant to the Stock Pledge Agreement) as of the Closing Date on the Equity Interests and (ii) liabilities, indebtedness or other encumbrances upon the assets of the Company resulting from the acts or omissions of Optionor or the Company except as otherwise expressly contemplated in the Transaction Documents and except as resulting from the acts or omissions of BCC or a BCC affiliate including, without limitation, the Manager. (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents, if and to the extent that the Working Capital Reserve is borrowed by the Optionor (such borrowings, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Except as otherwise provided in Section 4(d), Optionor shall give BCC prior written notice before making any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay from the Purchase Price the total amount outstanding with respect to the Borrowings. Such Borrowings shall be contributed by Optionor to Lessee as an equity contribution of Optionor to Lessee and in no event shall the Borrowings be deemed in any manner indebtedness of Lessee to Optionor. Without limiting the generality of the foregoing, in connection with the exercise of the Option, BCC and Optionor agree that, at the time the Stock Transfer (as defined in the Lease) is consummated, any amounts then due under the Note (as defined in the Lease) shall be paid in accordance with the 3 4 terms thereof from the Purchase Price. (c) Notwithstanding anything to the contrary contained herein, in the other Transaction Documents or in the Lease Documents, in addition to the repayment of Borrowings from the Purchase Price as provided in Section 3(b) above, the BCC Pay-off Amount shall be paid in full by Optionor to BCC at the Closing from the Purchase Price. 4. COVENANTS OF OPTIONOR/LEGEND. (a) Optionor shall not (i) sell, assign, convey, pledge, encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, other than as set forth herein or as expressly provided in the Transaction Documents, the Lease or the Stock Pledge Agreement in favor of Lessor, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute equity interests (including the issuance of warrants) or sell all or any portion of the Company's assets, (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement, the Lease Documents or the other Transaction Documents, or (iv) challenge or disaffirm the validity or perfection of the lien held by BCC in the Equity Interests. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF JUNE 30, 1998. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a security interest in the Equity Interests, subject to the lien of the Lessor as provided in the Stock Pledge Agreement. Notwithstanding the foregoing, BCC acknowledges and agrees that BCC may not exercise any rights or remedies with respect to such lien in the Equity Interests without the prior written consent of the Lessor, which consent maybe withheld in the Lessor's sole and absolute discretion. The Lessor may enforce the provisions of the foregoing sentence as a third party beneficiary. (d) Optionor shall permit the Manager to request Loan Proceeds from the Lender (as such terms are defined in the Note) in accordance with the Note to fund operating deficits with respect to the Facility (as defined in the Lease). Notwithstanding the provisions of Section 3(b), Optionor shall not be required to provide BCC prior written notice with respect to any requests for Loan Proceeds made by Manager in accordance with the provisions of this Section 4(d). 5. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owner of the Equity Interests free and clear of all liens, encumbrances and restrictions (except Permitted Liens and the security interest granted to the Lessor pursuant to the Stock Pledge Agreement), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) all shareholders of the Optionor are accredited investors as that term is defined in Regulation D promulgated under the 1933 Act, (iii) no other person or entity holds any equity 4 5 interests in the Company, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (vi) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any party (other than the Lessor), (vi) each shareholder of Optionor has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) each shareholder of Optionor has the requisite knowledge and sophistication to make an informed decision regarding the risks and merits of an investment in the Optionor and the Company, and has not relied on any oral or written statements of BCC or any party affiliated with BCC in connection with Optionor's investment in the Company, (viii) each shareholder of Optionor understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and each shareholder of Optionor must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time and (ix) the representations and warranties contained in Article III of the Shortfall Agreement are true and correct to the best knowledge of Optionor in every material respect. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 6. NO WAIVER. No failure or delay on the part of BCC in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof or of any other right, remedy, power or privilege of BCC hereunder or under any other Transaction Document; nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 7. GOVERNING LAW/BINDING EFFECT. This Agreement shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed in accordance with the laws of said Commonwealth, excepting its rules and laws relating to conflicts of law. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 8. ASSIGNMENT. Except for the pledge of the Equity Interests to the Lessor pursuant to the Stock Pledge Agreement, Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC. Subject to the terms of the Working Capital Agreement and the Subordination Agreement, BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor. 9. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionor. Without limiting the foregoing, in the event that BCC fails to pay any Option Payment to the Optionor within ten (10) days after the date that such Option Payment is due, BCC agrees, upon behalf of itself and its subsidiaries, that 5 6 the Optionor shall have the right, at any time thereafter, to exercise any or all of the following remedies upon written notice to BCC: (i) to cause the Company to terminate the Management Agreement and (ii) terminate this Agreement; all without recourse to the Optionor or the Company. In addition, in the event of any such termination of this Agreement, to the extent any Advances have been made under the Shortfall Agreement or any other sums are then due and owing to BCC or an affiliate of BCC under the Shortfall Agreement and/or any of the other Transaction Documents, the then outstanding BCC Pay-Off Amount shall be forgiven. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. 10. MISCELLANEOUS. (a) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn. Bruce A. Rendina (ii) If to BCC, at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. A notice or other communication shall be deemed to be duly received: (a) if sent by hand or telegram or express service, when left at the address of the recipient; (b) if sent by registered or certified U.S. mail, return receipt requested, the second day after mailing; and (c) if sent by facsimile, upon receipt by the sender of an acknowledgment or transmission report generated by the machine from which the facsimile was sent indicating that the facsimile was sent in its entirety to the recipient's facsimile number; PROVIDED THAT if a notice or other communication is served by hand or by telegram, or is received by telex or facsimile on a day which is not a business day, or after 5:00 P.M. on 6 7 any business day at the addressee's location, such notice or communication shall be deemed to be duly received by the recipient at 9:00 A.M. on the first business day thereafter. (b) Entire Agreement. This Agreement, together with all other Transaction Documents and Lease Documents, contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (c) Amendments. Subject to the terms of the Lease Documents, this Agreement may be modified or amended only by a written instrument executed by the Company, BCC and Optionor. (d) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. 7 EX-10.7 7 BALANCED CARE CORPORATION 1 Exhibit 10.7 SCHEDULE TO FORM OF MEDITRUST OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Demand Facility Promissory Location Company County Manager Note Amount - -------- ------- ------ ---------------- ----------- Hendersonville, TN TC Realty of Sumner County, TN Balanced Care at $128,550 Hendersonville, Inc. Hendersonville, Inc. Kingsport, TN TC Realty of Sullivan County, TN Balanced Care at $123,600 Kingsport, Inc. Kingsport, Inc. Knoxville, TN TC Realty of Knox County, TN Balanced Care at $297,600 Knoxville, Inc. Knoxville, Inc. Chesterfield, VA TC Realty of Chesterfield County, VA Balanced Care at $175,050 Chesterfield, Inc. Chesterfield, Inc.
EX-10.8 8 BALANCED CARE CORPORATION 1 Exhibit 10.8 FORM OF SHORTFALL FUNDING AGREEMENT DATED AS OF JUNE 30, 1998 ____________________________________, a Delaware corporation ("LESSEE") and Balanced Care Corporation, a Delaware corporation ("BCC"), agree as follows: Witnesseth: WHEREAS, Lessee executed and delivered that certain Facility Lease Agreement dated as of the date hereof (the "LEASE") whereby Lessee leased from MEDITRUST COMPANY LLC, a Delaware limited liability company (the "LESSOR") property, together with all improvements built or to be built thereon, located in _____________________________, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Lessee and __________________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into a Management Agreement dated as of the date hereof (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator of an adult care residence on the Property (the "PROJECT"); and WHEREAS, BCC, the Lessee, TC Realty Holding Company, a Delaware corporation (the "Parent") and the Lessor have entered into that certain Working Capital Assurance Agreement dated as of the date hereof (the "WORKING CAPITAL AGREEMENT"), whereby, among other matters, BCC has agreed to provide credit support to Lessor by funding loans to Lessee to cover certain Shortfalls (as defined in the Working Capital Agreement); and WHEREAS, Lessor, Lessee and BCC have entered into a Subordination and Standstill Agreement dated as of the date hereof (the "SUBORDINATION AGREEMENT") whereby BCC has agreed to subordinate all loans advanced hereunder and under the Working Capital Agreement to the obligations of Lessee to Lessor under the Lease and the other Lease Documents (as defined under the Lease); and WHEREAS, BCC is willing to fund loans to Lessee covering Shortfalls only on the terms and conditions provided in this Agreement, subject to the terms of the Working Capital Agreement and the Subordination Agreement; and WHEREAS, Lessee has granted to Lessor that certain Line of Credit Leasehold Deed of Trust and Security Agreement dated as of the date hereof (the "FIRST DEED OF TRUST"), whereby Lessee has granted to Lessor a first priority security interest in Lessee's leasehold interest in the Lease as more fully provided in the First Deed of Trust. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Lessee and BCC agree as follows: 2 ARTICLE I LOANS SECTION 1.01 ADVANCES. Upon complete depletion of the Working Capital Reserve (as defined under the Working Capital Agreement), and to the extent thereafter of any Shortfall, BCC agrees to advance from time to time funds to the Lessee or the Lessor on behalf of the Lessee, as the case may be, in increments of no less than an aggregate of $25,000 and no more frequently than monthly, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall be payable upon demand. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants of the Lessee and the Parent under the Transaction Documents (as hereinafter defined) which are owed to BCC or any affiliate of BCC, together with all interest payable under the Transaction Documents and all other costs and expenses payable by Lessee or Parent to or for the benefit of BCC or any affiliate of BCC (including without limitation indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". SECTION 1.02 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee hereunder and prompt payment under the Notes and other sums which may become due and owing from Lessee to BCC, Lessee has executed and delivered the following: (i) the Working Capital Agreement; (ii) Line of Credit Leasehold Deed of Trust and Security Agreement in the form attached hereto as Exhibit B encumbering the Lessee's leasehold interest in the Property in favor of BCC (the "SECOND DEED OF TRUST"); and (iii) such other documents, certificates, affidavits and instrument as BCC may reasonably request. In addition to the foregoing documents, the Parent, the sole shareholder of the Lessee, has executed and delivered to BCC an Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby such equity owner has agreed that BCC shall have an option to purchase the equity interest of such equity owner in Lessee, on the terms and conditions provided therein. This Agreement, together with the Notes, the Working Capital Agreement, the Second Deed of Trust, the Management Agreement, the Option Agreement and the other documents, certificates, financing statements, affidavits and instruments executed by Lessee in connection with this Agreement, as any of the same may be amended, modified or supplemented from time to time, are collectively referred to herein as "Transaction Documents". Initially capitalized terms used herein that are not otherwise defined shall have the meanings ascribed to such terms in the Lease. 2 3 SECTION 1.03 PAYMENTS AND COMPUTATIONS. In no event shall the amount of interest due or payable pursuant to any Transaction Document exceed the maximum rate of interest allowed by applicable law and, in the event any such payment is inadvertently paid by the Lessee or inadvertently received by BCC, then such excess sum shall be credited as a payment of principal due under the Notes. It is the express intention of the parties hereto that the Lessee not pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.04 INTENTION. It is the intention of BCC and Lessee that, subject to the provisions of applicable law: (i) the Management Firm operate the Project pursuant to the Management Agreement and that Lessee act as a passive investor with respect to the Project, (ii) Lessee include on its financial statements all revenue and losses with respect to the Project during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other Obligations be secured, pursuant to the Second Deed of Trust, solely by the assets of Lessee (including without limitation the Lessee's leasehold interest in the Lease) and the Option, but subject to the rights of Lessor under the Lease and the other Lease Documents (as defined in the Lease), regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or against Lessee or the Parent. In no event shall the directors or officers of the Lessee or the shareholders, directors or officers of the Parent ever be personally liable to BCC or any affiliate of BCC or any third party for the payment and/or performance of any obligations or liabilities under this Agreement or the Transaction Documents; provided, however, no provision contained herein or in any other Transaction Document shall diminish in any manner the obligations of Parent (as shareholder of Lessee) under the Option Agreement. ARTICLE II CONDITIONS TO ACCEPTANCE OF TRANSACTION DOCUMENTS SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents are subject to the condition precedent that BCC receives the following, in form and substance satisfactory to BCC: (a) the Note(s); (b) the Working Capital Agreement; (c) the Second Deed of Trust; (d) the Option Agreement; (e) the Management Agreement; (f) a certificate of the Secretary of State of the State of Delaware stating that the Lessee is duly organized, validly existing and in good standing in such State; (g) a certified copy of the by-laws of the Lessee, together with certified resolutions of the Lessee granting the power to Lessee to enter into and perform the Transaction Documents; 3 4 (h) all other Transaction Documents; and (i) such other affidavits, documents, certificates, statements and instruments as BCC may reasonably request. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee represents and warrants to BCC as follows, which representations and warrants shall be true and correct to the best knowledge of Lessee as of the date hereof, as of the date of each Advance and as of each date thereafter until all Obligations are satisfied in full: (a) ORGANIZATION; QUALIFICATION. Each of the Parent and the Lessee is a corporation, duly formed, validly existing and in good standing under the laws of the State of Delaware; and each of the Parent and the Lessee has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. (b) POWER; AUTHORITY. The execution, delivery and performance by each of the Parent and the Lessee of the Transaction Documents to which it is a party are within each of the Parent's and the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which it is a party have been duly executed and delivered by the duly authorized officer or member of each of the Lessee and the Parent. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by each of the Parent and the Lessee of any Transaction Document to which it is a party and the execution, delivery and performance by each of the Parent and the Lessee of the Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under any contract, agreement or other document or instrument to which the Parent and/or the Lessee is a party or by which its or their properties are bound. (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee and/or the Parent are a party are legal, valid and binding obligations of the Lessee and/or the Parent (as applicable) enforceable against the Lessee and/or the Parent (as applicable) in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) LITIGATION. There is no pending or, to the best of Lessee's knowledge, threatened action, suit or proceeding against or affecting the Lessee or the Parent before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Lessee and/or the Parent 4 5 are a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any law, rule or regulation of any governmental body applicable to the Lessee and/or the Parent. (g) TITLE AND CONDITION OF ASSETS. The Lessee has good, marketable and legal title to, or a valid leasehold interest in, its properties and assets. (h) LIENS. None of the properties and assets of the Lessee or the Parent are subject to any lien, security interest or other charge or encumbrance, other than Permitted Encumbrances, the First Deed of Trust, security interests, pledges and assignments granted by the Lessee or the Parent to the Lessor pursuant to the express provisions of the Lease and other Lease Documents, and liens and encumbrances in favor of BCC as provided herein (collectively, "Permitted Liens"), and the execution, delivery and performance by each of the Parent and the Lessee of the Transaction Documents to which it is a party will neither result in the creation of any lien, security interest or other charge or encumbrance upon any of the Lessee's and/or the Parent's properties or assets (other than the Permitted Liens), nor cause a default under any agreements to which Lessee and/or the Parent are a party. (i) SECURITY. Upon the consummation of this transaction, BCC will have a mortgage lien in the Lessee's leasehold interest in the Lease and a security interest in the stock of the Lessee owned by the Parent pursuant to the Option Agreement which lien or security interest BCC may perfect. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of each of the Parent and the Lessee required by law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid. (k) NO EMPLOYEES. Neither the Parent nor the Lessee has employees for which either are required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. No event has occurred, which has not been remedied, cured or waived, which constitutes, or which with the passage of time or giving of notice or both would constitute, an event of default under any Transaction Document or which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by either the Parent or the Lessee under any agreement or judgment, decree or order, to which either the Parent or the Lessee are a party or by which either the Parent or the Lessee or any of their respective properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. All written information, reports and other papers and data furnished to BCC were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give BCC a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the persons involved as at the date thereof and the results of operations for such periods. No document furnished or written statement made to BCC in connection with the execution of this Agreement or any 5 6 of the other Transaction Documents contains or will contain any untrue statement of a fact material to the credit worthiness of the Lessee or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any corporation, partnership, limited partnership, limited liability company, trust or other entity. (o) INVESTMENT COMPANY. Neither the Parent nor the Lessee is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. Neither the Parent nor the Lessee is a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. (q) SECURITIES REPRESENTATIONS. Neither Parent, Lessee nor any agent, broker, dealer or other person or entity has offered or sold any equity interests in Parent or Lessee in violation of the Securities Act of 1933, as amended ("1933 ACT") or any state securities laws. All owners of equity interests in Parent are accredited investors as defined in Regulation D promulgated under the 1933 Act. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. (a) Subject in all respects to Section 4.01(b) below, and so long as this Agreement shall remain in effect, the Lessee will: (i) COMPLIANCE WITH LAWS; ETC. Comply, in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. (ii) MAINTENANCE OF INSURANCE. Maintain or contract to be maintained, with premiums fully paid, with responsible and reputable insurance companies or associations, such insurance in such amounts and covering such risks as is required to be carried under the Lease, and all such policies evidencing such insurance shall name BCC and Lessor as additional insureds thereunder. Lessee shall also maintain insurance of sufficient types and amounts to comply with all other laws, regulations and rules, of any government entity exercising jurisdiction over Lessee. All insurance policies shall provide for notice of nonrenewal and notice of extension to BCC and Lessor, and shall not be terminated, amended or modified without 30 days prior written notice to BCC and Lessor. Lessee shall provide BCC with evidence of all insurance, including renewals or extensions of such insurance, promptly after receiving such insurance. 6 7 (iii) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (A) any actions, suits or proceedings instituted against the Lessee; (B) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (C) the occurrence of a default or an event of default under this Agreement or the other Transaction Documents. (iv) MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of any of the other Transaction Documents, (A) protect and preserve all of its properties, (B) maintain in good repair, working order and condition all of its tangible properties, and (C) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties so that the business carried on in connection therewith may be properly and advantageously conducted at all times, as reasonably may be determined by BCC. (v) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a corporation and shall qualify and remain qualified and authorized to do business in such state. (vi) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the Primary Intended Use (as defined in the Lease). (vii) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents. (b) Notwithstanding anything to the contrary contained in Section 4.01(a), Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01(a) are required to be performed by the Developer under any Lease Document or the Management Firm under the Management Agreement. Pursuant to the Management Agreement, the Management Firm (as defined in the Management Agreement) has agreed to fulfill Lessee's obligations as set forth in Section 4.01(a)(i), 4.01(a)(ii), 4.01(a)(iv) and 4.01(a)(vi) of this Agreement, as well as all other obligations of the Lessee applicable to the operation of the Facility as provided in the Lease Documents. SECTION 4.02 NEGATIVE COVENANTS. So long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will not, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Except as otherwise expressly provided in the Working Capital Assurance Agreement or any of the other Lease Documents, make any distribution of cash or other property to any equity holder, or declare or pay any dividend or distribution on any securities of the Lessee. 7 8 (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Project. (d) TRANSFER OF ASSETS. Convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person, business venture or entity. (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any indebtedness, except indebtedness incurred to the Lessor or BCC under the Lease Documents or the Transaction Documents, and indebtedness otherwise permitted under the Lease. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any entity, or make any investment in any newly formed or existing entity, person or business venture. (g) LOANS. Extend credit to or make any advance, loan or contribution to any person, business venture or entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Incorporation or the by-laws of the Lessee in any way without the prior written consent of BCC, which consent shall not be unreasonably withheld or delayed. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than those transactions contemplated by the Lease Documents; provided, however, this provision shall in no manner prevent the directors or officers of the Lessee or officers, directors or shareholders of the Parent from entering into transactions and agreements with affiliates of the shareholder of the Lessor. (j) TRANSFERS OF EQUITY INTERESTS. Except as otherwise may be provided in the Stock Pledge Agreement, permit any equity holder in Lessee to transfer all or any portion of such person's equity interest in Lessee to a party that does not as of the date hereof hold an equity interest in the Lessee. (k) AMEND LEASE DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Lease Document, (ii) waive any default or potential event of default by Lessor under any Lease Document, (iii) declare a default or event of default under any Lease Document, (iv) exercise any right to acquire the Property or extend the term of the Lease or (v) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Project, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any business or any firm, association, corporation or other business organization or division thereof. (m) ISSUANCE OF SECURITIES. Except for the common stock of the 8 9 Lessee that has been issued and outstanding as of the date hereof, issue any capital stock or options, warrants or other rights to purchase any capital stock or any securities convertible or exchangeable for shares of such stock, or commit to do any of the foregoing. (n) MORTGAGE LIEN. Challenge or disaffirm the validity or perfection of the mortgage lien held by BCC in Lessee's leasehold interest in the Lease. ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due ("Monetary Default"); or (b) Any representation or warranty made by either of the Parent or the Lessee under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) Either of the Lessee or the Parent shall fail to perform or observe any term, covenant or agreement contained in the Lease Documents or in any Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) Either of the Lessee or the Parent shall generally not pay its or their debts when due; or (e) Either of the Parent or the Lessee shall admit in writing its or their inability to pay its or their debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against either of the Parent or the Lessee seeking to adjudicate it or them a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of either of the Parent or the Lessee of any of its or their debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for either of the Parent or the Lessee or for any substantial part of its or their property; or either of the Parent or the Lessee shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $100,000 shall be rendered against either the Parent or the Lessee and the same shall not be discharged within 30 days after entry; or (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $100,000 in value and such warrant or process shall continue undischarged or unstayed for ten consecutive days; or 9 10 (h) Any material provision of any Transaction Document to which either of the Parent or the Lessee is a party shall for any reason cease to be valid and binding on the Lessee or the Parent (as applicable), or the Lessee or the Parent shall so state in writing; or (i) The Second Deed of Trust shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens. ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of an event of default, but subject to the terms of the Working Capital Agreement and the Subordination Agreement, the following provisions shall apply: (a) ACCELERATOR AND TERMINATION: (i) Automatic. Upon the occurrence of an event of default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other event of default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (b) BCC'S RIGHT TO ENTER PROPERTY. Subject to applicable laws and rights of the residents, BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (c) ASSEMBLY. The Lessee shall, upon request of and without charge to BCC, assemble the collateral and maintain or deliver it into the possession of BCC or 10 11 any agent or representative of BCC at such place or places as BCC may designate. (d) COLLATERAL PLACEMENT. BCC may, at the expense of the Lessee, cause any of the collateral to be placed in a public or field warehouse, and BCC shall not be liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (e) USE OF PREMISES. BCC may, without payment of any rent or any other charge, enter the Property and, without breach of peace, until BCC completes the enforcement of its rights in the collateral, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Lessee's equipment, for the purpose of (i) operating the Project and (ii) collecting any accounts receivable. (f) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in law or in equity. (g) CASH COLLATERAL. BCC may apply any cash collateral to the payment of any obligations owing by the Lessee to BCC in any order in which BCC may elect or use such cash in connection with the exercise of any of its other rights hereunder or under any of the other Transaction Documents. (h) RIGHTS AS A SECURED CREDITOR. BCC may exercise all of the rights and remedies of a secured party under the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania, and under any other applicable law, including, without limitation, the right without notice except as specified and with or without taking possession thereof, to sell the Collateral or any part thereof in one or more parcels at public or private sale at any location chosen by BCC, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as BCC may deem commercially reasonable. The Lessee agrees that, to the extent notice of sale shall be required by law, at least 20 days notice to the Lessee of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. BCC shall not be obligated to make any sale of collateral regardless of notice of sale having been given. BCC may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (i) RIGHT TO FORECLOSE. BCC may foreclose upon the Lease, take immediate possession of the Project and Property and operate the Property, all in accordance with the terms and conditions of the Second Deed of Trust. Provided, however, BCC shall exercise its rights hereunder only in conformance with the Working Capital Agreement and the Subordination Agreement. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an event of default shall be applied or paid over as follows: 11 12 (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses described in Section 8.07 herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to monetary defaults under this Agreement or any other Transaction Document. ARTICLE VII ADDITIONAL AGREEMENTS 12 13 SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER LEASE DOCUMENTS. Lessee shall give BCC immediate notice of a default or an event of default under any Lease Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand. 13 14 ARTICLE VIII MISCELLANEOUS SECTION 8.01 AMENDMENTS, ETC. No amendment or waiver of any provision of any Transaction Document, nor consent to any departure by the Lessee therefrom, shall in any event be effective unless the same shall be in writing and signed by BCC and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.02 NOTICES, ETC. All notices and other communications provided for under this Agreement or any other Transaction Document shall be in writing and mailed or delivered, if to the Lessee, at its address of: 3801 PGA Boulevard, Suite 1000, Palm Beach Gardens, FL 33410, Attn. Bruce A. Rendina, or, if to BCC, at its address of: c/o BCC Development and Management Co., 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, or at such other address as shall be designated by such party in a written notice to the other party from time to time. All such notices and communications shall, when mailed, be effective two days after being deposited in the mail, and when sent by telecopy shall be effective upon receipt of confirmation. SECTION 8.03 NO WAIVER; REMEDIES. No failure on the part of BCC to exercise, and no delay in exercising, any right under this Agreement or any other Transaction Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement or any other Transaction Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in this Agreement and the other Transaction Documents are cumulative and not exclusive of any remedies provided by law. SECTION 8.04 CERTAIN TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistently applied, except as otherwise stated herein. Unless otherwise specified, a reference in this Agreement to a particular section, subsection or exhibit is a reference to that section, subsection or exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. SECTION 8.05 JURISDICTION. SUBJECT TO THE TERMS OF THE WORKING CAPITAL AGREEMENT, THE LESSEE HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE IRREVOCABLY CONSENTS TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE 14 15 SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.06 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations under this Agreement and the other Transaction Documents to which it is a party shall be performed by the Lessee at its sole cost and expense. If the Lessee shall fail to do any act or thing which it has covenanted to do under this Agreement or any of the other Transaction Documents to which it is a party, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee, and the Lessee hereby irrevocably authorizes BCC so to act. BCC hereby acknowledges that under the Management Agreement, the Management Firm, an affiliate of BCC, has agreed to perform, on behalf of Lessee, all obligations and duties of Lessee under the Lease Documents and the Transaction Documents related to the operation of the Facility. SECTION 8.07 INDEMNIFICATION. The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (a) any claim, and the prosecution or defense thereof arising out of or in any way connected with this Agreement or any of the other Transaction Documents or any action or inaction on the part of BCC in connection with this Agreement and the other Transaction Documents, (b) any and all uncollected items, including without limitation, all checks or other negotiable instruments returned to BCC for insufficient funds, returned to BCC after the date of this Agreement, and (c) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business or sale thereto. The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. Notwithstanding anything to the contrary contained in this Section 8.07, the Lessee shall have no indemnification obligation under this Section 8.07 in the event that the claim for which the indemnification has arisen results from a breach of a duty or obligation of the Lessee under the Lease Documents or the Transaction Documents that has been delegated to the Management Firm (as defined in the Management Agreement) under the terms and conditions of the Management Agreement. 15 16 SECTION 8.08 INJUNCTIVE RELIEF. The Lessee recognizes that, in the event the Lessee fails to perform, observe or discharge any of its obligations or liabilities under this Agreement or any of the other Transaction Documents to which it is a party, any remedy of law may prove to be inadequate relief to BCC; therefore, the Lessee agrees that BCC shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. SECTION 8.09. ENTIRE AGREEMENT. This Agreement, and the other documents, instruments and certificates executed and delivered in connection herewith and explicitly contemplated hereby, including, without limitation, the Transaction Documents constitute the entire agreement and understanding between the parties hereto with respect to the transactions set forth herein, and supersede all prior written or oral agreements or understandings between the parties with respect to such matters. SECTION 8.10 TITLES AND CAPTIONS. Titles and captions of Articles, sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 8.11 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee and BCC and their respective successors and assigns, except that no Lessee shall have the right to assign its rights hereunder or any interest herein. SECTION 8.12 GOVERNING LAW. SUBJECT TO THE WORKING CAPITAL AGREEMENT, THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA EXCLUDING ITS CONFLICTS OF LAWS. SECTION 8.13 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed, shall be deemed to be an original and all of which, when taken together, shall constitute but one and the same agreement. SECTION 8.14 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE AND BCC HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE LESSEE AND BCC OF ANY KIND OR NATURE, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND BCC HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC OR LESSEE MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN 16 17 EVIDENCE OF THE CONSENT OF THE LESSEE TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. (b) FURTHER, THE LESSEE WAIVES THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. SECTION 8.15 ENFORCEABILITY. If any provision of this Agreement or any other Transaction Document is held to be unenforceable for any reason, all other provisions of this Agreement and the other Transaction Documents shall be deemed valid and enforceable to the fullest extent possible. To the extent permitted by applicable law, the parties hereto hereby waive any provision of law that renders any term or provision hereof invalid or unenforceable in any respect. SECTION 8.16 INCONSISTENCIES BETWEEN TRANSACTION DOCUMENTS. To the extent any terms or conditions of the Transaction Documents are inconsistent with or more restrictive than the terms of this Agreement, the terms of this Agreement shall control. SECTION 8.17 THIRD PARTY BENEFICIARY. Without limiting any of the terms of the Working Capital Agreement, BCC and the Lessee acknowledge and agree that the Lessor is intended to be a third party beneficiary of the terms and conditions set forth in Section 6.01, Section 8.05, Section 8.12, and Section 8.18 of this Agreement and any other terms and/or conditions relating to the Lessor, the Working Capital Agreement and/or the Subordination Agreement set forth herein. Accordingly, the Lessor shall be entitled to enforce the same to the fullest extent, and in all respects, as if the Lessor were a party hereto. SECTION 8.18 WORKING CAPITAL AGREEMENT AND SUBORDINATION AGREEMENT. The provisions of this Agreement shall be subject to the provisions of the Working Capital Agreement and the Subordination Agreement. In the event that any terms or conditions of this Agreement or any of the other Transaction Documents are inconsistent with or more restrictive than the terms of the Working Capital Agreement or the Subordination Agreement, the terms of the Working Capital Agreement and Subordination Agreement shall control. 17 18 OMITTED EXHIBITS Exhibit A Form of Note Exhibit B Form of Second Deed of Trust Exhibit C Form of Option Agreement EX-10.9 9 BALANCED CARE CORPORATION 1 Exhibit 10.9 SCHEDULE TO FORM OF MEDITRUST SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Lessee County Management Firm - -------- ------ ------ ---------------- Hendersonville, TN TC Realty of Sumner County, TN Balanced Care at Hendersonville, Inc. Hendersonville, Inc. Kingsport, TN TC Realty of Sullivan County, TN Balanced Care at Kingsport, Inc. Kingsport, Inc. Knoxville, TN TC Realty of Knox County, TN Balanced Care at Knoxville, Inc. Knoxville, Inc. Chesterfield, VA TC Realty of Chesterfield County, VA Balanced Care at Chesterfield, Inc. Chesterfield, Inc.
EX-10.10 10 BALANCED CARE CORPORATION 1 Exhibit 10.10 FORM OF WORKING CAPITAL ASSURANCE AGREEMENT ------------------------------------------- (____________) THIS AGREEMENT is made as of the 30th day of June, 1998, by and among BALANCED CARE CORPORATION, a Delaware corporation, with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC"), TC REALTY OF ____________, INC., a Delaware corporation (the "Lessee"), TC REALTY HOLDING COMPANY, a Delaware corporation (the "Pledgor"), both the Lessee and Pledgor with their principal place of business at 3801 PGA Boulevard, Suite 1000, Palm Beach Gardens, Florida 33410, and MEDITRUST COMPANY LLC, a Delaware limited liability company, with a principal place of business at 197 First Avenue, Needham Heights, Massachusetts (the "Lessor"). W I T N E S S E T H: -------------------- WHEREAS, the Lessor and the Lessee have agreed to enter into that certain Facility Lease Agreement, of even date herewith, relating to certain premises located in _____________________________ (the "Lease") and all capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, pursuant to the terms of the Note, the Lessor has agreed to advance to the Pledgor funds to be used by the Pledgor as equity contributions to the Lessee, so that the Lessee may use such funds for certain working capital obligations, as more particularly set forth in the Note, and the maximum aggregate amount of such funds to be advanced under the Note shall equal the Working Capital Reserve; and WHEREAS, because the Lessee shall receive a direct benefit from the advances made under the Note (which shall be deemed to be equity contributions to the Lessee), the Lessee has executed and delivered to the Lessor a guaranty of even date, guarantying the obligations of the Pledgor under the Note (the "Lessee's Guaranty"); WHEREAS, as additional security for the Lease Obligations, the Lessor has requested the execution and delivery of this Agreement. NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in consideration of the covenants and agreements set forth herein, the parties hereto agree as follows: 2 1. Subject to the terms of Sections 5 and 6 hereof, from the date hereof until the complete payment and performance of the Lease Obligations, BCC unconditionally agrees to pay to the Lessee, on a monthly basis, sufficient funds, by means of working capital loans (collectively, the "Working Capital Loans"), to pay and satisfy the amount by which the Lessee's cash requirements to meet its obligations (including, without limitation, operating expenses, debt service and the Lease Obligations) due and payable during any month and the obligations of the Pledgor under the Note due and payable during such month exceed the Gross Revenues received by the Lessee during such month (the "Shortfall"). Without limiting the foregoing, BCC hereby acknowledges and agrees that it shall advance the Working Capital Loans as required hereunder notwithstanding any default, breach of condition or failure to satisfy any condition under the Shortfall Agreement and/or any of the other Working Capital Loan Documents. It is further acknowledged and agreed that the term Lease Obligations includes, together with all other obligations set forth in the definition thereof in the Lease, all of the Lessee's obligations under the Lessee's Guaranty and the First Leasehold Mortgage and the Pledgor's obligations under the Note. 2. The Working Capital Loans shall be completely subordinate to the Lease Obligations pursuant to the terms and conditions of that certain Subordination and Standstill Agreement of even date by and between the Lessor and BCC. 3. Subject to the terms of Sections 5 and 6 hereof, but without regard to any default, breach of condition or failure to satisfy any condition under the Shortfall Agreement and/or any of the other Working Capital Loan Documents, BCC shall, without further direction, advance to the Lessee, each month, the amount equal to the Shortfall in a timely fashion so that the Lessee is able to meet all of its working capital obligations (including, without limitation, the Lease Obligations) when due and so that the payments due under the Note are made in a timely fashion. Such portion of the funds advanced under the Shortfall Agreement that are advanced to satisfy the Pledgor's obligations under the Note shall be advanced directly to the Lessor to satisfy the Pledgor's obligations under the Note and shall be deemed to be payments made by the Lessee under the Lessee's Guaranty. Notwithstanding anything to the contrary set forth under the Shortfall Agreement and/or any of the other Working Capital Loan Documents, BCC and Balanced Care at Chesterfield, Inc. (the "Manager") each hereby waive all rights of subrogation they may have against Bruce A. Rendina (the "Shareholder") at law or in equity as a consequence of any payment by BCC or the Manager of (A) its obligations hereunder or under the Shortfall Agreement, (B) the Pledgor's obligations under the Note, (C) the Lessee's obligations under the Lessee's Guaranty or (D) any other obligations under any of the Lease Documents or the Working Capital Loan Documents. 4. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to (a) induce the Lessor to enter into and accept the Lease and the other Lease Documents, (b) induce the Lessor to accept the Note from the Pledgor and the Lessee's Guaranty and the First Leasehold Mortgage from the Lessee and to lend to the Pledgor the sums to be advanced under the Note in accordance with the terms thereof, and (c) enable the Pledgor to make equity contributions to the Lessee (up to the original 3 principal amount of the Note) to enable the Lessee, upon the complete disbursement of the original principal amount of the Note (which amount shall equal the Working Capital Reserve) and upon receipt of the corresponding equity contributions to be made by the Pledgor to the Lessee, to fulfill the Lessee's working capital obligations, including, without limitation, the Lease Obligations and (d) induce the Shareholder to execute and deliver a Demand Promissory Note, of even date herewith, in the original principal amount of ______________________________________________ DOLLARS ($__________) to the Lessor. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor, the Lessee, the Pledgor and the Shareholder. Furthermore, BCC agrees to pay to the Lessor forthwith upon demand, in funds immediately available to the Lessor, all costs and expenses, including, without limitation, court costs and attorneys' fees and expenses, reasonably incurred or expended by the Lessor in connection with the collection or enforcement of the obligations hereunder. Any amounts owed to the Lessor under this Section 4 shall be a demand obligation and, if not paid within ten (10) days after demand, shall thereafter, to the extent then permitted by applicable law, bear interest at the Overdue Rate until the date of payment. The provisions of this Section 4 shall survive the expiration or earlier termination of the Agreement. 5. Notwithstanding anything to the contrary set forth herein, BCC's obligations to provide the Working Capital Loans to the Lessee and advance to the Lessee the Shortfall each month shall not commence until such time as BCC has received written confirmation from the Lessor that the Lessor has advanced the original principal amount of the Note (which amount shall equal the Working Capital Reserve) in accordance with the terms of the Note. 6. Notwithstanding anything to the contrary set forth herein, in the event of (a) the occurrence of a Lease Default and/or (b) a termination of the Lease as a result of the exercise by the Lessor of any of its rights and/or remedies thereunder, upon written notice from the Lessor, BCC shall without further direction advance to the Lessor, each month, the amount equal to the Rental Shortfall (as hereinafter defined) in a timely fashion until the expiration of the Fixed Term or, if the Lessee had exercised its option to extend the Lease, the expiration of the Extended Term in effect as of the date of the termination of the Lease. In the event of any such termination of the Lease, the Lessor agrees that it shall use its best efforts to relet the Leased Property, so as to mitigate the amount due and payable under this Section 6 by BCC. As used herein, the term "Rental Shortfall" shall mean the difference, if positive, between (i) the sum of the Rent that would have otherwise been due under the Lease plus the amounts payable under the Note minus (ii) the aggregate rent due under the leases affecting the Leased Property and any damages or other payments (other than any reimbursement for expenses incurred by the Lessor) received by the Lessor from the Lessee or any endorser, surety or guarantor of the Lease Obligations as a result of the termination of the Lease. 4 7. The obligations of BCC hereunder shall not be affected by the termination, discontinuance, release or modification of any agreement from (a) any endorser, surety or guarantor of the Lease Obligations and/or (b) any other endorser, surety or guarantor of any of the other Obligations; provided, however, that, notwithstanding the foregoing, as long as no Lease Default has occurred, nor any event which, with notice and/or the passage of time could constitute a Lease Default, the Lessor hereby covenants and agrees with BCC that the Lessor shall not amend any of the Lease Documents without BCC's prior written consent, in each instance, which consent, shall not be unreasonably withheld, conditioned or delayed. Nothing contained herein or otherwise shall require the Lessor to make demand upon or join the Lessee or any such endorser, surety or guarantor or other party in any suit brought upon this Agreement; and subject to the terms of Section 5 hereof, BCC hereby waives any right to require marshalling or exhaustion of any remedy against any collateral, other property, or any other Person primarily or secondarily liable for the Lease Obligations. In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise of any of its rights and/or remedies under the Lease Documents, as long as no Lease Default has occurred, nor any event which, with notice and/or the passage of time could constitute a Lease Default, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 8. The Lessor shall be at liberty, without giving notice to or obtaining the assent of BCC and without relieving BCC of any liability hereunder, to deal with the Lessee and with each other Person who now is or after the date hereof becomes liable in any manner for any of the Obligations in such manner as the Lessor, in its reasonable discretion, deems fit. The Lessor and the other Meditrust Entities have full authority (in their reasonable discretion) to do any or all of the following things, none of which shall discharge or affect BCC's liability hereunder: (a) extend credit, make loans and afford other financial accommodations to the Lessee, any other member of the Leasing Group and/or any of the Related Parties at such times, in such amounts and on such terms as the Lessor may approve; (b) modify, amend, vary the terms and grant extensions or renewals of any present or future indebtedness or of any of the Obligations or any instrument relating to or securing the same; (c) grant time, waivers and other indulgences in respect of any of the Obligations; (d) vary, exchange, release or discharge, wholly or partially, or delay or abstain from perfecting and enforcing any security or guaranty or other means of obtaining payment of any of the Obligations which the Lessor or any of the other Meditrust Entities now has or acquires after the date hereof; 5 (e) take or omit to take any of the actions referred to in any instrument evidencing, securing or relating to any of the Obligations or any actions under this Agreement; (f) fail, omit or delay to enforce, assert or exercise any right, power or remedy conferred on the Lessor or any of the other Meditrust Entities in any instrument evidencing, securing or relating to any of the Obligations or take or refrain from taking any other action; (g) accept partial payments from the Lessee, any other member of the Leasing Group, any of the Related Parties or any other Person; (h) release or discharge, wholly or partially, the Lessee, any other member of the Leasing Group, any of the Related Parties and/or any other Person now or hereafter primarily or secondarily liable for the Obligations (or any portion thereof) or accept additional collateral for the payment of any Obligations; (i) compromise or make any settlement or other arrangement with the Lessee, any other member of the Leasing Group, any of the Related Parties or any other Person referred to in clause (h) above; and (j) consent to and participate in the proceeds of any assignment, trust or mortgage for the benefit of creditors; provided, however, that notwithstanding the foregoing, as long as the Lessee is not an Affiliate of BCC, the Lessor and the Meditrust Entities shall not elect to take any of the actions described in clauses (b), (g), (h) and/or (i) above without the prior consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 9. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee, any other member of the Leasing Group or any of the Related Parties or by reason of any disability of the Lessee, any other member of the Leasing Group, or any Related Party. This Agreement shall be in addition to any guaranty or other security for the Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Obligations is rescinded or must otherwise be returned by the Lessor or any of the other Meditrust Entities, upon the insolvency, bankruptcy or reorganization of the Lessee, any other member of the Leasing Group or any of the Related Parties or otherwise, all as though such payment had not been made. BCC covenants to take no action of any kind which might be the basis for a claim that BCC has any defense hereunder other than the complete payment of the Shortfall or the Rent Shortfall, as the case may be. 10. In order to induce the Lessor to enter into or accept this Agreement, BCC hereby warrants and represents to, and covenants and agrees with, the Lessor that: 6 10.1. FORMATION AND AUTHORITY OF BCC. (a) BCC is a corporation duly organized, validly existing and in good standing under the laws of Delaware. BCC has all requisite corporate power to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction where such qualification is necessary or desirable in order to carry out its business as now conducted and as proposed to be conducted; (b) BCC is duly authorized to make and enter into this Agreement and all of the other Working Capital Loan Documents to which BCC is a party and to carry out the transactions contemplated therein. This Agreement and all of the other Working Capital Loan Documents to which BCC is a party have each been duly executed and delivered by BCC, and each is a legal, valid and binding obligation of BCC, enforceable in accordance with its terms; 10.2. NO VIOLATIONS. The execution, delivery and performance of this Agreement and the other Working Capital Loan Documents and the consummation of the transactions thereby contemplated shall not result in any breach of, or constitute a default under, or result in the acceleration of, or constitute an event which, with notice or passage of time could result in default or acceleration of any obligation of BCC or any other contract, mortgage, lien, lease, agreement, instrument, franchise, arbitration award, judgment, decree, bank loan or credit agreement, trust indenture or other instrument to which BCC is a party or by which BCC may be bound or affected and do not violate or contravene any Legal Requirement; 10.3. NO CONSENT OR APPROVAL. Except as already obtained or filed, as the case may be, no consent or approval or other authorization of, or exemption by, or declaration or filing with, any Person and no waiver of any right by any Person is required to authorize or permit, or is otherwise required as a condition to BCC's execution and delivery of this Agreement or any of the other Working Capital Loan Documents to which it is a party and the performance of its obligations thereunder, or as a condition to the validity (assuming the due authorization, execution and delivery by all of the other parties to this Agreement and the other Working Capital Loan Documents) or enforceability of any of the same; 10.4. FINANCIAL CONDITION. (a) BCC is financially solvent and there are no actions, suits, investigations or proceedings including, without limitation, outstanding federal or state tax liens, garnishments or insolvency and bankruptcy proceedings, pending or, to the best of BCC's knowledge and belief, threatened: 7 i. against or affecting BCC which, if adversely resolved against BCC would materially adversely affect the ability of BCC to perform its obligations under this Agreement or any of the other Working Capital Loan Documents to which it is a party; or ii. which may involve or affect the validity, priority or enforceability of this Agreement or any of the other Working Capital Loan Documents, at law or in equity, or before or by any arbitrator or Governmental Authority; (b) After giving effect to the consummation of the transactions contemplated by this Agreement and the other Working Capital Loan Documents, BCC: i. will be able to pay its debts as they become due; ii. will have sufficient funds and capital to carry on its business as now conducted or as contemplated to be conducted (in accordance with the terms of this Agreement); iii. will own property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts as they become due; and iv. will not be rendered insolvent as determined by applicable law; (c) BCC is not a party to any agreement, the terms of which now have or, based upon current circumstances, as far as can be reasonably foreseen, may have a material adverse effect on its financial condition or business; (d) BCC is not delinquent or claimed to be delinquent under any material obligation for the payment of borrowed money; 10.5. COMMERCIAL ACTS. BCC's performance of and compliance with the obligations and conditions set forth herein and the other Working Capital Loan Documents to which it is a party will constitute commercial acts done and performed for commercial purposes; 8 10.6. FILING OF TAX RETURNS. BCC has filed all federal, state and local tax returns which are required to be filed as to which extensions are not currently in effect and has paid all taxes, assessments, impositions, fees and other governmental charges (including interest and penalties) which have become due pursuant to such returns or pursuant to any assessment or notice of tax claim or deficiency received by BCC. No tax liability has been asserted by the Internal Revenue Service against BCC or any other federal, state or local taxing authority for taxes, assessments, impositions, fees or other governmental charges (including interest or penalties thereon) in excess of those already paid; and 10.7. ACCURACY OF FINANCIAL STATEMENTS AND OTHER INFORMATION. The financial statements of BCC given to the Lessor in connection with the consummation of the transaction contemplated by this Agreement were true, complete and accurate and fairly presented the financial condition of BCC as of the date thereof and for the periods covered thereby, having been prepared in accordance with GAAP and such financial statements disclosed all material liabilities, including, without limitation, contingent liabilities, of BCC. There has been no material adverse change since such date with respect to the Tangible Net Worth or liquidity of BCC or with respect to any other matters referred to or contained therein and no additional material liabilities, including, without limitation, contingent liabilities of BCC have arisen or been incurred since such date. The projections heretofore delivered to the Lessor continue to be reasonable (with respect to the material assumptions upon which such projections are based) and BCC reasonably anticipates the results projected therein will be achieved, there having been (a) no material adverse change in the business, assets or condition, financial or otherwise of BCC or (b) no material depletion of BCC's cash or decrease in working capital. 10.8. WORKING CAPITAL LOAN DOCUMENTS. True and correct copies of the Working Capital Loan Agreement and the other Working Capital Loan Documents have been delivered to Lessor and the transaction contemplated by the Working Capital Loan Documents has closed in accordance with the terms thereof and in compliance with all applicable Legal Requirements. Attached hereto as EXHIBIT A is a true and correct list of all of the Working Capital Loan Documents. There are no agreements in force and effect between Lessee and BCC or any Affiliate of BCC, other than (i) the Leasehold Improvement Agreement, (ii) the Affiliated Party Subordination Agreement, (iii) the Current Management Agreement and (iv) the Working Capital Loan Documents. BCC shall not terminate, amend, abridge, modify or otherwise limit any of the Working Capital Loan Documents without the prior written consent of the Lessor, in each instance, which consent may be withheld in the Lessor's sole and absolute discretion. Notwithstanding the foregoing, from and after the date hereof, BCC shall not enter into, nor permit any of its Subsidiaries to enter into, any contractual arrangement with the Lessee without the prior written consent of the Lessor, in each instance, which consent may be withheld in the Lessor's sole and absolute discretion. 9 10.9. FINANCIAL COVENANTS. BCC shall maintain, at all times, a ratio of Consolidated Current Assets to Consolidated Current Liabilities equal to or greater than 1 to 1. In addition, BCC shall maintain a Tangible Net Worth equal to or greater than (a) SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($750,000) from July 1, 1997 through June 30, 1998 and (b) ONE MILLION DOLLARS ($1,000,000) from July 1, 1998 through the end of the Term. 10.10. NON-COMPETITION. BCC acknowledges and agrees that BCC, the Current Manager and the Developer are members of the Leasing Group and, as such, the terms of Section 11.5.4 of the Lease shall apply to each of the foregoing parties and any Person holding or controlling, directly or indirectly, any interest in any of the foregoing parties. Accordingly the terms of Section 11.5.4 of the Lease are hereby incorporated herein by reference, mutatis, mutandis. The provisions of this Section 10.10 shall survive the expiration or earlier termination of this Agreement and/or the Lease. 11. All representations and warranties contained in this Agreement shall constitute continuing representations and warranties which shall remain true, correct and complete as long as this Agreement is in force and effect. Notwithstanding the provisions of the foregoing sentence but without derogation from any other terms and provisions of this Agreement, including, without limitation, those terms and provisions containing covenants to be performed or conditions to be satisfied on the part of BCC, the representations and warranties contained in Sections 10.4(a), 10.4(c), 10.4(d), in the second sentence of Section 10.6 and in the second and third sentences of Section 10.7 hereof shall not constitute continuing representations and warranties hereunder. 12. Without limiting BCC's obligations to provide the Working Capital Loans, upon the occurrence of any default under any of the Lease Documents, BCC shall have the right, but not the obligation, to cure such default within any applicable notice and grace periods and, to the extent permitted by law, enter upon the Leased Property, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such default. The Lessor agrees to give written notice to BCC simultaneous with the provision by the Lessor of any notice to the Lessee (or any other member of the Leasing Group) relating to any such default. The Lessor agrees to accept any remedy performed by BCC as if the same had been performed by the Lessee, but, nevertheless, reserves the right to determine whether any remedy performed by BCC cures any such default to the Lessor's satisfaction. 13. Subject to the provisions of Section 5 hereof, no set-off, counterclaim, reduction or diminution of any obligation, or any claim or defense of any kind or nature which BCC has or may have against the Lessee, any other member of the Leasing Group, any of the Related Parties or the Lessor shall be available hereunder to BCC. Subject to the terms of the Working Capital Assurance Documents, BCC shall not assert and hereby 10 waives any right whatsoever that BCC may have at law or in equity, including, without limitation, any right of subrogation or to seek contribution, indemnification or any other form of reimbursement from the Lessee, any other endorser, surety or guarantor of any of the Obligations or any other Person now or hereafter primarily or secondarily liable for any of the Obligations. 14. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: If to BCC: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President With copies to: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart, LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven Adelkoff, Esq. If to the Lessee: _______________________________ 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Bruce A. Rendina With a copy to: Lawrence B. Juran, P.A. 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Lawrence B. Juran, Esq. If to the Pledgor: TC Realty Holding Company 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Bruce A. Rendina With a copy to: Lawrence B. Juran, P.A. 11 3801 PGA Boulevard, Suite 1000 Palm Beach Gardens, FL 33410 Attn: Lawrence B. Juran, Esq. If to the Lessor: Meditrust Company LLC 197 First Avenue Needham Heights, Massachusetts 02494 Attn: President With copies to: Meditrust Company LLC 197 First Avenue Needham Heights, Massachusetts 02494 Attn: General Counsel Nutter, McClennen & Fish, LLP One International Place Boston, Massachusetts 02110 Attn: Marianne Ajemian or at such other place as any of the parties hereto may from time to time hereafter designate by a written notice to the others in such manner. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 15. This Agreement shall be construed, and the rights and obligations of the Lessor, the Lessee and BCC shall be determined, in accordance with the laws of the Commonwealth of Massachusetts. Notwithstanding anything to the contrary set forth in any of the Working Capital Loan Documents, BCC and the Lessee each hereby consents to personal jurisdiction in the courts of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceeding arising out of or with respect to this Agreement, any of the other Working Capital Assurance Documents and/or any of the other Working Capital Loan Documents, the negotiation and/or consummation of the transactions evidenced by this Agreement, the other Working Capital Assurance Documents and the other Working Capital Loan Documents and/or the performance of any obligation or the exercise of any remedy under this Agreement, any of the other Working Capital Assurance Documents and/or any of the other Working Capital Loan Documents and BCC and the Lessee each expressly waives any and all objections it may have as to venue in any of such courts. 16. The provisions of Article 23 and Sections 2.2, 16.8 through 16.10, 24.2, 24.3, 24.5 through 24.10 and 24.12 of the Lease are hereby incorporated herein by 12 reference, mutatis, mutandis and shall be applicable to this Agreement as if set forth in full herein. 17. Without limiting any other provisions of any of the other Lease Documents, this Agreement and BCC's obligations hereunder shall automatically terminate upon BCC's purchase of all of the issued and outstanding capital stock of the Lessee in accordance with the terms of Section 19.4 of the Lease. 18. BCC agrees that, as long as this Agreement remains in force and effect, BCC shall provide to the Lessor, all of the Consolidated Financials required to be provided by the Guarantor under the terms of the Lease (whether or not the Lease is then in effect) and such other information relating to the financial condition of BCC as the Lessor may reasonably request. 19. The Lessor covenants and agrees with BCC that, as long as no Lease Default has occurred, nor any event which, with notice and/or the passage of time could constitute a Lease Default, the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except as provided in, and in accordance with the terms of, Section 19.4 of the Lease) or any transfer of substantially all of the Lessee's assets or any transfer of the issued and outstanding capital stock of the Lessee without the prior written consent of BCC, which consent, BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of the Lease, (a) the Lessee attempts to assign its interest in the Lease (or transfer substantially all of its assets), (b) the current holders of the issued and outstanding capital stock of the Lessee attempt to transfer any such stock or (c) if any of the events described in Section 16.1 (f) occurs, the Lessor covenants and agrees with BCC that, subject to the provisions of applicable Legal Requirements, the Lessor shall terminate the Lease (in accordance with the terms thereof) and shall enter into a new lease of the Leased Property with BCC (or any of its wholly-owned Subsidiaries, provided, that, BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to the Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (a) BCC and its Subsidiaries shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents (such as assignments of Contracts and Permits, a pledge of the issued and outstanding capital stock of the new lessee, an affiliated party subordination agreement, etc.) and (b) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed and delivered and are enforceable (such as opinions, certificates of legal existence and good standing and certified copies of corporate resolutions). BCC agrees to pay all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 19. 20. BCC covenants and agrees with the Lessor that BCC shall not assign any interest that it holds in any of the Working Capital Loan Documents without the prior written consent of the Lessor, in each instance, which consent may be withheld in the Lessor's sole and absolute discretion. 13 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: - -------- ---- BALANCED CARE CORPORATION, a Delaware corporation _____________________________ By: _______________________________ Name: Name: Title: WITNESS: LESSEE: - -------- ------- __________________________ _____________________________ By: _______________________________ Name: Name: Title: WITNESS: PLEDGOR: - -------- -------- TC REALTY HOLDING COMPANY, a Delaware corporation _____________________________ By: _______________________________ Name: Name: Title: WITNESS: LESSOR: - -------- ------- MEDITRUST COMPANY LLC, a Delaware limited liability company _____________________________ By: _______________________________ Name: Name: Title: 14 The undersigned hereby acknowledges and consents to the provisions of Section 3 of the Working Capital Assurance Agreement as specifically set forth in Section 3. ____________________________________ By: __________________________________ Name: ________________________________ Title: _______________________________ EX-10.11 11 BALANCED CARE CORPORATION 1 Exhibit 10.11 SCHEDULE TO FORM OF MEDITRUST WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ----------------------------- ----------------------------- ---------------------------- ---------------------------- Facility Location Lessee Location of Premises Amount of Promissory Note - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Hendersonville, TC Realty of Hendersonville, Sumner $128,550 TN Hendersonville, Inc. County, Tennessee - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Knoxville, TC Realty of Knoxville, Inc. Knoxville, Knox County, $297,000 TN Tennessee - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Kingsport, TC Realty of Kingsport, Inc. Kingsport, Sullivan $123,600 TN County, Tennessee - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Chesterfield, TC Realty of Chesterfield, Chesterfield County, $175,050 VA Inc. Virginia - ----------------------------- ----------------------------- ---------------------------- ----------------------------
EX-10.12 12 BALANCED CARE CORPORATION 1 Exhibit 10.12 FORM OF LEASE AND SECURITY AGREEMENT BY AND BETWEEN ___________________________________ ______________________ AS "LANDLORD" AND __________________________________ ____________________________________ AS "TENANT" DATED _______________ _______________________ ____________________ ____ 2 TABLE OF CONTENTS Page 1. Term.................................................................. 1.1 Term......................................................... 1.2 Renewal Terms................................................ 2. Rent.................................................................. 2.1 Initial Term Minimum Rent.................................... 2.2 Initial Term Additional Rent................................. 2.3 Renewal Term Minimum Rent.................................... 2.4 Renewal Term Additional Rent................................. 2.5 Rent Cap and Floor........................................... 2.6 Proration for Partial Periods................................ 2.7 Forms for Additional Rent and Annual Rent Limits............. 2.8 Absolute Net Lease........................................... 3. Taxes, Assessments and Other Charges.................................. 3.1 Tenant's Obligations......................................... 3.2 Proration................................................... 3.3 Right to Protest............................................ 3.4 Tax Indemnity............................................... 3.5 Tax Bills................................................... 3.6 Other Charges............................................... 4. Insurance............................................................ 4.1 General Insurance Requirements.............................. 4.2 Fire and Extended Coverage.................................. 4.3 Public Liability............................................ 4.4 Professional Liability Insurance............................ 4.5 Workers Compensation........................................ 4.6 Boiler Insurance............................................ 4.7 Business Interruption Insurance............................. 4.8 Deductible Amounts.......................................... 5. Use, Maintenance and Alteration of the Premises...................... 5.1 Tenant's Maintenance Obligations............................ 5.2 Regulatory Compliance....................................... 5.3 Permitted Use............................................... 5.4 Tenant Repurchase Obligation................................ 5.5 No Liens; Permitted Contests................................ 5.6 Alterations by Tenant....................................... i 3 5.7 Capital Improvements Funded by Landlord..................... 5.8 Compliance With IRS Guidelines.............................. 6. Condition of, and Title to, Premises................................. 7. Landlord and Tenant Personal Property................................ 7.1 Tenant Personal Property.................................... 7.2 Landlord's Security Interest................................ 7.3 Financing Statements........................................ 7.4 Intangible Property......................................... 8. Representations and Warranties....................................... 8.1 Due Authorization and Execution............................. 8.2 Due Organization............................................ 8.3 No Breach of Other Agreements............................... 9. Financial, Management and Regulatory Reports......................... 9.1 Monthly Facility Reports.................................... 9.2 Quarterly Financial Statements.............................. 9.3 Annual Financial Statement.................................. 9.4 Accounting Principles....................................... 9.5 Regulatory Reports.......................................... 10. Events of Default and Landlord's Remedies............................ 10.1 Events of Default........................................... 10.2 Remedies.................................................... 10.3 Receivership................................................ 10.4 Late Charges................................................ 10.5 Remedies Cumulative; No Waiver.............................. 10.6 Performance of Tenant's Obligations by Landlord............. 11. Security Deposit..................................................... 12. Damage by Fire or Other Casualty..................................... 12.1 Reconstruction Using Insurance.............................. 12.2 Surplus Proceeds............................................ 12.3 No Rent Abatement........................................... 13. Condemnation......................................................... 13.1 Complete Taking............................................. 13.2 Partial Taking.............................................. 13.3 Lease Remains in Effect..................................... 14. Provisions on Termination of Term.................................... 14.1 Surrender of Possession..................................... 14.2 Removal of Personal Property................................ 14.3 Title to Personal Property Not Removed...................... ii 4 14.4 Management of Premises...................................... 14.5 Correction of Deficiencies.................................. 15. Notices and Demands.................................................. 16. Right of Entry; Examination of Records............................... 17. Landlord May Grant Liens............................................. 18. Subordination and Non-Disturbance. .................................. 19. Quiet Enjoyment...................................................... 20. Easements, Etc....................................................... 21. Applicable Law....................................................... 22. Preservation of Gross Revenues....................................... 23. Hazardous Materials.................................................. 23.1 Hazardous Material Covenants................................ 23.2 Tenant Notices to Landlord.................................. 23.3 Extension of Term........................................... 23.4 Participation in Hazardous Materials Claims................. 23.5 Environmental Activities.................................... 23.6 Hazardous Materials......................................... 23.7 Hazardous Materials Claims.................................. 23.8 Hazardous Materials Laws.................................... 24. Assignment and Subletting............................................ 25. Indemnification...................................................... 26. Holding Over......................................................... 27. Estoppel Certificates................................................ 28. Conveyance by Landlord............................................... 29. Access to Records.................................................... 30. Waiver of Jury Trial................................................. 31. Attorneys' Fees...................................................... 32. Severability......................................................... iii 5 33. Counterparts......................................................... 34. Binding Effect....................................................... 35. Waiver and Subrogation............................................... 36. Memorandum of Lease.................................................. 37. Incorporation of Recitals and Attachments............................ 38. Titles and Headings.................................................. 39. Usury Savings Clause................................................. 40. Joint and Several.................................................... 41. Survival of Representations, Warranties and Covenants................ 42. Interpretation....................................................... EXHIBITS: EXHIBIT A LEGAL DESCRIPTION EXHIBIT B APPRAISAL PROCESS EXHIBIT C CALCULATION OF ADDITIONAL RENT EXHIBIT D PERMITTED EXCEPTIONS EXHIBIT E CALCULATION OF RENT CAP AND FLOOR iv 6 LEASE AND SECURITY AGREEMENT THIS LEASE AND SECURITY AGREEMENT ("LEASE") is made and entered into as of the ____ day of _____, 1998, by and between ______________________________ , ("LANDLORD"), and _______________________________________, a Delaware limited liability company ("TENANT"). W I T N E S S E T H: WHEREAS, Landlord has acquired that certain real property, all improvements thereon and all appurtenances thereto, located along _____________ ____________________________________, and more specifically described in EXHIBIT "A" attached hereto (the "REAL PROPERTY"), pursuant to the terms and provisions of that certain __________________ (the "PURCHASE AGREEMENT") dated ___________, ____, by and between BALANCED CARE CORPORATION, a Delaware corporation ("BCC"), as buyer, and ___________________________________________ ("SELLER"), as seller, and pursuant to the terms and provisions of that certain Assignment of Purchase Agreement of even date herewith, by and between Guarantor and Landlord, pursuant to which Landlord acquired all of Guarantor's rights under the Purchase Agreement. The Real Property, together with all subsequent improvements and appurtenances thereto, and all Landlord Personal Property (defined below) shall be collectively referred to in this Lease as the "PREMISES"; and WHEREAS, ELDER CARE OPERATORS, LLC, a Delaware limited liability company ("GUARANTOR") has agreed to guaranty Tenant's obligation under this Lease pursuant to the terms and provisions of that certain Lease Guaranty of even date herewith by and between Guarantor and Landlord; and WHEREAS, BCC has agreed to provide working capital advances to Tenant in the event Tenant would otherwise be unable to meet Tenant's obligations under this Lease or otherwise, pursuant to the terms and provisions of (i) that certain Shortfall Funding Agreement ("SHORTFALL FUNDING AGREEMENT") of even date herewith, by and between Tenant, BCC and all equity owners of Tenant, (ii) that certain Open End Leasehold Mortgage and Security Agreement ("LEASEHOLD MORTGAGE") of even date herewith, by and between Tenant and BCC, (iii) that certain Deposit Pledge Agreement ("DEPOSIT PLEDGE AGREEMENT") of even date herewith, by and between Tenant, Landlord, BCC and all equity owners of Tenant, (iv) that certain Option Agreement ("OPTION AGREEMENT") of even date herewith, by and between the equity owners of Tenant and BCC, (v) that certain Equity Pledge Agreement of even date herewith, by and between Tenant, BCC and all equity owners of Tenant, and (vi) that certain Working Capital Assurance Agreement ("WORKING CAPITAL ASSURANCE AGREEMENT") of even date herewith, by and between BCC and Landlord; and WHEREAS, Landlord has agreed to provide funds for the construction of a personal care home/assisted living facility (such type of facility being hereinafter individually referred to as a "FACILITY" and severally referred to as "FACILITIES"), pursuant to the terms and provisions of that certain Development Agreement of even date herewith entered into by and between Landlord and -1- 7 BCC DEVELOPMENT AND MANAGEMENT CO. ("DEVELOPER"), a Delaware corporation, all of the issued and outstanding capital stock of Developer being owned by BCC. The Facility to be built on the Premises pursuant to the development agreement shall be deemed part of the Premises for all purposes of this Lease, together with any furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith and funded by Landlord (the "LANDLORD PERSONAL PROPERTY"); and WHEREAS, Tenant and ___________________________., a Delaware corporation (the "MANAGER") have entered into a Management Agreement dated on or about the date of this Lease (the "MANAGEMENT AGREEMENT") for the operation and management of the applicable Facility; and WHEREAS, Landlord, Guarantor, BCC and Developer have agreed to enter into other transactions involving the acquisition, lease, and/or development of other tracts or parcels of real property (the "OTHER PROPERTIES") pursuant to the terms and provisions of that certain First Series Master Investment Agreement ("MASTER AGREEMENT") of even date herewith, and Tenant has agreed to be bound by the Master Agreement pursuant to the terms and provisions of that certain Tenant Estoppel Certificate of even date herewith. Any leases of such Other Properties entered into by and between Landlord, Guarantor, BCC or their respective Affiliates (defined below) shall be hereinafter collectively referred to as the "OTHER LEASES"; and WHEREAS, Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and intending to be legally bound hereby, Landlord hereby leases and lets unto Tenant the Premises for the term and upon the conditions and provisions hereinafter set forth. 1. TERM. 1.1 TERM. The term of this Lease shall commence on ________, 1998 and shall end on March 31, 2009 (the "INITIAL TERM") unless extended pursuant to Section 1.2 or earlier terminated in accordance with the provisions hereof. The Initial Term and all Renewal Terms (as hereinafter defined) are referred to collectively as the "TERM". 1.2 RENEWAL TERMS. The Renewal Terms. The Term may be extended for three (3) separate renewal terms (each, a "RENEWAL TERM") of six (6) years each, upon the satisfaction of all of the following terms and conditions: 1.2.1 Not more than thirty (30) days before or after the date which is twelve (12) months prior to the end of the then current Term, Tenant shall give Landlord written notice that Tenant desires to exercise its right to extend the then current Term for one (1) Renewal Term. -2- 8 1.2.2 There shall be no Event of Default under this Lease or any of the Other Leases, either on the date of Tenant's notice to Landlord pursuant to Section 1.2.1 above, or on the last day of the then current Term of this Lease. 1.2.3 The tenants of all the Other Leases concurrently exercise their respective rights to extend the then current term of such Other Leases, and the terms and conditions of renewal of such Other Leases are fully satisfied, all as provided in the Master Agreement and such Other Leases. 1.2.4 All other provisions of this Lease shall remain in full force and effect and shall continuously apply throughout the Renewal Term(s). 2. RENT. During the Initial Term and all Renewal Terms Tenant shall pay to Landlord minimum rent ("MINIMUM RENT") and additional rent ("ADDITIONAL RENT") as follows: 2.1 INITIAL TERM MINIMUM RENT. During the Initial Term, the Minimum Rent shall accrue or be paid to Landlord by Tenant monthly in advance and shall be calculated as follows: 2.1.1 CONSTRUCTION PERIOD MINIMUM RENT. During the Initial Term, but prior to the earliest to occur of (A) Substantial Completion, or (B) the Completion Date (both as defined in the Development Agreement) (such earliest date being hereinafter in this Lease referred to as the "RESET DATE"), Minimum Rent shall be calculated as follows: (i) Landlord shall determine in good faith based on recognized industry sources the London Interbank Offering Rate for 30 day advances (the "LIBOR Rate") in effect on the first business day of each calendar month before the Reset Date occurs; (ii) During each calendar month in the Initial Term until the Reset Date occurs, Minimum Rent (referred to herein as the "CONSTRUCTION PERIOD MINIMUM RENT") shall accrue but shall not be paid: (A) on the total outstanding from time to time of (x) $__________________________________________________________ (hereinafter referred to as the "LAND COST") plus (y) all advances made under the Development Agreement with respect to Work (as defined in the Development Agreement) plus (z) all previously accrued but unpaid Construction Period Minimum Rent; (B) at a rate equal to one twelfth (1/12) of the sum of (x) the LIBOR Rate in affect for the applicable month, plus (y) one hundred fifty (150) basis points; (iii) The accrual of Construction Period Minimum Rent calculated under this Section 2.1.1 with respect to advances made other than on the first day of a -3- 9 calendar month shall be prorated in the month in which advances are made on the basis of a thirty (30) day month and actual days elapsed; 2.1.2 POST-CONSTRUCTION MINIMUM RENT. On the Reset Date, the monthly Minimum Rent with respect to the total of (A) the Land Cost plus (B) all advances under the Development Agreement for Work plus (C) all accrued but unpaid Construction Period Minimum Rent shall be reset at an amount equal to one-twelfth (1/12) of the product of (I) the total of the Land Cost plus such advances made for Work plus accrued but unpaid Construction Period Minimum Rent, times (II) three hundred thirty (330) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the Reset Date (the "INITIAL TERM POST-CONSTRUCTION MINIMUM RENT"). 2.1.3 DEFERRAL PERIOD. (i) The Initial Term Post-Construction Minimum Rent shall accrue but not be paid until one hundred twenty (120) days after the Reset Date. The total amount which accrues during such one hundred twenty (120) day period is referred to herein as the "BASE DEFERRED RENT" and such one hundred twenty (120) day period is referred to as the "DEFERRAL PERIOD". With respect to the Deferral Period, Tenant hereby agrees to pay additional deferred rent in an amount equal to six percent (6%) of the Base Deferred Rent (hereinafter referred to as the "ADDITIONAL DEFERRED RENT"). The sum of the Base Deferred Rent plus the Additional Deferred Rent is referred to herein as the "DEFERRED RENT AMOUNT"; (ii) Commencing with the Payment Commencement Date (as such term is defined in the next sentence) and on the first business day of each calendar month thereafter during the Initial Term, the Minimum Rent payable during the Initial Term shall include the Initial Term Post-Construction Minimum Rent and the Amortizing Payment (as defined below). As used herein, the "PAYMENT COMMENCEMENT DATE" shall mean the first business day of the calendar month immediately following the expiration of the Deferral Period. If the Reset Date falls on other than the first business day of a calendar month, on the Payment Commencement Date, Tenant shall also pay a prorated amount of Initial Term Post-Construction Minimum Rent for the period from the end of the Deferral Period to the Payment Commencement Date, based on a thirty (30) day month and actual days elapsed; (iii) Commencing on the Payment Commencement Date and monthly thereafter during the Initial Term, the Minimum Rent payable by Tenant shall include an amount (the "AMORTIZING PAYMENT") equal to (A) the Deferred Rent Amount, divided by (B) the number of calendar months remaining after the end of the Deferral Period through the end of the Initial Term; (iv) Therefore, during the Initial Term but before the end of the Deferral Period, although the Deferred Rent Amount shall accrue and be payable over -4- 10 the balance of the Initial Term, there shall be no monthly Minimum Rent payable by Tenant; and (v) After the end of the Deferral Period and continuing for the remainder of the Initial Term, monthly Minimum Rent payable by Tenant consists of (A) the Initial Term Post-Construction Minimum Rent plus (B) the Amortizing Payment. 2.2 INITIAL TERM ADDITIONAL RENT. 2.2.1 During the second Lease Year of the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in advance on the first business day of each calendar month. Such Additional Rent (which shall be expressed as an annual amount but shall be payable in equal monthly installments) shall be equal to the total Minimum Rent payable by Tenant with respect to the first Lease Year times the percentage increase (the "CPI INCREASE") in the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup "All Items" (1982-1984=100) (the "CPI"). In no event shall a CPI Increase calculated under this Lease be a negative number. For purposes of this Section 2.2.1, the CPI Increase shall be calculated by comparing the CPI in effect on January 1, 1998 to the CPI in effect on January 1, 1999. 2.2.2 Commencing with the third Lease Year and continuing thereafter during the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in arrears on the fifteenth (15th) day of each calendar month; provided, however, if such payment date falls on a weekend or federal holiday, Tenant shall make such payment on the first business day immediately preceding such payment date. Such Additional Rent shall be equal to the sum of (a) eleven percent (11%) of the amount by which the Gross Revenues for the applicable Lease Year through the applicable month exceed the Gross Revenues for the applicable portion of the Base Year, minus (b) all Additional Rent previously paid by Tenant with respect to such Lease Year. The obligation to make a payment of Additional Rent which accrues during the Term shall survive the termination of this Lease and be payable as if the Lease was still in effect. 2.2.3 "GROSS REVENUES" shall be calculated according to generally accepted accounting principles consistently applied ("GAAP") and shall be defined as all revenues generated by the operation, sublease and/or use of the Premises in any way, excluding (a) contractual allowances during the Term for billings not paid by or received from the appropriate governmental agencies or third party providers; (b) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount billed to the patient or resident or other recipient of such services or goods, whether included in the billing or stated separately; (c) allowances according to GAAP or uncollectible accounts; (d) all proper patient or resident billing credits; and (e) deposits refundable -5- 11 to patients or residents of the applicable Facility. To the extent any portion of the Premises is subleased or occupied by an Affiliate of Tenant, Gross Revenues calculated for all purposes of this Lease (including, without limitation, the determination of the Additional Rent payable under this Lease) shall include the Gross Revenues of such sublessee with respect to the premises demised under the applicable sublease (i.e., the Gross Revenues generated from the operations conducted on such subleased portion of the Premises) and the rent received or receivable from such sublessee pursuant to such subleases shall be excluded from Gross Revenues for all such purposes. As to any sublease between Tenant and a non-Affiliate of Tenant, only the rental actually received by Tenant from such non-Affiliate shall be included in Gross Revenues. 2.2.4 "LEASE YEAR" shall be defined as the twelve (12) month periods commencing on April 1 of each year of the Term. 2.2.5 The "BASE YEAR" during the Initial Term shall mean the second Lease Year. 2.2.6 (a) the term "AFFILIATE" is defined to mean with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity, and the term "AFFILIATES" is defined to mean any group of such persons or entities; (b) the term "CONTROL" is expressly deemed to include any actual discretion or power to direct the affairs of the controlled person or entity, either directly or through a chain of ownership or control (regardless of actual ownership); (c) a general partner, manager, or managing member of a partnership or limited liability company, and any owner of thirty percent (30%) or more of such general partner or managing member, is expressly deemed to control such partnership or limited liability company; (d) a person or entity owning thirty percent (30%) or more of the common stock of a corporation or thirty percent (30%) or more of the voting interest in any other type of entity, is expressly deemed to control such corporation or other entity; (e) a trustee of a trust is expressly deemed to control such trust; (f) Tenant and Guarantor, and any entity which is an Affiliate of any of the aforementioned entities, are all expressly deemed to be Affiliates of each other, and (g) BCC, Developer, Manager and any entity which is an Affiliate of any of the aforementioned entities, are all expressly deemed to be Affiliates of each other. Notwithstanding the foregoing, the term "Affiliate" shall not include any person or entity that is an equity owner or parent entity of Elder Care Operators, LLC, a Delaware limited liability company; provided, however, this exclusion provision shall not exclude BCC, Developer, Manager, or Tenant as an Affiliate. 2.3 RENEWAL TERM MINIMUM RENT. The Minimum Rent for each Renewal Term shall be expressed as an annual amount but shall be payable in advance in equal monthly installments on the first business day of each calendar month. Such annual Minimum Rent shall be equal to the product of: -6- 12 2.3.1 the greater of (a) the fair market value of the Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1 or (b) Landlord's Adjusted Investment (defined below) in the Premises, both as applicable; and 2.3.2 a percentage equal to three hundred twenty (320) basis points over the average 10 year United States Treasury rate for the 20 day period ending on the date of Tenant's notice of exercise pursuant to Section 1.2.1 above. 2.3.3 As used in this Lease, the term "LANDLORD'S ADJUSTED INVESTMENT" means the product of Landlord's Investment (defined below) times the percentage equal to the sum of (i) One Hundred Percent (100%) plus (ii) the Increase. For purposes of this Section 2.3.3, the Increase shall be determined by comparing the CPI in effect as of January 1, 1998 to the CPI in effect on January 1 of the calendar year during which the applicable Renewal Term begins. 2.3.4 As used in this Lease, the term "LANDLORD'S INVESTMENT" means the sum of (i) the Land Cost, plus (ii) all amounts advanced by Landlord pursuant to Section 5.7 below, plus (iii) all amounts advanced by Landlord under the Development Agreement for Work, plus (iv) the total accrued Construction Period Minimum Rent, plus (v) the total accrued Deferred Rent Amount (but only to the extent such Deferred Rent Amount remains unamortized or unpaid as of this calculation), minus (vi) any net award paid to Landlord pursuant to Section 13.1 or Section 13.2 below. If within ten (10) days of the date of Tenant's notice of exercise pursuant to Section 1.2.1 above, Landlord and Tenant are unable to agree on the fair market value of the Premises for purposes of this calculation, such fair market value shall be established by the appraisal process described on Exhibit "B" attached hereto. The fair market value for purposes of determining the Minimum Rent for the applicable Renewal Term must be finally determined by such appraisal process on or before a date ninety (90) days after Tenant's notice of exercise pursuant to Section 1.2.1 above or Tenant shall lose its right to extend the Term. Landlord and Tenant acknowledge and agree that this Section is designed to establish a fair market Minimum Rent for the Premises during the applicable Renewal Terms. 2.4 RENEWAL TERM ADDITIONAL RENT. Except during the first Lease Year of any Renewal Term, Tenant shall pay to Landlord Additional Rent in each Renewal Term on a monthly basis in arrears on the fifteenth (15th) day of each calendar month; provided, however, if such payment date falls on a weekend or federal holiday, Tenant shall make such payment on the first business day immediately preceding such payment date. The Additional Rent for each Renewal Term shall be calculated as provided in Section 2.2 hereof except that (i) Section 2.2.1 hereof shall not apply, and (ii) the Base Year for the purpose of determining such Additional Rent shall be the first Lease Year of the applicable Renewal Term. -7- 13 2.5 RENT CAP AND FLOOR. 2.5.1 Notwithstanding any of the other terms of this Section 2 but subject to Sections 2.5.2 and 2.5.3 below, the total of the Minimum Rent and Additional Rent (the "TOTAL RENT") due during each Lease Year shall not increase from one Lease Year to the next by an amount in excess of the product of (i) three percent (3%), times (ii) the Total Rent due during the immediately preceding Lease Year. 2.5.2 The terms of Section 2.5.1 above shall have no applicability in determining the calculation of the Total Rent due with respect to the first Lease Year of any Renewal Term. Notwithstanding any of the other terms of this Section 2, the Total Rent due with respect to the first Lease Year of any Renewal Term shall not exceed one hundred twenty-five percent (125%) of the Total Rent due during the immediately preceding Lease Year. 2.5.3 Notwithstanding any of the other terms of this Section 2, the Total Rent due during any Lease Year shall not under any circumstances be less than the Total Rent due during the immediately preceding Lease Year. 2.5.4 To the extent that Section 2.5.1 above operates to limit the Total Rent due for any Lease Year, the amount of rent which would have otherwise been paid or payable by Tenant will be carried forward on a cumulative basis and will be paid by Tenant to Landlord in any subsequent Lease Year (other than the first Lease Year of a Renewal Term) to the extent that the Total Rent due for such subsequent Lease Year is less than one hundred three percent (103%) of the Total Rent due during the Lease Year immediately preceding such subsequent Lease Year. 2.5.5 Within sixty (60) days of the end of each Lease Year, Tenant shall deliver to Landlord a report in a form mutually agreed upon by Landlord and Tenant, certified by an officer or general partner of Tenant, as applicable, setting forth the calculations required by the application of this Section 2.5. If said report provides that Tenant owes Landlord any sum of money, Tenant shall accompany such report delivered to Landlord with such funds. If said report provides that Landlord owes Tenant any sum of money, such sum shall be applied as a credit against future installments of Minimum Rent and Additional Rent due from Tenant to Landlord; provided, however, if such sum is owed by Landlord to Tenant with respect to the last Lease Year of the Term, Landlord shall pay such sum to Tenant within thirty (30) days of Landlord's receipt of the report in question. 2.5.6 For the purpose of comparing the Total Rent due from Lease Year to Lease Year pursuant to this Section 2.5, the increase in Minimum Rent by reason of any disbursement by Landlord pursuant to Section 5.7 of this Lease or pursuant to the Development Agreement shall be treated as follows: (i) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made against the Total Rent in the preceding Lease Year, such increase in Minimum Rent shall be ignored, and (ii) for the purpose of comparing the Total Rent in the Lease Year in which such -8- 14 disbursement is made to the Total Rent in the following Lease Year, such increase in Minimum Rent shall be deemed effective on the first day of the Lease Year in which the disbursement is made. 2.5.7 For the purpose of comparing the Total Rent due from Lease Year to Lease Year pursuant to this Section 2.5, the Total Rent due during the second Lease Year shall be calculated as if the Reset Date occurred during the first Lease Year. 2.6 PRORATION FOR PARTIAL PERIODS. The rent for any month during the Term which begins or ends on other than the first or last calendar day of a calendar month shall be prorated based on actual days elapsed. 2.7. FORMS FOR ADDITIONAL RENT AND ANNUAL RENT LIMITS. Tenant shall accompany each payment of Additional Rent with a completed calculation in the form of Exhibit "C" attached hereto. Tenant shall accompany each payment of the first month's Minimum Rent for each Lease Year with a completed calculation in the form of Exhibit "D" attached hereto. 2.8 ABSOLUTE NET LEASE. All rent payments shall be absolutely net to the Landlord free of Taxes (as hereinafter defined), assessments, utility charges, operating expenses, refurnishings, insurance premiums or any other charge or expense in connection with the Premises. All expenses and charges, whether for upkeep, maintenance, repair, refurnishing, refurbishing, restoration, replacement, insurance premiums, taxes, utilities, and other operating or other charges of a like nature or otherwise, shall be paid by Tenant. This provision is not in derogation of the specific provisions of this Lease, but in expansion thereof and as an indication of the general intentions of the parties hereto. Tenant shall continue to perform its obligations under this Lease even if Tenant claims that Tenant has been damaged by any act or omission of Landlord. Therefore, except for any credit due from Landlord in favor of Tenant as provided in Section 2.5.5 of this Lease, Tenant shall at all times remain obligated under this Lease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind. Tenant's sole right to recover damages against Landlord by reason of a breach or alleged breach of Landlord's obligations under this Lease shall be to prove such damages in a separate action against Landlord. 3. TAXES, ASSESSMENTS AND OTHER CHARGES: 3.1 TENANT'S OBLIGATIONS. Tenant agrees to pay and discharge (including the filing of all required returns) any and all taxes (including, but not limited to, real estate and personal property taxes, business and occupational license taxes, ad valorem sales, use, intangible property, single business, gross receipts, transaction privilege, franchise taxes, business privilege, rent or other excise taxes) and other assessments levied or assessed against Tenant, the Premises or any interest therein or Landlord (with respect to this Lease and/or the Premises, but excluding (i) any state or federal income tax based upon the net income of Landlord, and (ii) any transfer tax or stamps assessed in connection with the transfer by Landlord of its interest in the Premises to any person or entity other than BCC or a BCC Affiliate) (all such taxes and assessments payable by Tenant being collectively referred to herein as "TAXES") prior to delinquency or imposition of any fine, penalty, interest or other cost. If any of the foregoing may, at the option of the taxpayer, -9- 15 be paid in installments, Tenant may exercise such option to pay the same in installments (whether or not interest shall accrue on the unpaid balance) as the same respectively become due and before any delinquency, fine, penalty, or further interest or costs may be added thereto. 3.2 PRORATION. At the commencement and at the end of the Term, all Taxes shall be prorated. 3.3 RIGHT TO PROTEST. Landlord and/or Tenant shall have the right, but not the obligation, to protest the amount or payment of any real or personal property taxes, assessments, or other impositions levied against the Premises; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of any such protest and shall cooperate in such protest, Tenant shall diligently and continuously prosecute any such protest and notwithstanding such protest Tenant shall pay any tax, assessment or other charge before the imposition of any penalty or interest. 3.4 TAX INDEMNITY. In the event any Taxes, or fine, penalty, and/or interest thereon are at any time assessed against the Landlord by the state in which the Premises is located or any local governmental entity or authority as a result of or arising out of the sale of the Premises to the Landlord by the Seller or the lease of the Premises by the Tenant from the Landlord, or Landlord becomes liable for any reason for any liability of Tenant for Taxes or for any fine, penalty, or interest thereon, whether such assessment arises from the sole liability of Landlord or from the joint liability of Landlord and Tenant, and Landlord pays such assessment or liability, Tenant hereby agrees to pay to the Landlord an amount equal to the amount of such assessment of Tax, fine, penalty and interest. Such payment shall be due and payable to Landlord on or before the thirtieth (30th) day following Tenant's receipt of a written notice from Landlord (pursuant to the notice provisions under this Lease) of any such assessment and payment. Tenant shall have the right, but not the obligation, to protest the amount or payment of such assessment (in whole or in part) against the Landlord, and Landlord will cooperate fully with Tenant in regard to such protest; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of such protest. Tenant shall diligently and continuously prosecute any such protest. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents, and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, costs, deficiency, fine, penalty, interest, or other damages (including, without limitation, punitive or consequential damages, reasonable attorneys' fees, and expenses) arising out of or due to any tax protest by Tenant pursuant to Sections 3.3 and 3.4 hereof whether such items arise from the sole liability of Landlord or from the joint liability of Landlord and Tenant. Upon receiving notice of or information concerning any suit, claim or demand, including any proposed tax audit of Landlord or any proposed tax assessment, asserted by a third party that Landlord believes is covered by the indemnity set forth in this Lease, Landlord shall give Tenant notice of same. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense with legal counsel reasonably satisfactory to Landlord. 3.5 TAX BILLS. Landlord shall promptly forward to Tenant copies of all tax bills and payment receipts relating to the Premises received by Landlord. -10- 16 3.6 OTHER CHARGES. Tenant agrees to pay and discharge, punctually as and when the same shall become due and payable without penalty, all electricity, gas, garbage collection, cable television, telephone, water, sewer, and other utilities costs and all other charges, obligations or deposits assessed against the Premises during the Term. 4. INSURANCE. 4.1 GENERAL INSURANCE REQUIREMENTS. All insurance provided for in this Lease shall be maintained under valid and enforceable policies issued by insurers of recognized responsibility, licensed and approved to do business in the state in which the Premises is located having a general policyholders rating of not less than "A-11" and a financial rating of not less than "XII" in the then most current Best's Insurance Report. Any and all policies of insurance required under this Lease shall name the Landlord as an additional insured and shall be on an "occurrence" basis. In addition, Landlord shall be shown as the loss payable beneficiary under the casualty insurance policy maintained by Tenant pursuant to Section 4.2 hereof. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name the Landlord and Tenant as their interests may appear and allocate to the Premises the full amount of insurance required hereunder. Original policies or satisfactory certificates from the insurers evidencing the existence of all policies of insurance required by this Lease and showing the interest of the Landlord shall be filed with the Landlord prior to the commencement of the Term and shall provide that the subject policy may not be canceled except upon not less than thirty (30) days prior written notice to Landlord. If Landlord is provided with a certificate, upon Landlord's request Tenant shall provide Landlord with a complete copy of the insurance policy evidenced by such certificate within thirty (30) days of the commencement of the Term. Originals of the renewal policies or certificates therefor from the insurers evidencing the existence thereof shall be deposited with Landlord not less than ten (10) days prior to the expiration dates of the policies. If Landlord is provided with a certificate for a renewal policy, upon Landlord's request Tenant shall deliver a copy of the complete renewal policy to Landlord within thirty (30) days of the expiration of the replaced policy. Any claims under any policies of insurance described in this Lease shall be adjudicated by and at the expense of the Tenant or of its insurance carrier, but shall be subject to joint control of Tenant and Landlord. 4.2 FIRE AND EXTENDED COVERAGE. Tenant shall keep the Premises insured against loss or damage from all causes under standard "all risk" property insurance coverage, without exclusion for fire, lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake (if in an earthquake zone), malicious mischief or any other risks as are normally covered under an extended coverage endorsement, in the amounts that are not less than the full insurable value of the Premises including all equipment and personal property (whether or not Landlord Personal Property) used in the operation of the Premises. The term "FULL INSURABLE VALUE" as used in this Lease shall mean the actual replacement value of the Premises (including all improvements, but excluding the value of the Land) and every portion thereof, including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction. In addition, the casualty insurance required under this Section 4.2 will include an agreed amount endorsement such that the insurance carrier has accepted the amount of coverage and deductible and has agreed that there will be no co-insurance penalty. -11- 17 4.3 PUBLIC LIABILITY. Tenant shall maintain comprehensive general public liability insurance coverage (including products liability coverage) against claims for bodily injury, death or property damage occurring on, in or about the Premises and the adjoining sidewalks and passageways, such insurance shall include a broad form endorsement and to afford protection to Landlord and Tenant of not less than One Million Dollars ($1,000,000.00) with respect to bodily injury or death to any one person, not less than Three Million Dollars ($3,000,000.00) with respect to any one accident, and not less than One Million Dollars ($1,000,000.00) with respect to property damage; provided, that Landlord shall have the right at any time hereafter to require such higher limits as may be reasonable and customary for transactions and properties similar to the Premises; provided, further, that Tenant shall have the right to satisfy the requirements of this Section 4.3 with excess coverage of not less than Three Million Dollars ($3,000,000.00). 4.4 PROFESSIONAL LIABILITY INSURANCE. Tenant shall maintain insurance against liability imposed by law upon such persons for damages on account of professional services rendered or which should have been rendered by or on behalf of Tenant, or by any person for whose or which acts Tenant is legally liable (including without limitation Manager or any future manager), on account of injury, sickness or disease, including death at any time resulting therefrom, and including damages allowed for loss of service, in a minimum amount of One Million Dollars ($1,000,000.00) for each claim and Three Million Dollars ($3,000,000.00) in the aggregate. 4.5 WORKERS COMPENSATION. Tenant, Manager and any future manager shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain worker's compensation insurance against claims for injuries sustained by their respective employees in the course of their employment. 4.6 BOILER INSURANCE. Tenant shall maintain boiler and pressure vessel insurance, including an endorsement for boiler business interruption insurance, on any fixtures or equipment which are capable of bursting or exploding, in an amount not less Five Million Dollars ($5,000,000.00) for damage to property, bodily injury or death resulting from such perils. 4.7 BUSINESS INTERRUPTION INSURANCE. Tenant shall maintain, at its expense, business interruption and extra expense insurance insuring against loss of rental value for a period not less than one (1) year. 4.8 DEDUCTIBLE AMOUNTS. The policies of insurance which Tenant is required to provide under this Lease shall not have deductibles or self-insured retentions in excess of Fifty Thousand Dollars ($50,000). 5. USE, MAINTENANCE AND ALTERATION OF THE PREMISES. 5.1 TENANT'S MAINTENANCE OBLIGATIONS. 5.1.1 Tenant will keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping. Tenant shall promptly make -12- 18 or cause to be made all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Premises in good and lawful order and condition and in substantial compliance with all requirements for the operation of a Facility in the state in which the Premises is located and, if applicable, certification for participation in Medicare and Medicaid (or any successor programs) as otherwise required under all applicable local, state and federal laws. 5.1.2 As part of Tenant's obligations under this Section 5.1, Tenant shall be responsible to maintain, repair and replace all Landlord Personal Property and all Tenant Personal Property (as defined in Section 7.1 below) in good condition, ordinary wear and tear excepted, consistent with prudent industry practice for a Facility. 5.1.3 Without limiting Tenant's obligations to maintain the Premises under this Lease, within thirty (30) days of the end of each Lease Year starting with the end of the fourth (4th) Lease Year, Tenant shall provide Landlord with evidence satisfactory to Landlord in the reasonable exercise of Landlord's discretion that Tenant has in such Lease Year spent on Upgrade Expenditures (as hereinafter defined) an annual average amount of at least Two Hundred and No/100 Dollars ($200.00) per living unit as such amount is adjusted annually at the end of each Lease Year for CPI Increases. For purposes of this Section 5.1.3, the CPI Increase shall be determined by comparing the CPI in effect as of January 1, 1998 to the CPI in effect on January 1 of the calendar year during which the Upgrade Expenditures are to be made. The term "UPGRADE EXPENDITURES" is defined to mean upgrades or improvements to the Premises which have the effect of maintaining or improving the competitive position of the Premises in its marketplace. Non-exclusive examples of Upgrade Expenditures are new or replacement wallpaper, tiles, window coverings, lighting fixtures, painting, upgraded landscaping, carpeting, architectural adornments, common area amenities and the like. It is expressly understood that capital improvements or repairs (such as but not limited to repairs or replacements to the structural elements of the walls, parking area, or the roof or to the electrical, plumbing, HVAC or other mechanical or structural systems in the Premises) shall not be considered to be Upgrade Expenditures. If Tenant fails to make at least the above amount of Upgrade Expenditures, Tenant shall promptly on demand from Landlord (but in no event more than five days) pay to Landlord the applicable shortfall in Upgrade Expenditures. Such funds shall be the sole property of Landlord and Landlord may in its sole discretion provide such funds to Tenant to correct the shortfall in Upgrade Expenditures or may simply retain such funds as supplemental rent hereunder. 5.2 REGULATORY COMPLIANCE. 5.2.1 Tenant and the Premises shall comply with all federal, state and local licensing and other laws and regulations applicable to the operation of a Facility as well as with the certification requirements of Medicare and Medicaid (or any successor program), if applicable. Further, Tenant shall ensure that the Premises -13- 19 continue to be operated as at least a 66-unit Facility, all without any suspension, revocation, decertification or limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Premises. 5.2.2 The Facility license and all other licenses and certifications on or affecting the Property must be in the name of Tenant, or another operator (the "OPERATOR") approved in writing by Landlord, whose consent may not be unreasonably withheld, except for transfers between Tenant and BCC or a BCC Affiliate (provided Landlord receives at least 30 days prior written notice of such transfer). Neither Tenant, BCC, a BCC Affiliate, nor any such Operator may sell, transfer, assign, encumber, sublet, permit to lapse, expire, become suspended, or terminate any such licenses or certifications, operating rights associated with the Premises and certification without the prior written consent of Landlord which may not be unreasonably withheld, except for transfers between Tenant and BCC or a BCC Affiliate (provided Landlord receives at least 30 days prior written notice of such transfer). Tenant understands and agrees, and agrees to so direct Manager, any future manager, and/or such other Operator (as applicable), that all such licenses are an integral part of the Property and must remain at the Property unless approved in writing by Landlord, which approval may be unreasonably withheld. Tenant or such other Operator must provide photocopies of all such certifications and licenses, and any and all notices and reports requested by Landlord, within five (5) days of receipt of such request. 5.2.3 All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Tenant. Tenant shall at its sole cost make any additions or alterations to the Premises necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of the Premises from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's designee at the expiration or termination of the Term. 5.3 PERMITTED USE. Tenant shall continuously use and occupy the Premises during the Term, as a personal care/assisted living facility with at least 66 units or such additional units as may hereafter be permitted under this Lease, and for such ancillary health care uses as are permitted by law and acceptable to Landlord in the exercise of Landlord's reasonable discretion, including, without limitation, outpatient rehab and Alzheimer services. 5.4 TENANT REPURCHASE OBLIGATION. If Tenant fails to comply with Section 5.3 of this Lease, if any certification of the Premises under Medicare or Medicaid (or any successor program) is ever granted and then later revoked, suspended or materially limited, or if any material license relating to the operation of the Premises is revoked, suspended or materially limited, then in addition to Landlord's other rights and remedies under this Lease, Landlord shall have the right, thirty (30) days after providing to Tenant written notice an opportunity to cure, to put the Premises to Tenant. If Landlord exercises such right, Tenant shall purchase the Premises from Landlord for a cash price equal to the greater of (a) Landlord's Adjusted Investment, or (b) the fair market value of the Premises on the date of Landlord's notice of exercise. Such fair market value shall be as agreed between Landlord and Tenant. However, failing such agreement -14- 20 within ten (10) days of Landlord's notice of exercise under this Section, such fair market value shall be determined by the appraisal process set forth in Exhibit "B" attached hereto. Within ninety (90) days of Landlord's exercise of its put under this Section 5.4, such purchase shall be consummated utilizing an escrow at a national title company selected by Landlord. Such escrow shall be documented on such title company's standard sale escrow instructions without representations or warranties and without any due diligence or other contingencies in favor of the buyer. Tenant shall pay all costs of such sale transaction. At the close of such sale, Landlord shall deliver to Tenant title to the Premises free and clear of any liens created by Landlord (other than liens, leases, subleases, and related instruments entered into, caused or created in whole or in part by BCC, Guarantor, Developer, Manager, or their respective Affiliates) subject only to those title exceptions shown on Exhibit "E" attached hereto and any additional title exceptions required or approved by Landlord in its sole discretion. 5.5 NO LIENS; PERMITTED CONTESTS. Tenant shall not cause or permit any liens, levies or attachments to be placed or assessed against the Premises or the operation thereof for any reason, other than the Permitted Encumbrances. For purposes of this Section 5.5, the term "PERMITTED ENCUMBRANCES" shall mean and include the Leasehold Mortgage and any recorded financing statements related thereto. Tenant acknowledges and agrees the interest of the Landlord in the Premises shall not be subject to liens for improvements made by Tenant to the Premises. However, Tenant shall be permitted in good faith and at its expense to contest the existence, amount or validity of any lien upon the Premises by appropriate proceedings sufficient to prevent the collection or other realization of the lien or claim so contested, as well as the sale, forfeiture or loss of any of the Premises or any rent to satisfy the same. Tenant shall provide Landlord with security satisfactory to Landlord in Landlord's reasonable judgment to assure the foregoing. Each contest permitted by this Section 5.5 shall be promptly and diligently prosecuted to a final conclusion by Tenant. 5.6 ALTERATIONS BY TENANT. Tenant shall have the right of altering, improving, replacing, modifying or expanding the facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises under this Lease; provided, however, that any alterations, improvements, replacements, expansions or modifications in excess of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) in any rolling twelve (12) month period shall require the prior written consent of the Landlord. The cost of all such alterations, improvements, replacements, modifications, expansions or other purchases, whether undertaken as an on-going licensing, Medicare or Medicaid (or any successor program) (if applicable), other regulatory requirement, or otherwise, shall be borne solely and exclusively by Tenant (unless funded by Landlord under Section 5.7 below) and shall immediately become a part of the Premises and the property of the Landlord subject to the terms and conditions of this Lease. All work done in connection therewith shall be done in a good and workmanlike manner and in compliance with all existing codes and regulations pertaining to the Premises and shall comply with the requirements of insurance policies required under this Lease. In the event any items of the Premises have become inadequate, obsolete or worn out or require replacement (by direction of any regulatory body or otherwise), Tenant shall remove such items and exchange or replace the same at Tenant's sole cost and the same shall become part of the Premises and property of the Landlord. -15- 21 5.7 CAPITAL IMPROVEMENTS FUNDED BY LANDLORD. In the event Tenant desires to make a capital improvement or a related series of capital improvements to the Premises and if Tenant desires that Landlord fund the same, Landlord shall, in its discretion and without obligation, within thirty (30) days of Tenants' written request therefor, consider Tenant's request to fund such capital improvements. Each and every capital improvement funded by Landlord under this Section shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease. If Landlord funds any capital improvements, Landlord's Investment shall be increased for all purposes under this Lease by the amount of the funds provided by Landlord for capital improvements. 5.8 COMPLIANCE WITH IRS GUIDELINES. Any improvement or modification to the Premises shall satisfy the requirements set forth in Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves the right to refuse to consent to any improvement or modification to the Premises if, in its judgment, such improvement or modification does not meet the foregoing requirements. 6. CONDITION OF, AND TITLE TO, PREMISES. Tenant acknowledges that it is presently engaged in the operation of Facilities in the state in which the Premises is located and has expertise in the Facility industry. Tenant has thoroughly investigated the Premises, has selected the Premises to its own specifications, and has concluded that no other improvements or modifications to the Premises are required in order to operate the Premises for its intended use, except for the improvements to be constructed pursuant to the Development Agreement. Tenant accepts the Premises for use as a Facility under this Lease on an "AS IS, WHERE IS, WITH ALL FAULTS" basis and will assume all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. In making its decision to enter into this Lease, Tenant has not relied on any representations or warranties, express or implied, of any kind from Landlord. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. Notwithstanding any other provisions of this Lease to the contrary, Tenant accepts the Premises in their present condition, AS IS, WHERE IS, WITH ALL FAULTS, and without any representations or warranties whatsoever, express or implied, including, without limitation, any express or implied representations or warranties as to the fitness, use, suitability, or condition of the Premises. Tenant hereby represents and warrants to Landlord that Tenant is thoroughly familiar with the Premises and the condition thereof, that Tenant is relying on Tenant's own personal knowledge of the condition of the Premises, that neither Landlord nor any person or entity acting or allegedly acting for or on behalf of Landlord or any other person or entity having or claiming any interest in the Premises has made any representations, warranties, agreements, statements, or expressions of opinions in any way or manner whatsoever related to, connected with, or concerning the Premises, the condition of the Premises, or any other fact or circumstance whatsoever on which Tenant is relying, and, to the maximum extent not prohibited by applicable law, Tenant hereby releases and discharges Landlord and all other persons and entities having or claiming any interest in the Premises from all liability, damages, costs, and expenses of every kind and nature whatsoever in any way or manner arising out of, connected with, related to, or emanating from the condition of the Premises at any time during the Term of this Lease. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. -16- 22 7. LANDLORD AND TENANT PERSONAL PROPERTY. 7.1 TENANT PERSONAL PROPERTY. Tenant shall install, affix or assemble or place on the Premises all items of furniture, fixtures, equipment and supplies not included as Landlord Personal Property as Tenant reasonably considers to be appropriate for Tenant's use of the Premises as contemplated by this Lease (the "TENANT PERSONAL PROPERTY"). Tenant shall provide and maintain during the entire Term all Tenant Personal Property as shall be necessary in order to operate the Premises in compliance with all requirements set forth in this Lease. All Tenant Personal Property shall be and shall remain the property of Tenant and may be removed by Tenant upon the expiration of the Term. However, if there is any Event of Default, Tenant will not remove the Tenant Personal Property from the Premises and will on demand from Landlord, convey the Tenant Personal Property to Landlord by executing a bill of sale in a form reasonably required by Landlord conveying all right, title, and interest Tenant has in Tenant Personal Property, including, without limitation, all rights under third party agreements regarding lease or purchase of Tenant Personal Property and all related cure rights and rights to receive notice of default thereunder. In any event, Tenant will repair all damage to the Premises caused by any removal of the Tenant Personal Property. 7.2 LANDLORD'S SECURITY INTEREST. 7.2.1 The parties intend that if Tenant defaults under this Lease, Landlord will control the Tenant Personal Property and the Intangible Property (as defined in Section 7.4 below) so that Landlord or its designee can operate or re-let the Premises intact for use as a Facility. 7.2.2 Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant's right, title and interest in and to the Tenant Personal Property and in and to the Intangible Property and any and all products and proceeds thereof, in which Tenant now owns or hereafter acquires an interest or right, including any leased Tenant Personal Property. This Lease constitutes a security agreement covering all such Tenant Personal Property and the Intangible Property. The security interest granted to Landlord in this Section 7.2.2 is intended by Landlord and Tenant to be subordinate to any security interest granted in connection with the financing or leasing of all or any portion of the Tenant Personal Property so long as the lessor or financier of such Tenant Personal Property agrees to (a) give Landlord written notice of any default by Tenant under the terms of such lease or financing arrangement, (b) give Landlord the lesser of (i) five days after receipt of such notice to cure any such default or (ii) the same time period as given to Tenant to cure any such default, and (c) consent to Landlord's written assumption of such lease or financing arrangement upon Landlord's curing of any defaults thereunder. This security agreement and the security interest created herein shall survive the termination of this Lease if such termination results from the occurrence of an Event of Default. -17- 23 7.3. FINANCING STATEMENTS. If required by Landlord at any time during the Term, Tenant will execute and deliver to Landlord, in form reasonably satisfactory to Landlord, additional security agreements, financing statements, fixture filings and such other documents as Landlord may reasonably require to perfect or continue the perfection of Landlord's security interest in the Tenant Personal Property and the Intangible Property and any and all products and proceeds thereof now owned or hereafter acquired by Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing such documents in public offices and in obtaining such record searches as Landlord may reasonably require. In the event Tenant fails to execute any financing statements or other documents for the perfection or continuation of Landlord's security interest, Tenant hereby appoints Landlord as its true and lawful attorney-in-fact to execute any such documents on its behalf, which power of attorney shall be irrevocable and is deemed to be coupled with an interest. 7.4 INTANGIBLE PROPERTY. The term "INTANGIBLE PROPERTY" means all accounts, proceeds of accounts, rents, profits, income or revenue derived from the use of rooms or other space within the Premises or the providing of services in or from the Premises; documents, chattel paper, instruments, contract rights, deposit accounts, general intangibles, chooses in action, now owned or hereafter acquired by Tenant (including any right to any refund of any taxes or other charges heretofore or hereafter paid to any governmental authority) arising from or in connection with Tenant's operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the Premises under this Lease, including, without limitation, if applicable, any certificate of need or other similar certificate; and the right to use any trade or other name now or hereafter associated with the operation of the Premises by Tenant, including, without limitation, the name "_______________________." The word "ACCOUNTS" above shall include, without limitation and to the extent assignable, accounts to be paid by Medicaid or Medicare (or successor programs), if any. With respect to the above referenced trade name, Landlord and BCC each agree to cooperate to enter into a licensing agreement for the use of the trade name, in form and substance reasonably acceptable to both Landlord and BCC, which agreement shall include, without limitation, that the license shall be (i) perpetual (except in the event BCC or an Affiliate acquires the Premises in which case the license shall automatically terminate); (ii) at no cost to Landlord; (iii) assignable by Landlord to a successor operator of the Premises upon or after the occurrence of an Event of Default under the Lease, and (iv) solely applicable to the Premises. 8. REPRESENTATIONS AND WARRANTIES. Landlord and Tenant do hereby each for itself represent and warrant to each other as follows: 8.1 DUE AUTHORIZATION AND EXECUTION. This Lease and all agreements, instruments and documents executed or to be executed in connection herewith by either Landlord or Tenant were duly authorized and shall be binding upon the party that executed and delivered the same. 8.2 DUE ORGANIZATION. Landlord and Tenant are duly organized, validly existing and in good standing under the laws of the State of their respective formations and are duly authorized and qualified to do all things required of the applicable party under this Lease within the state in which the Premises is located. -18- 24 8.3 NO BREACH OF OTHER AGREEMENTS. Neither this Lease nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which either Landlord or Tenant is a party. 9. FINANCIAL, MANAGEMENT AND REGULATORY REPORTS. 9.1 MONTHLY FACILITY REPORTS. Within thirty (30) days after the end of each calendar month during the Term, Tenant shall prepare and deliver monthly financial reports to Landlord consisting of a balance sheet, income statement, total patient days, occupancy and payor mix concerning the business conducted at the Premises. Without limitation, such reports shall clearly state Gross Revenues for the applicable period. These reports will be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President, Development, or other officer of Tenant or the current manager of the Facility as approved by Landlord in writing, certifying that said reports are true, correct, and complete in all material respects after due inquiry. 9.2 QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of Guarantor, Tenant shall deliver the quarterly consolidated or combined, as applicable, financial statements of Guarantor to Landlord. 9.3 ANNUAL FINANCIAL STATEMENT. Within one hundred (100) days of the fiscal year end of Guarantor, Tenant shall deliver to Landlord the annual consolidated or combined, as applicable, financial statement of Guarantor audited by a reputable certified public accounting firm. Notwithstanding any of the other terms of this Section 9.3, if Tenant becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, Tenant shall concurrently deliver to Landlord such reports as are delivered to the SEC pursuant to applicable securities laws. 9.4 ACCOUNTING PRINCIPLES. All of the reports and statements required hereby shall be prepared in accordance with GAAP and Tenant's accounting principles consistently applied. 9.5 REGULATORY REPORTS. In addition, Tenant shall within thirty (30) business days of receipt thereof deliver to Landlord all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to the Premises and the operation of business thereon, including, without limitation, state department of health licensing surveys, Medicare and Medicaid (and successor programs) certification surveys (if applicable), and life safety code reports. Within five (5) business days of receipt thereof, Tenant shall give Landlord written notice of any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including, without limitation, Medicare or Medicaid (or successor programs) (if applicable), any suspension, termination or restriction placed upon Tenant or the Premises, the operation of business thereon or the ability to admit residents or patients, or any violation of any other permit, approval or certification in connection with the Premises or its business, by any federal, state or local authority, including, without limitation, Medicare or Medicaid (or successor programs) (if applicable). -19- 25 10. EVENTS OF DEFAULT AND LANDLORD'S REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant hereunder ("EVENT OF DEFAULT"): 10.1.1 The failure to pay within five (5) calendar days of the date when due any Minimum Rent, Additional Rent, Taxes (except for Taxes and other charges being contested in accordance with Sections 3.3 and 3.4 hereof), utilities, premiums for insurance or other charges or payments required of Tenant under this Lease; 10.1.2 A material breach by Tenant of any representation or warranty in this Lease; 10.1.3 A material default by Tenant, BCC, Developer, Guarantor, any future guarantor of this Lease, or their respective Affiliates under any obligation with respect to any of the Other Leases or any document concerning the Other Properties owed by such persons to Landlord or its Affiliates (including, without limitation, any development agreements regarding Other Properties, any financing agreements, and any of the Other Leases), which default is not cured within any applicable cure period provided in the documentation for such obligation; 10.1.4 A material default by Tenant, Guarantor, or any future guarantor of this Lease with respect to any obligation under any other lease or financing agreement with any other party, which default is not cured within any applicable cure period provided in the documentation for such obligation. For purposes of this Section 10.1.4, a default shall be deemed to be material if it does or could result in damages equal to or greater than One Million and No/100 Dollars ($1,000,000.00); 10.1.5 Any material misstatement or omission of fact in any written report, notice or communication from Tenant, BCC, Manager, Guarantor, or any future manager or guarantor of this lease to Landlord with respect to any of such persons or the Premises; 10.1.6 Any Change in Control (as defined below) of Tenant, BCC, or Guarantor as of the date hereof. As used in this Section 10.1.6, the term "CHANGE IN CONTROL" shall mean the acquisition by any person, entity or group of persons or entities acting in concert (other than the current management of Tenant, BCC or Guarantor, respectively) of the beneficial interest in sufficient Voting Stock (defined below) of Tenant, BCC or Guarantor to permit the person, persons, entity, or entities acquiring such beneficial interests to vote for a majority of the board of directors of Tenant, BCC or Guarantor, respectively. For purposes of this Section 10.1.6, the term "VOTING STOCK" shall collectively mean (i) any and all classes of capital stock of a corporation to which any voting rights are ascribed to the holders thereof, at law or by contract, together with (ii) any contracts for the purchase of such stock already issued by that corporation, (iii) subscriptions for the purchase of such stock to be issued by that corporation, (iv) options to purchase such stock, (v) warrants for such stock, (vi) securities convertible into such -20- 26 stock, (vii) voting trusts, proxies, or other agreements or understandings with respect to the voting of such stock, or (viii) purchase rights, exchange rights, or other contracts or commitments that could require that corporation to sell, transfer, or otherwise dispose of any such stock or that could require that corporation to issue, sell, or otherwise cause to become outstanding any of such stock; 10.1.7 An assignment by Tenant, BCC, Guarantor, or any future guarantor of this Lease of all or substantially all of its property for the benefit of creditors; 10.1.8 The appointment of a receiver, trustee, or liquidator for Tenant, BCC Developer, Manager, Guarantor or any future guarantor of this Lease (any such person being hereinafter individually referred to in this Section 10.1.8 as the "AFFECTED PERSON"), or any of the property of the Affected Person, if within ten (10) business days of such appointment the Affected Person does not inform Landlord in writing that the Affected Person intends to cause such appointment to be discharged or the Affected Person does not thereafter diligently prosecute such discharge to completion within sixty (60) days after the date of such appointment; 10.1.9 The failure to deliver evidence of insurance to Landlord as required by Section 4.1; 10.1.10 The filing by Tenant, BCC, Developer, Manager, Guarantor, or any future manager or guarantor of this Lease of a voluntary petition under any federal bankruptcy law or under the law of any state to be adjudicated as bankrupt or for any arrangement or other debtor's relief, or in the alternative, if any such petition is involuntarily filed against Tenant, BCC, Developer, Manager, Guarantor, or any future manager or guarantor of this Lease (any such person being hereinafter individually referred to in this Section 10.1.10 as the "BANKRUPT PERSON") by any other party and the Bankrupt Person, BCC, or Tenant does not within three (3) business days of any such filing inform Landlord in writing of the intent by the Bankrupt Person to cause such petition to be dismissed, or if the Bankrupt Person does not thereafter diligently prosecute such dismissal, or if such filing is not dismissed within ninety (90) days after filing thereof; 10.1.11 The failure to perform or comply with any other term or provision of this Lease not requiring the payment of money (except as provided in Section 10.1.9), including, without limitation, the failure to comply with the provisions hereof pertaining to the use, operation and maintenance of the Premises; provided, however, the default described in this Section 10.1.11 is curable and shall be deemed cured, if: (a) within ten (10) business days of Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (b) Tenant cures such default within thirty (30) days after such notice from Landlord, unless such default cannot with due diligence be cured within a period of thirty (30) days because of the nature of the default or delays beyond the control of Tenant, and cure after such thirty (30) day period will not have a material and adverse effect upon the Premises, in which case such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof, provided, -21- 27 however, no such default shall continue for more than one hundred twenty (120) days from Tenant's receipt of a notice of default from Landlord; 10.1.12 There shall be no cure period in the event of the breach by Tenant of (a) the obligation to provide replacement policies of insurance as required in Section 4.1 above, (b) the provisions of Section 20 below, or (c) the provisions of Section 22 below with respect to assignments and other related matters; and 10.1.13 All notice and cure periods provided herein shall run concurrently with any notice or cure periods provided by applicable law. 10.2 REMEDIES. Upon the occurrence of an Event of Default, Landlord may exercise all rights and remedies under this Lease and the laws of the state in which the Premises is located available to a lessor of real and personal property in the event of a default by its lessee, and as to the Tenant Personal Property and the Intangible Property all remedies granted under the laws of such State to a secured party under its Uniform Commercial Code. Without limiting the foregoing, Landlord shall have the right to do any of the following: 10.2.1 Sue for the specific performance of any covenant of Tenant under this Lease as to which Tenant is in breach; 10.2.2 Enter upon the Premises, terminate this Lease, dispossess Tenant from the Premises and/or collect money damages by reason of Tenant's breach, including, without limitation, the acceleration of all rent which would have accrued after such termination and all obligations and liabilities of Tenant under this Lease which survive the termination of the Term; 10.2.3 Elect to leave this Lease in place and sue for rent and/or other money damages as the same come due; 10.2.4 Before or after repossession of the Premises pursuant to Section 10.2.2, and whether or not this Lease has been terminated, Landlord shall have the right (but shall be under no obligation) to relet any portion of the Premises to such tenant or tenants, for such term or terms (which may be greater or less than the remaining balance of the Term), for such rent, or such conditions (which may include concessions) and for such uses, as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Tenant agrees to pay Landlord, immediately upon demand, all reasonable expenses incurred by Landlord in obtaining possession and in reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers. Although Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any of the Premises or for any failure to collect any rent due upon any such reletting, Landlord agrees that any rents actually received by Landlord from reletting the Premises shall be credited towards the amounts due hereunder. -22- 28 10.2.5 Sell the Tenant Personal Property and/or the Intangible Property in a non-judicial foreclosure sale. 10.2.6 For the purpose of calculating rent loss damages payable to Landlord, Additional Rent for all periods after an Event of Default shall be calculated based on the higher of actual Gross Revenues or extrapolated Gross Revenues based on Gross Revenues performance prior to the Event of Default. 10.3 RECEIVERSHIP. Tenant acknowledges that one of the rights and remedies available to Landlord under applicable law is to apply to a court of competent jurisdiction for the appointment of a receiver to take possession of the Premises, to collect the rents, issues, profits and income of the Premises and to manage the operation of the Premises. Tenant further acknowledges that the revocation, suspension or material and adverse limitation of (i) certification of the Premises for provider status (in the event such certification is ever obtained) under Medicare or Medicaid (or successor programs) and/or (ii) a license relating to the operation of the Premises for its intended use as a Facility under the laws of the state in which the Premises is located will materially and irreparably impair the value of Landlord's investment in the Premises. Therefore, in any of such events, and in addition to any other right or remedy of Landlord under this Lease, Landlord may petition any appropriate court for, and Tenant hereby consents to, the appointment of a receiver to take possession of the Premises, to manage the operation of the Premises, to collect and disburse all rents, issues, profits and income generated thereby and to preserve or replace to the extent possible any such license for the Premises or to otherwise substitute the licensee or provider thereof. The receiver shall be entitled to a reasonable fee for its services as a receiver. All such fees and other expenses of the receivership estate shall be added to the monthly rent due to Landlord under this Lease (but shall not be considered for the purpose of calculating any amounts pursuant to Section 2.5 of this Lease). Tenant hereby irrevocably stipulates to the appointment of a receiver under such circumstances and for such purposes and agrees not to contest such appointment. 10.4 LATE CHARGES. Tenant acknowledges that the late payment of any Minimum Rent or Additional Rent will cause Landlord to lose the use of such money and incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, if any installment of Minimum Rent or Additional Rent is not paid within five (5) calendar days after the due date for such rent payment, then Tenant shall pay to Landlord on demand a late charge equal to ten percent (10%) of the amount of all installments of Minimum Rent or Additional Rent not paid on the due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. 10.5 REMEDIES CUMULATIVE; NO WAIVER. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No failure of Landlord to insist at any time upon the strict performance of any provision of this Lease or to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or -23- 29 relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. A receipt by Landlord of any rent or other sum due hereunder (including any late charge) with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. 10.6 PERFORMANCE OF TENANT'S OBLIGATIONS BY LANDLORD. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant, and may enter upon the Premises for the purpose of taking all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Tenant. All sums so paid by Landlord and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Landlord, together with interest at the rate of the Prime Rate as reported daily by the Wall Street Journal plus 5% (or if said interest rate is violative of any applicable statute or law, then the maximum interest rate allowable) from the date of the making of such payment or the incurring of such costs and expenses by Landlord, shall be payable by Tenant to Landlord on demand. 11. SECURITY DEPOSIT. On the date hereof, Tenant or Guarantor shall deposit with Landlord a sum equal to $ ____________________________ _____________________________________________________ in cash representing a security deposit against the faithful performance of the terms and conditions contained in this Lease; and monthly after the Reset Date for four (4) months, Tenant or Guarantor shall deposit with Landlord a sum equal to $ _______ _________________________________________________________________ in cash representing additional security deposit against the faithful performance of the terms and conditions contained in this Lease. Landlord shall not be deemed a trustee as to such deposit and shall have the right to commingle any such security deposit with its own or other funds. Interest on any such cash deposit shall be paid by Landlord to Tenant or Guarantor, as applicable, on a quarterly basis in arrears at the average rate earned in such period on Landlord's cash and cash equivalent investments. In the event Tenant has fully complied with the terms of this Lease and no Event of Default exists, the remaining balance of the security deposit shall be returned to Tenant, without interest, within thirty (30) days after the expiration of the Term provided, however, Landlord shall have the right to retain and expend such remaining balance for cleaning and repairing the Premises if Tenant shall fail to deliver the Premises at the termination or expiration of this Lease in a neat and clean condition and in as good a condition as existed at the date of possession and occupancy of same, ordinary wear and tear only excepted. 12. DAMAGE BY FIRE OR OTHER CASUALTY. 12.1 RECONSTRUCTION USING INSURANCE. In the event of the damage or destruction of the Premises, Tenant shall forthwith notify Landlord and diligently repair or reconstruct the same to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be used for the repair or reconstruction of the Premises pursuant to reasonable disbursement controls in favor of Landlord. -24- 30 If such proceeds are insufficient for such purposes, Tenant shall provide the required additional funds. 12.2 SURPLUS PROCEEDS. If there remains any surplus of insurance proceeds after the completion of the repair or reconstruction of the Premises, such surplus shall belong to and be paid to Tenant. 12.3 NO RENT ABATEMENT. The rent payable under this Lease shall not abate by reason of any damage or destruction of the Premises by reason of an insured or uninsured casualty. Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such damage or destruction. 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by condemnation, terminate this Lease, and the current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such taking, the award shall be allocated between Landlord and Tenant pursuant to the appraisal procedure described on Exhibit "B" attached hereto. 13.2 PARTIAL TAKING. In the event such condemnation proceeding or right of eminent domain results in a taking of less than all or substantially all of the Premises, the Minimum Rent and Additional Rental thereto shall be abated to the same extent as the diminution in the fair market value of the Premises by reason of the condemnation. Such diminution in the fair market value shall be as agreed between Landlord and Tenant, but failing such agreement within thirty (30) days of the effective date of the condemnation such fair market value will be determined by appraisal pursuant to Exhibit "B" attached hereto. Landlord shall be entitled to receive and retain any and all awards for the partial taking and damage and Tenant shall not be entitled to receive or retain any such award for any reason. Landlord's Investment will be reduced for all purposes under this Lease by reason of any award paid to Landlord under this Section 13.2. 13.3 LEASE REMAINS IN EFFECT. Except as provided above, this Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. 14. PROVISIONS ON TERMINATION OF TERM. 14.1 SURRENDER OF POSSESSION. To the extent permitted by applicable law, Tenant shall, on or before the last day of the Term, or upon earlier termination of this Lease, surrender to Landlord the Premises (including all patient charts and resident records along with appropriate -25- 31 patient and resident consents if necessary) in good condition and repair, ordinary wear and tear excepted. 14.2 REMOVAL OF PERSONAL PROPERTY. If Tenant is not then in default hereunder Tenant shall have the right in connection with the surrender of the Premises to remove from the Premises all Tenant Personal Property but not the Landlord Personal Property (including the Landlord Personal Property replaced by Tenant or required by the state in which the Premises is located or any other governmental entity to operate the Premises for the purpose set forth in Section 5.3 above). Any such removal shall be done in a workmanlike manner leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal. At the end of the Term or upon the earlier termination of this Lease, Tenant shall return the Premises to Landlord with the Landlord Personal Property (or replacements thereof) in the same condition and utility as was delivered to Tenant at the commencement of the Term, normal wear and tear excepted. 14.3 TITLE TO PERSONAL PROPERTY NOT REMOVED. Title to any of Tenant Personal Property which is not removed by Tenant upon the expiration of the Term shall, at Landlord's election, vest in Landlord; provided, however, that Landlord may remove and dispose at Tenant's expense of any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to the Tenant. 14.4 MANAGEMENT OF PREMISES. Upon the expiration or earlier termination of the Term, Landlord or its designee may elect, upon written notice to Tenant and to the extent permitted by applicable law, to assume the responsibilities and obligations for the management and operation of the Premises, and Tenant agrees to cooperate fully with Landlord or its designee to accomplish the transfer of such management and operation without interrupting the operation of the Premises. Tenant shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of the facility, and Tenant shall, at the time of any such surrender and to the extent permitted by applicable law, comply with all requests for an orderly transfer of (a) the Applicable Facility license, (b) any Medicare and Medicaid (or any successor program) certifications and (if applicable), and (c) possession of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall promptly deliver copies of all of Tenant's books and records relating to the Premises and its operations to Landlord. 14.5 CORRECTION OF DEFICIENCIES. Upon termination or cancellation of this Lease, Tenant shall indemnify Landlord for any loss, damage, cost or expense incurred by Landlord to correct all deficiencies of a physical nature identified by the governmental agency responsible for licensing Facilities in the state in which the Premises is located and/or the governmental agency responsible for administering Medicare or Medicaid payments or any other government agency or Medicare or Medicaid (or any successor programs) providers in the course of the change of ownership inspection and audit. 15. NOTES AND DEMANDS. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Lease shall be in writing and shall be sent by personal delivery or by either (a) United States certified or registered mail, return receipt -26- 32 requested, postage prepaid, or (b) Federal Express or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows: To Tenant: To Landlord: - ---------- ------------ __________________________________ __________________________________ c/o Retirement Operators 610 Newport Center Drive, Suite 1150 Management, Inc. Newport Beach, California 92660 1350 Bayshore Highway, Suite 300 Attn: President and General Counsel Burlingame, CA 94010 Facsimile: (713) 759-6876 Attn: F. David Carr Facsimile: (650) 348-6300 With Copy To: With Copy To: - ------------- ------------- Balanced Care Corporation Cordray & Goodrich 5021 Louise Drive, Suite 200 3306 Sul Ross Mechanicsburg, PA 17055 Houston, Texas 77098 Attn: Legal Department Attn: Howard F. Cordray, Jr. Facsimile: (717) 796-6150 Facsimile: (713) 630-0017 With Copy To: - ------------- Kirkpatrick & Lockhart, LLP 1500 Oliver Building Philadelphia, PA 15222 Attn: Steven Adelkoff Facsimile: (412) 355-6501 With Copy To: - ------------- Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, CA 94111 Attn: Barry Graynor Facsimile: (415) 951-3699 Any notice so given by mail shall be deemed to have been given as of the date of delivery (whether accepted or refused) established by U.S. Post Office return receipt or the overnight carrier's proof of delivery, as the case may be, whether accepted or refused. Any such notice not so given shall deemed given upon receipt of the same by the party to whom the same is to be given. Any party hereto may designate a different address for itself by notice to the other party in accordance with this Section 15. If Tenant is not an individual, notice may be made to any officer, general partner or principal thereof. Notice to any one co-Tenant shall be deemed notice to all co-Tenants. -27- 33 16. RIGHT OF ENTRY; EXAMINATION OF RECORDS. Landlord and its representative may enter the Premises at any reasonable time after reasonable notice to Tenant for the purpose of inspecting the Premises for any reason, including, without limitation, Tenant's default under this Lease, or to exhibit the Premises for sale, lease or mortgage financing, or posting notices of default, or non-responsibility under any mechanic's or materialman's lien law or to otherwise inspect the Premises for compliance with the terms of this Lease. Any such entry shall not unreasonably interfere with residents, patients, patient care, or any other of Tenant's operations. During normal business hours and to the extent permitted by applicable law, Tenant will permit Landlord and Landlord's representatives, inspectors and consultants to examine all contracts, books and records relating to Tenant's operations at the Premises, whether kept at the Premises or at some other location, including, without limitation, Tenant's financial records. 17. LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section 17, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Premises, or any portion thereof or interest therein (including this Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Any such Encumbrance shall provide that it is subject to the rights of Tenant under this Lease, and shall further provide that so long as no Event of Default shall have occurred under this Lease, Tenant's occupancy hereunder, including, but without limitation, Tenant's right of quiet enjoyment provided in Section 18, shall not be disturbed in the event any such lienholder or any other person takes possession of the Premises through foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant shall subordinate this Lease to the lien of a new Encumbrance on the Premises; provided, however, if Tenant is not then in default hereunder, then Tenant shall not be required to so subordinate this Lease unless the holder or beneficiary of such Encumbrance executes a nondisturbance agreement in conformity with the provisions of Section 18 hereof. 18. SUBORDINATION AND NON-DISTURBANCE. (a) Concurrently with the execution and delivery of any fee mortgage entered into after the date hereof, provided that the Tenant executes and delivers an agreement of the type described in the following paragraph, Landlord shall obtain and deliver to Tenant an agreement by the holder of such fee mortgage, pursuant to which, the applicable fee mortgagee (i) consents to this Lease, and (ii) agrees that, notwithstanding the terms of the applicable fee mortgage held by such fee mortgagee, or any default, expiration, termination, foreclosure, sale, entry or other act or omission under or pursuant to such fee mortgage, or any transfer in lieu of foreclosure, (A) Tenant's rights under this Lease shall not be disturbed so long as Tenant is not in default hereunder, nor shall this Lease be terminated or cancelled at any time, except in the event that Landlord shall have the right to terminate this Lease under the terms and provisions expressly set forth herein, (B) BCC's option to purchase the Premises shall remain in force and effect pursuant to the terms of the Master Agreement, and (C) in the event that BCC or its Affiliate elects its option to purchase the Premises and performs all of its obligations hereunder in connection with any such election, the holder of the fee mortgage shall release its fee mortgage upon payment by BCC or its Affiliate of the purchase price required under the Master Agreement. (b) At the request from time to time of any fee mortgagee, Tenant shall (i) subordinate this Lease and all of Tenant's rights and estate hereunder to the fee mortgage held by such fee mortgagee, and (ii) agree that Tenant will attorn to and recognize such fee mortgagee or the -28- 34 purchaser at any foreclosure sale or any sale under a power of sale contained in any such fee mortgage as Landlord under this Lease for the balance of the Term then remaining. To effect the intent and purpose of the immediately preceding sentence, Tenant agrees to execute and deliver such instruments in recordable form as are reasonably requested by Landlord or the applicable fee mortgagee; provided, however, that such fee mortgagee simultaneously executes, delivers and records a written agreement of the type described in Section 18(a) above. 19. QUIET ENJOYMENT. So long as there is no Event of Default by Tenant, Landlord covenants and agrees that Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Tenant (excepting, however, intrusion of Tenant's quiet enjoyment occasioned by condemnation or destruction of the property as referred to in Sections 12 and 13 hereof). 20. EASEMENTS, ETC. Landlord will, from time to time, at the request of Tenant and at Tenant's cost and expense, but subject to the approval of Landlord (a) grant easements and other rights in the nature of easements, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Premises, (c) dedicate or transfer unimproved portions of the Premises for road, highway or other public purposes, (d) execute petitions to have the Premises annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Premises, and (f) execute and deliver to any person such instruments as may be necessary or appropriate to confirm or effect such grants, releases, dedications and transfers (to the extent of its interest in the Premises). Along with any such request, Tenant shall deliver to Landlord an Officer's Certificate stating (and such other confirming information as Landlord may reasonably require) that such grant, release, dedication, transfer, petition or amendment has no adverse effect on the intended use of the Premises and does not reduce the value thereof. 21. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the internal laws of the state in which the Premises is located without regard to the conflict of laws rules of such State. 22. PRESERVATION OF GROSS REVENUES. 22.1 Tenant acknowledges that a fair return to Landlord on its investment in the Premises is dependent, in part, on the concentration on the Premises during the Term of the Facility business of Tenant and its Affiliates in the geographical area of the Premises. Tenant further acknowledges that the diversion of residents and/or patient care activities from the Premises to other facilities owned or operated by Tenant or its Affiliates at or near the end of the Term will have a material adverse impact on the value and utility of the Premises. 22.1.1 Therefore, Tenant agrees that during the Term, and for a period of one (1) year thereafter, neither Tenant nor any of its Affiliates shall, without the prior written consent of Landlord, operate, own, participate in or otherwise receive revenues from any other facility or institution providing services or similar goods to those provided on or in connection with the Premises and the permitted use thereof as contemplated under this Lease, within a five (5) mile radius of the Premises; -29- 35 provided, however, that the provisions of this Section 22.1.1 shall not apply to the operation or ownership of any licensed skilled nursing facility or licensed acute care hospital facility. 22.1.2 In addition, Tenant hereby covenants and agrees that for a period of one (1) year following the expiration or earlier termination of this Lease, neither Tenant nor any of its Affiliates shall, without prior written consent of Landlord, solicit for hire, engage or otherwise employ any management or supervisory personnel working on or in connection with the Premises and not also working at any other facility owned or operated by BCC or any Affiliate of BCC. 22.2 Except as required for medically appropriate reasons, prior to and for a period of one (1) year after Lease termination, neither Tenant nor any of its Affiliates will recommend or solicit the removal or transfer of any resident or patient from the Premises to any other assisted living, senior housing, or retirement housing facility; provided, however, the provisions of this Section 22.2 shall not apply to the removal or transfer of a resident or patient to a licensed skilled nursing facility or licensed acute care hospital facility. 22.3 Tenant hereby specifically acknowledges and agrees that the temporal, geographical and other restrictions contained in this Section 22 are reasonable and necessary to protect the business and prospects of Landlord, and that the enforcement of the provisions of this Section 22 will not work an undue hardship on Tenant. Tenant further agrees that in the event either the length of time, geographical or any other restrictions, or portion thereof, set forth in this Section 22 is overly restrictive and unenforceable in any court proceeding, the court may reduce or modify such restrictions, but only to the extent necessary, to those which it deems reasonable and enforceable under the circumstances, and the parties agree that the restrictions of this Section 22 will remain in full force and effect as reduced or modified. Tenant further agrees and acknowledges that Landlord does not have an adequate remedy at law for the breach or threatened breach by Tenant of the covenants contained in this Section 22, and Tenant therefore specifically agrees that Landlord may, in addition to other remedies which may be available to Landlord hereunder, file a suit in equity to enjoin Tenant from such breach or threatened breach, without the necessity of posting any bond. Tenant further agrees, in the event that any provision of this Section 22 is held to be invalid or against public policy, the remaining provisions of this Section 22 and the remainder of this Lease shall not be affected thereby. 23. HAZARDOUS MATERIALS. 23.1 HAZARDOUS MATERIAL COVENANTS. Tenant's use of the Premises shall comply with all Hazardous Materials Laws. In the event any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws or if Tenant has received any Hazardous Materials Claim against the Premises, Tenant shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord's approval of the remediation plan (which approval shall not be unreasonably withheld or delayed), remedy any such problem to the satisfaction of Landlord and all applicable governmental authorities, in accordance with all Hazardous Materials Laws and good business practices. -30- 36 23.2 TENANT NOTICES TO LANDLORD. Tenant shall immediately advise Landlord in writing of: 23.2.1 any Environmental Activities in violation of any Hazardous Materials Laws; 23.2.2 any Hazardous Materials Claims against Tenant or the Premises; 23.2.3 any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about the Premises in violation of any Hazardous Materials Laws; 23.2.4 Tenant's discovery of any occurrence or condition on or in a one (1) mile radius of the Premises that materially increase the risk that the Premises will be exposed to Hazardous Materials; and 23.2.5 all communications to or from Tenant, any governmental authority or any other person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to the Premises, including copies thereof. 23.3 EXTENSION OF TERM. Notwithstanding any other provision of this Lease, in the event any Hazardous Materials are discovered on, under or about the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord, in accordance with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this Lease (which date may be subsequent to the date upon which the Term was to have expired). 23.4 PARTICIPATION IN HAZARDOUS MATERIALS CLAIMS. Landlord shall have the right, at Tenant's sole cost and expense (including, without limitation, Landlord's reasonable attorneys' fees and costs) and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. 23.5 ENVIRONMENTAL ACTIVITIES shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from the Premises or located on or present on or under the Premises. Nothing contained in the foregoing or elsewhere in this Section 21 is intended to, nor shall it, limit the liability of Tenant, if any, to Landlord with respect to any representation or warranty given to Landlord with respect to Hazardous Materials or environmental matters generally as set forth in the Purchase Agreement. 23.6 HAZARDOUS MATERIALS shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to the Premises or to persons on or about the -31- 37 Premises or cause the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards; (f) radon gas in excess of permissible state or federal guidelines; (g) underground storage tanks which pose a hazard to the property or to persons on or about the Property or cause the Property to be in violation of any Hazardous Materials Laws; and (h) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time. 23.7 HAZARDOUS MATERIALS CLAIMS shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. 23.8 HAZARDOUS MATERIALS LAWS shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, underground storage tanks, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters. 24. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, without the prior written consent of Landlord, which may be withheld at Landlord's sole discretion, voluntarily or involuntarily assign, mortgage, encumber or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof. For the purposes of this Lease, the following, without limitation, shall be considered an assignment of this Lease by Tenant: (i) a management or similar agreement (other than any such agreement between Tenant and BCC or an Affiliate of BCC), and (ii) any Change in Control (as such term is defined in Section 10.1.6 hereof) of Tenant. Any of the foregoing acts without such consent shall be void but shall, at the option of Landlord in its sole discretion, constitute an Event of Default giving rise to Landlord's right, among other things, to terminate this Lease. Without limiting the foregoing, this Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law without the prior written consent of Landlord which may be withheld at Landlord's sole discretion. Notwithstanding the foregoing, Tenant may without Landlord's consent assign this Lease or sublet all (but not less than all) of the Premises thereof to an Affiliate of Tenant or Guarantor, provided that such Affiliate fully assumes the obligations of Tenant under this Lease, BCC has approved such assignment in writing, Tenant remains fully liable under this Lease, Guarantor remains fully liable with respect to its guaranty of this Lease, the use of the Premises remains unchanged, and no such assignment or sublease shall be valid and no such Affiliate shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Premises or any part thereof on any basis such that the rental to be paid by the sublessee thereunder would be based, -32- 38 in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. (b) If no Event of Default exists under this Lease and no event of default exists under the Master Agreement, the Development Agreement, the Deposit Pledge Agreement, or the Working Capital Assurance Agreement, then notwithstanding the provisions of Section 10.1.6 above or Section 24(a) above to the contrary, Tenant shall have the right, and Landlord hereby consents, to the transfer, assignment or sale to either BCC or an Affiliate of BCC of all the outstanding equity interests of Tenant pursuant to the Option Agreement or all of the assets of Tenant pursuant to the Asset Purchase Option (as defined in the Shortfall Funding Agreement); provided, however, should such purchase be made by an Affiliate of BCC, BCC shall provide to Landlord a guaranty in form and substance satisfactory to Landlord of all obligations of the successor Tenant under this Lease; and provided, further, that BCC must give Landlord thirty (30) days prior written notice of any such transfer, assignment or sale (without any obligation for BCC to obtain Landlord's approval of any such transfer). In such event, the initial Tenant and any guarantor of such Tenant's obligations to Landlord (exclusive of BCC or a BCC Affiliate) shall be relieved of all liability and obligations hereunder and to Landlord, and Landlord shall look solely to BCC (and, if applicable, the BCC Affiliate acting as Tenant hereunder) for the satisfaction of all such obligations owed to Landlord. 25. IDEMNIFICATION. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense loss, costs, deficiency, fine, penalty, or damage (including, without limitation, punitive or consequential damages) of any kind or nature, including reasonable attorneys' fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Lease (including, without limitation, the breach by Tenant of any of its obligations hereunder), the Premises, or the operations of Tenant on the Premises, including, without limitation, all Environmental Activities on the Premises, all Hazardous Materials Claims (including, without limitation, any Claims arising out of any Environmental Activities described in the "PHASE I REPORT", as defined in the Purchase Agreement) or any violation by Tenant of a Hazardous Materials Law with respect to the Premises. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Landlord believes is covered by this indemnity, Landlord shall give Tenant notice of the matter. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense (including, without limitation, Landlord's reasonable attorneys' fees and costs) with legal counsel reasonably satisfactory to Landlord. Landlord may elect to defend the matter with its own counsel at Tenant's expense. 26. HOLDING OVER. If Tenant shall for any reason remain in possession of the Premises after the expiration or earlier termination of this Lease, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental each month, one hundred fifty percent (150%) of the aggregate of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to -33- 39 the Premises. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease, nor shall anything contained herein be deemed to limit Landlord's remedies pursuant to this Lease or otherwise available to Landlord at law or in equity. 27. ESTOPPEL CERTIFICATES. Tenant or Landlord, as applicable, shall, at any time upon not less than five (5) days prior written request by the requesting party, execute, acknowledge and deliver to the requesting party or its designee a statement in writing, executed by an officer or general partner of Tenant or Landlord (as applicable), certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that this Lease is in full force and effect as modified, and setting forth such modifications), (b) the dates to which Minimum Rent, Additional Rent and additional charges hereunder have been paid, (c) that no default by either Landlord or Tenant exists hereunder or specifying each such default, and (d) as to such other matters as the requesting party may reasonably request. 28. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Premises shall convey the Premises in accordance with the terms hereof, Landlord or such successor owner shall thereupon be released from all future liabilities and obligations of Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Premises and all such future liabilities and obligations shall thereupon be binding upon the new owner. 29. ACCESS TO RECORDS. To the extent required by applicable law and until the expiration of four (4) years after the furnishing of services pursuant to this Lease, the Landlord shall make available (and, if Landlord carries out any of the duties under this Lease on behalf of Landlord or Tenant through a subcontract with a related organization, and such subcontract has a value or cost of Ten Thousand Dollars [$10,000.00] or more during any twelve [12] month period, then such subcontract shall contain a clause to the effect that the applicable subcontractor shall make available) the books, documents and records of the Landlord (or such subcontractor) that are necessary to verify the nature and extent of such costs in connection with said services, upon request by the Secretary of Health and Human Services, the U.S. Comptroller General, or their respective duly authorized representatives. 30. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive any rights to trial by jury in any action, proceedings or counterclaim brought by either of the parties against the other in connection with any matter whatsoever arising out of or in any way connected with this Lease, including, without limitation, the relationship of Landlord and Tenant, Tenant's use and occupancy of the Premises, or any claim of injury or damage relating to the foregoing or the enforcement of any remedy hereunder. 31. ATTORNEYS' FEES. If Landlord or Tenant brings any action to interpret or enforce this Lease, or for damages for any alleged breach hereof, the prevailing party in any such action shall be entitled to reasonable attorneys' fees and costs as awarded by the court in addition to all other recovery, damages and costs. -34- 40 32. SEVERABILITY. In the event any part or provision of the Lease shall be determined to be invalid or unenforceable, the remaining portion of this Lease shall nevertheless continue in full force and effect. 33. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. 34. BINDING EFFECT. Subject to the provisions of Section 24 above, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective successors in interest and assigns. 35. WAIVER AND SUBROGATION. Landlord and Tenant hereby waive to each other all rights of subrogation which any insurance carrier, or either of them, may have as to the Landlord or Tenant by reason of any provision in any policy of insurance issued to Landlord or Tenant, provided such waiver does not thereby invalidate the policy of insurance. 36. MEMORANDUM OF LEASE. If requested by Landlord or Tenant, then Landlord and Tenant shall execute a memorandum of lease in which reference to this Lease shall be made, in form suitable for recording under the laws of the state in which the Premises is located. Tenant shall pay all costs and expenses of preparing and recording such memorandum of this Lease. 37. INCORPORATION OF RECITALS AND ATTACHMENTS. The recitals and exhibits, schedules, addenda and other attachments to this Lease are hereby incorporated into this Lease and made a part hereof. 38. TITLES AND HEADINGS. The titles and headings of sections of this Lease are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Lease. 39. USURY SAVINGS CLAUSE. The parties intend that their relationship be that of lessor and lessee only. Nothing contained in this Lease shall be deemed or construed to constitute an extension of credit by Landlord to Tenant, nor shall this Lease be deemed to be a partnership or venture agreement between Landlord and Tenant. Notwithstanding the foregoing, in the event any payment made to Landlord hereunder is deemed to violate any applicable laws regarding usury, the portion of any payment deemed to be usurious shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and, in the event Tenant discharges and performs all obligations hereunder, such funds will be reimbursed to Tenant upon the expiration of the Term. No interest shall be paid on any such funds held by Landlord. 40. JOINT AND SEVERAL. If more than one person or entity is the Tenant hereunder, the liability and obligations of such persons or entities under this Lease shall be joint and several. 41. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the obligations, representations, warranties and covenants of Tenant under this Lease shall survive the expiration or earlier termination of the Term, including, without limitation, Tenant's obligations to pay rent -35- 41 and other sums under this Lease following the occurrence of an Event of Default and the termination of this Lease pursuant to Section 10.2.2 above. 42. INTERPRETATION. Both Landlord and Tenant have been represented by counsel and this Lease has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. 43. SUBSTITUTION OF PROPERTY FOR THE PREMISES. Substitution of Property for the Premises. In the event Landlord accepts an offer by Tenant to substitute other property for the Premises, and provided that no Event of Default shall have occurred and be continuing, Tenant shall have the right (subject to such conditions as Landlord may reasonably require, and upon notice to Landlord) to substitute one or more properties (collectively referred to as "SUBSTITUTE PROPERTIES" or individually as a "SUBSTITUTE PROPERTY") for the Premises on a monthly payment date specified in such notice (the "SUBSTITUTION DATE") occurring not less than ninety (90) days after receipt by Landlord of such notice. The notice shall be in the form of an Officer's Certificate and shall specify the reason(s) for the proposed substitution and the proposed Substitution Date. Notwithstanding anything contained herein to the contrary, any substitution for the Premises shall require the prior written consent of Landlord which shall be within the sole discretion of Landlord. -36- 42 Executed as of the date indicated above. TENANT: ___________________________________ a Delaware limited liability company By: Elder Care Operators, LLC, a Delaware limited liability company, its Manager and authorized representative By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Its Authorized Representative LANDLORD: ___________________________________ ______________________ By: ----------------------------------------- -37- EX-10.13 13 BALANCED CARE CORPORATION 1 Exhibit 10.13 SCHEDULE TO FORM OF NHP FIRST SERIES LEASE AND SECURITY AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Facility Location Date of Agreement Landlord Tenant Property Address Manager - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Akron, OH March 31, 1998 MLD Delaware Elder Care South Hawkins Balanced Care Trust Operators of Avenue in Akron, at Akron, Inc. Akron, LLC Summit County, Ohio - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Hilliard, OH March 27, 1998 Nationwide Elder Care Heritage Club Balanced Care Health Operators of Drive in Hilliard, at Hilliard, Properties, Inc. Hilliard, LLC Franklin County, Inc. Ohio - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Lakemont Farms, March 27, 1998 MLD Delaware Elder Care Washington Pike in Balanced Care PA Trust Operators of South Fayette at Lakemont Lakemont Farms, Township, Farms, Inc. LLC Allegheny County, Pennsylvania - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- York, PA March 27, 1998 MLD Delaware Elder Care Knob Hill Road in Balanced Care Trust Operators of York Township, at York, Inc. York, LLC York County, Pennsylvania - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Bristol, TN March 31, 1998 Nationwide Elder Care Meadow View Road Balanced Care Health Operators of in Bristol, 5th at Bristol, Properties, Inc. Bristol, LLC Civil District of Inc. Sullivan County, Tennessee - ------------------------- ------------------- ----------------- ----------------- -------------------- ---------------- Murfreesboro, TN March 27, 1998 Nationwide Elder Care U.S. Highway 231 Balanced Care Health Operators of in Murfreesboro, at Properties, Inc. Murfreesboro, the 9th Civil Murfreesboro, LLC District of Inc. Rutherford County, Tennessee - ------------------------- ------------------- ----------------- ----------------- -------------------- ----------------
- -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Facility Location Term of Lease Land Cost Tradename Security Deposit Additional Security Deposit - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Akron, OH 3/31/1998 - $240,000.00 Outlook Pointe at $104,927.50 $52,463.75 3/31/2009 Akron - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Hilliard, OH 3/27/1998- $631,272.00 Outlook Pointe at $114,601.68 $57,300.84 3/31/2009 Heritage Lakes - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Lakemont Farms, 3/27/1998 - $632,000.00 Outlook Pointe at $127,996.68 $63,998.34 PA 3/31/2009 Lakemont Farms - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- York, PA 3/27/1998- $400,000.00 Outlook Pointe at $66,230.83 $33,115.42 3/31/2009 York - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Bristol, TN 3/31/1998- $400,000.00 Outlook Pointe at $67,719.18 $33,859.59 3/31/2009 Bristol - -------------------------- ------------------- ----------------- --------------------- ------------------- --------------------- Murfreesboro, TN 3/27/1998- $489,130.00 Outlook Pointe at $66,975.00 $33,487.50 3/31/2009 Murfreesboro - -------------------------- ------------------- ----------------- --------------------- ------------------- ---------------------
EX-10.14 14 BALANCED CARE CORPORATION 1 Exhibit 10.14 FORM OF LEASE AND SECURITY AGREEMENT BY AND BETWEEN NATIONWIDE HEALTH PROPERTIES, INC., A MARYLAND CORPORATION AS "LANDLORD" AND ------------------------------------ ------------------------------------ AS "TENANT" DATED _______________, 1998 ------------------------------------ ------------------------------------ ------------------------------------ 2 TABLE OF CONTENTS Page 1. Term.............................................................. 1.1 Term..................................................... 1.2 Renewal Terms............................................ 2. Rent.............................................................. 2.1 Initial Term Minimum Rent................................ 2.2 Initial Term Additional Rent............................. 2.3 Renewal Term Minimum Rent................................ 2.4 Renewal Term Additional Rent............................. 2.5 Rent Cap and Floor....................................... 2.6 Proration for Partial Periods............................ 2.7 Forms for Additional Rent and Annual Rent Limits......... 2.8 Absolute Net Lease....................................... 3. Taxes, Assessments and Other Charges.............................. 3.1 Tenant's Obligations..................................... 3.2 Proration................................................ 3.3 Right to Protest......................................... 3.4 Tax Indemnity........................................... 3.5 Tax Bills............................................... 3.6 Other Charges........................................... 4. Insurance........................................................ 4.1 General Insurance Requirements.......................... 4.2 Fire and Extended Coverage.............................. 4.3 Public Liability........................................ 4.4 Professional Liability Insurance........................ 4.5 Workers Compensation.................................... 4.6 Boiler Insurance........................................ 4.7 Business Interruption Insurance......................... 4.8 Deductible Amounts...................................... 5. Use, Maintenance and Alteration of the Premises.................. 5.1 Tenant's Maintenance Obligations........................ 5.2 Regulatory Compliance................................... 5.3 Permitted Use........................................... 5.4 Tenant Repurchase Obligation............................ 5.5 No Liens; Permitted Contests............................ 5.6 Alterations by Tenant................................... 5.7 Capital Improvements Funded by Landlord................. 5.8 Compliance With IRS Guidelines.......................... 6. Condition of, and Title to, Premises............................. 7. Landlord and Tenant Personal Property............................ 7.1 Tenant Personal Property................................ 7.2 Landlord's Security Interest............................ 7.3 Financing Statements.................................... 7.4 Intangible Property..................................... 8. Representations and Warranties................................... 8.1 Due Authorization and Execution......................... 8.2 Due Organization........................................ 8.3 No Breach of Other Agreements........................... 9. Financial, Management and Regulatory Reports..................... 9.1 Monthly Facility Reports................................ 9.2 Quarterly Financial Statements.......................... 9.3 Annual Financial Statement.............................. 9.4 Accounting Principles................................... 9.5 Regulatory Reports...................................... 10. Events of Default and Landlord's Remedies........................ 10.1 Events of Default....................................... 10.2 Remedies................................................ 10.3 Receivership............................................ 10.4 Late Charges............................................ 10.5 Remedies Cumulative; No Waiver.......................... 10.6 Performance of Tenant's Obligations by Landlord......... 11. Security Deposit................................................. 12. Damage by Fire or Other Casualty................................. 12.1 Reconstruction Using Insurance.......................... 12.2 Surplus Proceeds........................................ 12.3 No Rent Abatement....................................... 13. Condemnation..................................................... 13.1 Complete Taking......................................... 13.2 Partial Taking.......................................... 13.3 Lease Remains in Effect................................. 14. Provisions on Termination of Term................................ 14.1 Surrender of Possession................................. 14.2 Removal of Personal Property............................ 14.3 Title to Personal Property Not Removed.................. 14.4 Management of Premises.................................. 14.5 Correction of Deficiencies.............................. 15. Notices and Demands.............................................. 16. Right of Entry; Examination of Records........................... 17. Landlord May Grant Liens......................................... 18. Subordination and Non-Disturbance. .............................. 19. Quiet Enjoyment.................................................. 20. Easements, Etc................................................... 21. Applicable Law................................................... 22. Preservation of Gross Revenues................................... 23. Hazardous Materials.............................................. 23.1 Hazardous Material Covenants............................ 23.2 Tenant Notices to Landlord.............................. 23.3 Extension of Term....................................... 23.4 Participation in Hazardous Materials Claims............. 23.5 Environmental Activities................................ 23.6 Hazardous Materials..................................... 23.7 Hazardous Materials Claims.............................. 23.8 Hazardous Materials Laws................................ 24. Assignment and Subletting........................................ 25. Indemnification.................................................. 26. Holding Over..................................................... 27. Estoppel Certificates............................................ 28. Conveyance by Landlord........................................... 29. Access to Records................................................ 30. Attorneys' Fees.................................................. 31. Severability..................................................... 32. Counterparts..................................................... 33. Binding Effect................................................... 34. Waiver and Subrogation........................................... 35. Memorandum of Lease.............................................. 36. Incorporation of Recitals and Attachments........................ 37. Titles and Headings.............................................. 38. Usury Savings Clause............................................. 39. Joint and Several................................................ 40. Survival of Representations, Warranties and Covenants............ 41. Interpretation................................................... 42. Substitution of Property for the Premises........................ 43. WAIVER OF JURY TRIAL............................................. EXHIBITS: EXHIBIT A LEGAL DESCRIPTION EXHIBIT B APPRAISAL PROCESS EXHIBIT C CALCULATION OF ADDITIONAL RENT EXHIBIT D PERMITTED EXCEPTIONS EXHIBIT E CALCULATION OF RENT CAP AND FLOOR EXHIBIT F SCHEDULE 1 TO FINANCING STATEMENT 3 LEASE AND SECURITY AGREEMENT THIS LEASE AND SECURITY AGREEMENT ("LEASE") is made and entered into as of the _____ day of ___________, 1998, by and between _____________________ __________________________________ ("LANDLORD"), and ___________________ _________________________________________________________ ("TENANT"). W I T N E S S E T H: WHEREAS, Landlord has acquired that certain real property, all improvements thereon and all appurtenances thereto, located at ____________ ____________________________________________________________________________ and more specifically described in EXHIBIT "A" attached hereto and incorporated herein for all purposes (the "REAL PROPERTY"), pursuant to the terms and provisions of that certain Option Agreement (the "PURCHASE AGREEMENT") dated December 22, 1997 by and between BALANCED CARE CORPORATION, a Delaware corporation ("BCC"), as buyer, and ____________________________________________ __________________________ ("SELLER"), formed and existing under the laws of or residing in the __________________, as seller, and pursuant to the terms and provisions of that certain Assignment of Purchase Agreement of even date herewith, by and between BCC and Landlord, pursuant to which Landlord acquired all of BCC's rights under the Purchase Agreement. The Real Property, together with all subsequent improvements and appurtenances thereto, and all Landlord Personal Property (defined below) shall be collectively referred to in this Lease as the "PREMISES"; and WHEREAS, BCC has agreed to provide working capital advances to Tenant in the event Tenant would otherwise be unable to meet Tenant's obligations under this Lease or otherwise, pursuant to the terms and provisions of (i) that certain Shortfall Funding Agreement ("SHORTFALL FUNDING AGREEMENT") of even date herewith, by and between Tenant, BCC and all equity owners of Tenant, (ii) that certain _______________________________________________________________________ ("LEASEHOLD MORTGAGE") of even date herewith, by and between Tenant and BCC, (iii) that certain Deposit Pledge Agreement ("DEPOSIT PLEDGE AGREEMENT") of even date herewith, by and between Tenant, Landlord, BCC and all equity owners of Tenant, (iv) that certain Option Agreement ("OPTION Agreement") of even date herewith, by and between the equity owners of Tenant and BCC, (v) that certain Equity Pledge Agreement of even date herewith, by and between Tenant, BCC and all equity owners of Tenant, and (vi) that certain Working Capital Assurance Agreement ("WORKING CAPITAL ASSURANCE AGREEMENT") of even date herewith, by and between BCC and Landlord; and WHEREAS, Landlord has agreed to provide funds for the construction of ____________________________ (such type of facility being hereinafter individually referred to as a "FACILITY" and severally referred to as "FACILITIES"), pursuant to the terms and provisions of that certain Development Agreement of even date herewith entered into by and between Landlord and BCC DEVELOPMENT AND MANAGEMENT CO. ("DEVELOPER"), a Delaware corporation, all of the issued and outstanding capital stock of Developer being owned by BCC. The Facility to be built on the Premises pursuant to the development -1- 4 agreement shall be deemed part of the Premises for all purposes of this Lease, together with any furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith and funded by Landlord (the "LANDLORD PERSONAL PROPERTY"); and WHEREAS, Tenant and ________________________________., a Delaware corporation (the "MANAGER") have entered into a Management Agreement dated on or about the date of this Lease (the "MANAGEMENT AGREEMENT") for the operation and management of the applicable Facility; and WHEREAS, Landlord, BCC and Developer have agreed to enter into other transactions involving the acquisition, lease, and/or development of other tracts or parcels of real property (the "OTHER PROPERTIES") pursuant to the terms and provisions of that certain Second Series Master Investment Agreement ("MASTER AGREEMENT") of even date herewith, and Tenant has agreed to be bound by the Master Agreement pursuant to the terms and provisions of that certain Tenant Estoppel Certificate of even date herewith. Any leases of such Other Properties entered into by and between Landlord, BCC or their respective Affiliates (defined below) shall be hereinafter collectively referred to as the "OTHER LEASES"; and WHEREAS, Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and intending to be legally bound hereby, Landlord hereby leases and lets unto Tenant the Premises for the term and upon the conditions and provisions hereinafter set forth. 1. TERM. 1.1 TERM. The term of this Lease shall commence on the date first written above and shall end on June 30, 2009 (the "INITIAL TERM") unless extended pursuant to Section 1.2 or earlier terminated in accordance with the provisions hereof. The Initial Term and all Renewal Terms (as hereinafter defined) are referred to collectively as the "TERM". 1.2 RENEWAL TERMS. The Term may be extended for three (3) separate renewal terms (each, a "RENEWAL TERM") of six (6) years each, upon the satisfaction of all of the following terms and conditions: 1.2.1 Not more than thirty (30) days before or after the date which is twelve (12) months prior to the end of the then current Term, Tenant shall give Landlord written notice that Tenant desires to exercise its right to extend the then current Term for one (1) Renewal Term. 1.2.2 There shall be no Event of Default under this Lease or any of the Other Leases, either on the date of Tenant's notice to Landlord pursuant to Section 1.2.1 above, or on the last day of the then current Term of this Lease. -2- 5 1.2.3 The tenants of all the Other Leases concurrently exercise their respective rights to extend the then current term of such Other Leases, and the terms and conditions of renewal of such Other Leases are fully satisfied, all as provided in the Master Agreement and such Other Leases. 1.2.4 All other provisions of this Lease shall remain in full force and effect and shall continuously apply throughout the Renewal Term(s). 2. RENT. During the Initial Term and all Renewal Terms Tenant shall pay to Landlord minimum rent ("MINIMUM RENT") and additional rent ("ADDITIONAL RENT") as follows: 2.1 INITIAL TERM MINIMUM RENT. During the Initial Term, the Minimum Rent shall accrue or be paid to Landlord by Tenant monthly in advance and shall be calculated as follows: 2.1.1 CONSTRUCTION PERIOD MINIMUM RENT. During the Initial Term, but prior to the earliest to occur of (A) Substantial Completion, or (B) the Completion Date (both as defined in the Development Agreement) (such earliest date being hereinafter in this Lease referred to as the "RESET DATE"), Minimum Rent shall be calculated as follows: (i) Landlord shall determine in good faith based on recognized industry sources the London Interbank Offering Rate for 30 day advances (the "LIBOR RATE") in effect on the first business day of each calendar month before the Reset Date occurs; (ii) During each calendar month in the Initial Term until the Reset Date occurs, Minimum Rent (referred to herein as the "CONSTRUCTION PERIOD MINIMUM RENT") shall accrue but shall not be paid: (A) on the total outstanding from time to time of (x) _________________________________________________ ________________ (hereinafter referred to as the "LAND COST") plus (y) all advances made under the Development Agreement with respect to Work (as defined in the Development Agreement) plus (z) all previously accrued but unpaid Construction Period Minimum Rent; (B) at a rate equal to one twelfth (1/12) of the sum of (x) the LIBOR Rate in affect for the applicable month, plus (y) one hundred fifty (150) basis points; (iii) The accrual of Construction Period Minimum Rent calculated under this Section 2.1.1 with respect to advances made other than on the first day of a calendar month shall be prorated in the month in which advances are made on the basis of a thirty (30) day month and actual days elapsed; -3- 6 2.1.2 POST-CONSTRUCTION MINIMUM RENT. On the Reset Date, the monthly Minimum Rent with respect to the total of (A) the Land Cost plus (B) all advances under the Development Agreement for Work plus (C) all accrued but unpaid Construction Period Minimum Rent shall be reset at an amount equal to one-twelfth (1/12) of the product of (I) the total of the Land Cost plus such advances made for Work plus accrued but unpaid Construction Period Minimum Rent, times (II) three hundred thirty (330) basis points over the twenty (20) day average 10 year United States Treasury rate in effect on the Reset Date (the "INITIAL TERM POST-CONSTRUCTION MINIMUM RENT"). 2.1.3 DEFERRAL PERIOD. (i) The Initial Term Post-Construction Minimum Rent shall accrue but not be paid until one hundred twenty (120) days after the Reset Date. The total amount which accrues during such one hundred twenty (120) day period is referred to herein as the "BASE DEFERRED RENT" and such one hundred twenty (120) day period is referred to as the "DEFERRAL PERIOD". With respect to the Deferral Period, Tenant hereby agrees to pay additional deferred rent in an amount equal to six percent (6%) of the Base Deferred Rent (hereinafter referred to as the "ADDITIONAL DEFERRED RENT"). The sum of the Base Deferred Rent plus the Additional Deferred Rent is referred to herein as the "DEFERRED RENT AMOUNT"; (ii) Commencing with the Payment Commencement Date (as such term is defined in the next sentence) and on the first business day of each calendar month thereafter during the Initial Term, the Minimum Rent payable during the Initial Term shall include the Initial Term Post-Construction Minimum Rent and the Amortizing Payment (as defined below). As used herein, the "PAYMENT COMMENCEMENT DATE" shall mean the first business day of the calendar month immediately following the expiration of the Deferral Period. If the Reset Date falls on other than the first business day of a calendar month, on the Payment Commencement Date, Tenant shall also pay a prorated amount of Initial Term Post-Construction Minimum Rent for the period from the end of the Deferral Period to the Payment Commencement Date, based on a thirty (30) day month and actual days elapsed; (iii) Commencing on the Payment Commencement Date and monthly thereafter during the Initial Term, the Minimum Rent payable by Tenant shall include an amount (the "AMORTIZING PAYMENT") equal to (A) the Deferred Rent Amount, divided by (B) the number of calendar months remaining after the end of the Deferral Period through the end of the Initial Term; (iv) Therefore, during the Initial Term but before the end of the Deferral Period, although the Deferred Rent Amount shall accrue and be payable over the balance of the Initial Term, there shall be no monthly Minimum Rent payable by Tenant; and -4- 7 (v) After the end of the Deferral Period and continuing for the remainder of the Initial Term, monthly Minimum Rent payable by Tenant consists of (A) the Initial Term Post-Construction Minimum Rent plus (B) the Amortizing Payment. 2.2 INITIAL TERM ADDITIONAL RENT. 2.2.1 During the second Lease Year of the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in advance on the first business day of each calendar month. Such Additional Rent (which shall be expressed as an annual amount but shall be payable in equal monthly installments) shall be equal to the total Minimum Rent payable by Tenant with respect to the first Lease Year times the percentage increase (the "CPI INCREASE") in the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup "All Items" (1982-1984=100) (the "CPI"). In no event shall a CPI Increase calculated under this Lease be a negative number. For purposes of this Section 2.2.1, the CPI Increase shall be calculated by comparing the CPI in effect on January 1, 1998 to the CPI in effect on January 1, 1999. 2.2.2 Commencing with the third Lease Year and continuing thereafter during the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a monthly basis in arrears on the fifteenth (15th) day of each calendar month; provided, however, if such payment date falls on a weekend or federal holiday, Tenant shall make such payment on the first business day immediately preceding such payment date. Such Additional Rent shall be equal to the sum of (a) eleven percent (11%) of the amount by which the Gross Revenues for the applicable Lease Year through the applicable month exceed the Gross Revenues for the applicable portion of the Base Year, minus (b) all Additional Rent previously paid by Tenant with respect to such Lease Year. The obligation to make a payment of Additional Rent which accrues during the Term shall survive the termination of this Lease and be payable as if the Lease was still in effect. 2.2.3 "GROSS REVENUES" shall be calculated according to generally accepted accounting principles consistently applied ("GAAP") and shall be defined as all revenues generated by the operation, sublease and/or use of the Premises in any way, excluding (a) contractual allowances during the Term for billings not paid by or received from the appropriate governmental agencies or third party providers; (b) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount billed to the patient or resident or other recipient of such services or goods, whether included in the billing or stated separately; (c) allowances according to GAAP or uncollectible accounts; (d) all proper patient or resident billing credits; and (e) deposits refundable to patients or residents of the applicable -5- 8 Facility. To the extent any portion of the Premises is subleased or occupied by an Affiliate of Tenant, Gross Revenues calculated for all purposes of this Lease (including, without limitation, the determination of the Additional Rent payable under this Lease) shall include the Gross Revenues of such sublessee with respect to the premises demised under the applicable sublease (i.e., the Gross Revenues generated from the operations conducted on such subleased portion of the Premises) and the rent received or receivable from such sublessee pursuant to such subleases shall be excluded from Gross Revenues for all such purposes. As to any sublease between Tenant and a non-Affiliate of Tenant, only the rental actually received by Tenant from such non-Affiliate shall be included in Gross Revenues. 2.2.4 "LEASE YEAR" shall be defined as the twelve (12) month periods commencing on July 1 of each year of the Term. 2.2.5 The "BASE YEAR" during the Initial Term shall mean the second Lease Year. 2.2.6 (a) the term "AFFILIATE" is defined to mean with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity, and the term "AFFILIATES" is defined to mean any group of such persons or entities; (b) the term "CONTROL" is expressly deemed to include any actual discretion or power to direct the affairs of the controlled person or entity, either directly or through a chain of ownership or control (regardless of actual ownership); (c) a general partner, manager, or managing member of a partnership or limited liability company, and any owner of thirty percent (30%) or more of such general partner or managing member, is expressly deemed to control such partnership or limited liability company; (d) a person or entity owning thirty percent (30%) or more of the common stock of a corporation or thirty percent (30%) or more of the voting interest in any other type of entity, is expressly deemed to control such corporation or other entity; (e) a trustee of a trust is expressly deemed to control such trust; (f) Tenant and any entity which is an Affiliate of Tenant, are all expressly deemed to be Affiliates of each other, and (g) BCC, Developer, Manager and any entity which is an Affiliate of any of the aforementioned entities, are all expressly deemed to be Affiliates of each other. Notwithstanding the foregoing, the term "Affiliate" shall not include any person or entity that is an equity owner or parent entity of Tenant; provided, however, this exclusion provision shall not exclude BCC, Developer, Manager, or Tenant as an Affiliate. 2.3 RENEWAL TERM MINIMUM RENT. The Minimum Rent for each Renewal Term shall be expressed as an annual amount but shall be payable in advance in equal monthly installments on the first business day of each calendar month. Such annual Minimum Rent shall be equal to the product of: 2.3.1 the greater of (a) the fair market value of the Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1 or (b) Landlord's Adjusted Investment (defined below) in the Premises, both as applicable; and -6- 9 2.3.2 a percentage equal to three hundred twenty (320) basis points over the average 10 year United States Treasury rate for the 20 day period ending on the date of Tenant's notice of exercise pursuant to Section 1.2.1 above. 2.3.3 As used in this Lease, the term "LANDLORD'S ADJUSTED INVESTMENT" means the product of Landlord's Investment (defined below) times the percentage equal to the sum of (i) One Hundred Percent (100%) plus (ii) the CPI Increase. For purposes of this Section 2.3.3, the CPI Increase shall be determined by comparing the CPI in effect as of January 1, 1998 to the CPI in effect on January 1 of the calendar year during which the applicable Renewal Term begins. 2.3.4 As used in this Lease, the term "LANDLORD'S INVESTMENT" means the sum of (i) the Land Cost, plus (ii) all amounts advanced by Landlord pursuant to Section 5.7 below, plus (iii) all amounts advanced by Landlord under the Development Agreement for Work, plus (iv) the total accrued Construction Period Minimum Rent, plus (v) the total accrued Deferred Rent Amount (but only to the extent such Deferred Rent Amount remains unamortized or unpaid as of this calculation), minus (vi) any net award paid to Landlord pursuant to Section 13.1 or Section 13.2 below. If within ten (10) days of the date of Tenant's notice of exercise pursuant to Section 1.2.1 above, Landlord and Tenant are unable to agree on the fair market value of the Premises for purposes of this calculation, such fair market value shall be established by the appraisal process described on EXHIBIT "B" attached hereto and incorporated herein for all purposes. The fair market value for purposes of determining the Minimum Rent for the applicable Renewal Term must be finally determined by such appraisal process on or before a date ninety (90) days after Tenant's notice of exercise pursuant to Section 1.2.1 above or Tenant shall lose its right to extend the Term. Landlord and Tenant acknowledge and agree that this Section is designed to establish a fair market Minimum Rent for the Premises during the applicable Renewal Terms. 2.4 RENEWAL TERM ADDITIONAL RENT. Except during the first Lease Year of any Renewal Term, Tenant shall pay to Landlord Additional Rent in each Renewal Term on a monthly basis in arrears on the fifteenth (15th) day of each calendar month; provided, however, if such payment date falls on a weekend or federal holiday, Tenant shall make such payment on the first business day immediately preceding such payment date. The Additional Rent for each Renewal Term shall be calculated as provided in Section 2.2 hereof except that (i) Section 2.2.1 hereof shall not apply, and (ii) the Base Year for the purpose of determining such Additional Rent shall be the first Lease Year of the applicable Renewal Term. 2.5 RENT CAP AND FLOOR. 2.5.1 Notwithstanding any of the other terms of this Section 2 -7- 10 but subject to Sections 2.5.2 and 2.5.3 below, the total of the Minimum Rent and Additional Rent (the "TOTAL RENT") due during each Lease Year shall not increase from one Lease Year to the next by an amount in excess of the product of (i) three percent (3%), times (ii) the Total Rent due during the immediately preceding Lease Year. 2.5.2 The terms of Section 2.5.1 above shall have no applicability in determining the calculation of the Total Rent due with respect to the first Lease Year of any Renewal Term. Notwithstanding any of the other terms of this Section 2, the Total Rent due with respect to the first Lease Year of any Renewal Term shall not exceed one hundred twenty-five percent (125%) of the Total Rent due during the immediately preceding Lease Year. 2.5.3 Notwithstanding any of the other terms of this Section 2, the Total Rent due during any Lease Year shall not under any circumstances be less than the Total Rent due during the immediately preceding Lease Year. 2.5.4 To the extent that Section 2.5.1 above operates to limit the Total Rent due for any Lease Year, the amount of rent which would have otherwise been paid or payable by Tenant will be carried forward on a cumulative basis and will be paid by Tenant to Landlord in any subsequent Lease Year (other than the first Lease Year of a Renewal Term) to the extent that the Total Rent due for such subsequent Lease Year is less than one hundred three percent (103%) of the Total Rent due during the Lease Year immediately preceding such subsequent Lease Year. 2.5.5 Within sixty (60) days of the end of each Lease Year, Tenant shall deliver to Landlord a report in a form mutually agreed upon by Landlord and Tenant, certified by an officer or general partner of Tenant, as applicable, setting forth the calculations required by the application of this Section 2.5. If said report provides that Tenant owes Landlord any sum of money, Tenant shall accompany such report delivered to Landlord with such funds. If said report provides that Landlord owes Tenant any sum of money, such sum shall be applied as a credit against future installments of Minimum Rent and Additional Rent due from Tenant to Landlord; provided, however, if such sum is owed by Landlord to Tenant with respect to the last Lease Year of the Term, Landlord shall pay such sum to Tenant within thirty (30) days of Landlord's receipt of the report in question. 2.5.6 For the purpose of comparing the Total Rent due from Lease Year to Lease Year pursuant to this Section 2.5, the increase in Minimum Rent by reason of any disbursement by Landlord pursuant to Section 5.7 of this Lease or pursuant to the Development Agreement shall be treated as follows: (i) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made against the Total Rent in the preceding Lease Year, such increase in Minimum Rent shall be ignored, and (ii) for the purpose of comparing the Total Rent in the Lease Year in which such disbursement is made to the Total -8- 11 Rent in the following Lease Year, such increase in Minimum Rent shall be deemed effective on the first day of the Lease Year in which the disbursement is made. 2.5.7 For the purpose of comparing the Total Rent due from Lease Year to Lease Year pursuant to this Section 2.5, the Total Rent due during the second Lease Year shall be calculated as if the Reset Date occurred during the first Lease Year. 2.6 PRORATION FOR PARTIAL PERIODS. The rent for any month during the Term which begins or ends on other than the first or last calendar day of a calendar month shall be prorated based on actual days elapsed. 2.7 FORMS FOR ADDITIONAL RENT AND ANNUAL RENT LIMITS. Tenant shall accompany each payment of Additional Rent with a completed calculation in the form of EXHIBIT "C" attached hereto and incorporated herein for all purposes. Tenant shall accompany each payment of the first month's Minimum Rent for each Lease Year with a completed calculation in the form of EXHIBIT "D" attached hereto and incorporated herein for all purposes. 2.8 ABSOLUTE NET LEASE. All rent payments shall be absolutely net to the Landlord free of Taxes (as hereinafter defined), assessments, utility charges, operating expenses, refurnishings, insurance premiums or any other charge or expense in connection with the Premises. All expenses and charges, whether for upkeep, maintenance, repair, refurnishing, refurbishing, restoration, replacement, insurance premiums, taxes, utilities, and other operating or other charges of a like nature or otherwise, shall be paid by Tenant. This provision is not in derogation of the specific provisions of this Lease, but in expansion thereof and as an indication of the general intentions of the parties hereto. Tenant shall continue to perform its obligations under this Lease even if Tenant claims that Tenant has been damaged by any act or omission of Landlord. Therefore, except for any credit due from Landlord in favor of Tenant as provided in Section 2.5.5 of this Lease, Tenant shall at all times remain obligated under this Lease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind. Tenant's sole right to recover damages against Landlord by reason of a breach or alleged breach of Landlord's obligations under this Lease shall be to prove such damages in a separate action against Landlord. 3. TAXES, ASSESSMENTS AND OTHER CHARGES: 3.1 TENANT'S OBLIGATIONS. Tenant agrees to pay and discharge (including the filing of all required returns) any and all taxes (including, but not limited to, recordation taxes, real estate and personal property taxes, business and occupational license taxes, ad valorem sales, use, intangible property, single business, gross receipts, transaction privilege, franchise taxes, business privilege, rent or other excise taxes) and other assessments levied or assessed against Tenant, the Premises or any interest therein or Landlord (with respect to this Lease and/or the Premises, but excluding (i) any state or federal income tax based upon the net income of Landlord, and (ii) any transfer tax or stamps assessed in connection with the transfer -9- 12 by Landlord of its interest in the Premises to any person or entity other than BCC or a BCC Affiliate) (all such taxes and assessments payable by Tenant being collectively referred to herein as "TAXES") prior to delinquency or imposition of any fine, penalty, interest or other cost. If any of the foregoing may, at the option of the taxpayer, be paid in installments, Tenant may exercise such option to pay the same in installments (whether or not interest shall accrue on the unpaid balance) as the same respectively become due and before any delinquency, fine, penalty, or further interest or costs may be added thereto. 3.2 PRORATION. At the commencement and at the end of the Term, all Taxes shall be prorated. 3.3 RIGHT TO PROTEST. Landlord and/or Tenant shall have the right, but not the obligation, to protest the amount or payment of any real or personal property taxes, assessments, or other impositions levied against the Premises; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of any such protest and shall cooperate in such protest, Tenant shall diligently and continuously prosecute any such protest and notwithstanding such protest Tenant shall pay any tax, assessment or other charge before the imposition of any penalty or interest. 3.4 TAX INDEMNITY. In the event any Taxes, or fine, penalty, and/or interest thereon are at any time assessed against the Landlord by the state in which the Premises is located or any local governmental entity or authority as a result of or arising out of the sale of the Premises to the Landlord by the Seller or the lease of the Premises by the Tenant from the Landlord, or Landlord becomes liable for any reason for any liability of Tenant for Taxes or for any fine, penalty, or interest thereon, whether such assessment arises from the sole liability of Landlord or from the joint liability of Landlord and Tenant, and Landlord pays such assessment or liability, Tenant hereby agrees to pay to the Landlord an amount equal to the amount of such assessment of Tax, fine, penalty and interest. Such payment shall be due and payable to Landlord on or before the thirtieth (30th) day following Tenant's receipt of a written notice from Landlord (pursuant to the notice provisions under this Lease) of any such assessment and payment. Tenant shall have the right, but not the obligation, to protest the amount or payment of such assessment (in whole or in part) against the Landlord, and Landlord will cooperate fully with Tenant in regard to such protest; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of such protest. Tenant shall diligently and continuously prosecute any such protest. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents, and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, costs, deficiency, fine, penalty, interest, or other damages (including, without limitation, punitive or consequential damages, reasonable attorneys' fees, and expenses) arising out of or due to any tax protest by Tenant pursuant to Sections 3.3 and 3.4 hereof whether such items arise from the sole liability of Landlord or from the joint liability of Landlord and Tenant. Upon receiving notice of or information concerning any suit, claim or demand, including any proposed tax audit of Landlord or any proposed tax assessment, asserted by a third party that Landlord believes is covered by the indemnity set forth in this Lease, Landlord shall give Tenant notice of same. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense with legal counsel reasonably satisfactory to Landlord. -10- 13 3.5 TAX BILLS. Landlord shall promptly forward to Tenant copies of all tax bills and payment receipts relating to the Premises received by Landlord. 3.6 OTHER CHARGES. Tenant agrees to pay and discharge, punctually as and when the same shall become due and payable without penalty, all electricity, gas, garbage collection, cable television, telephone, water, sewer, and other utilities costs and all other charges, obligations or deposits assessed against the Premises during the Term. 4. INSURANCE. 4.1 GENERAL INSURANCE REQUIREMENTS. All insurance provided for in this Lease shall be maintained under valid and enforceable policies issued by insurers of recognized responsibility, licensed and approved to do business in the state in which the Premises is located having a general policyholders rating of not less than "A-11" and a financial rating of not less than "XII" in the then most current Best's Insurance Report. Any and all policies of insurance required under this Lease shall name the Landlord as an additional insured and shall be on an "occurrence" basis. In addition, Landlord shall be shown as the loss payable beneficiary under the casualty insurance policy maintained by Tenant pursuant to Section 4.2 hereof. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name the Landlord and Tenant as their interests may appear and allocate to the Premises the full amount of insurance required hereunder. Original policies or satisfactory certificates from the insurers evidencing the existence of all policies of insurance required by this Lease and showing the interest of the Landlord shall be filed with the Landlord prior to the commencement of the Term and shall provide that the subject policy may not be canceled except upon not less than thirty (30) days prior written notice to Landlord. If Landlord is provided with a certificate, upon Landlord's request Tenant shall provide Landlord with a complete copy of the insurance policy evidenced by such certificate within thirty (30) days of the commencement of the Term. Originals of the renewal policies or certificates therefor from the insurers evidencing the existence thereof shall be deposited with Landlord not less than ten (10) days prior to the expiration dates of the policies. If Landlord is provided with a certificate for a renewal policy, upon Landlord's request Tenant shall deliver a copy of the complete renewal policy to Landlord within thirty (30) days of the expiration of the replaced policy. Any claims under any policies of insurance described in this Lease shall be adjudicated by and at the expense of the Tenant or of its insurance carrier, but shall be subject to joint control of Tenant and Landlord. 4.2 FIRE AND EXTENDED COVERAGE. Tenant shall keep the Premises insured against loss or damage from all causes under standard "all risk" property insurance coverage, without exclusion for fire, lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake (if in an earthquake zone), malicious mischief or any other risks as are normally covered under an extended coverage endorsement, in the amounts that are not less than the full insurable value of the Premises including all equipment and personal property (whether or not Landlord Personal Property) used in the operation of the Premises. The term "FULL INSURABLE VALUE" as used in this Lease shall mean the actual replacement value of the Premises (including all improvements, but excluding the value of the -11- 14 Land) and every portion thereof, including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction. In addition, the casualty insurance required under this Section 4.2 will include an agreed amount endorsement such that the insurance carrier has accepted the amount of coverage and deductible and has agreed that there will be no co-insurance penalty. 4.3 PUBLIC LIABILITY. Tenant shall maintain comprehensive general public liability insurance coverage (including products liability coverage) against claims for bodily injury, death or property damage occurring on, in or about the Premises and the adjoining sidewalks and passageways, such insurance shall include a broad form endorsement and to afford protection to Landlord and Tenant of not less than One Million Dollars ($1,000,000.00) with respect to bodily injury or death to any one person, not less than Three Million Dollars ($3,000,000.00) with respect to any one accident, and not less than One Million Dollars ($1,000,000.00) with respect to property damage; provided, that Landlord shall have the right at any time hereafter to require such higher limits as may be reasonable and customary for transactions and properties similar to the Premises; provided, further, that Tenant shall have the right to satisfy the requirements of this Section 4.3 with excess coverage of not less than Three Million Dollars ($3,000,000.00). 4.4 PROFESSIONAL LIABILITY INSURANCE. Tenant shall maintain insurance against liability imposed by law upon such persons for damages on account of professional services rendered or which should have been rendered by or on behalf of Tenant, or by any person for whose or which acts Tenant is legally liable (including without limitation Manager or any future manager), on account of injury, sickness or disease, including death at any time resulting therefrom, and including damages allowed for loss of service, in a minimum amount of One Million Dollars ($1,000,000.00) for each claim and Three Million Dollars ($3,000,000.00) in the aggregate. 4.5 WORKERS COMPENSATION. Tenant, Manager and any future manager shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain worker's compensation insurance against claims for injuries sustained by their respective employees in the course of their employment. 4.6 BOILER INSURANCE. Tenant shall maintain boiler and pressure vessel insurance, including an endorsement for boiler business interruption insurance, on any fixtures or equipment which are capable of bursting or exploding, in an amount not less Five Million Dollars ($5,000,000.00) for damage to property, bodily injury or death resulting from such perils. 4.7 BUSINESS INTERRUPTION INSURANCE. Tenant shall maintain, at its expense, business interruption and extra expense insurance insuring against loss of rental value for a period not less than one (1) year. 4.8 DEDUCTIBLE AMOUNTS. The policies of insurance which Tenant is required to provide under this Lease shall not have deductibles or self-insured retentions in excess of Fifty Thousand Dollars ($50,000). -12- 15 5. USE, MAINTENANCE AND ALTERATION OF THE PREMISES. 5.1 TENANT'S MAINTENANCE OBLIGATIONS. 5.1.1 Tenant will keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping. Tenant shall promptly make or cause to be made all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Premises in good and lawful order and condition and in substantial compliance with all requirements for the operation of a Facility in the state in which the Premises is located and, if applicable, certification for participation in Medicare and Medicaid (or any successor programs) as otherwise required under all applicable local, state and federal laws. 5.1.2 As part of Tenant's obligations under this Section 5.1, Tenant shall be responsible to maintain, repair and replace all Landlord Personal Property and all Tenant Personal Property (as defined in Section 7.1 below) in good condition, ordinary wear and tear excepted, consistent with prudent industry practice for a Facility. 5.1.3 Without limiting Tenant's obligations to maintain the Premises under this Lease, within thirty (30) days of the end of each Lease Year starting with the end of the fourth (4th) Lease Year, Tenant shall provide Landlord with evidence satisfactory to Landlord in the reasonable exercise of Landlord's discretion that Tenant has in such Lease Year spent on Upgrade Expenditures (as hereinafter defined) an annual average amount of at least Two Hundred and No/100 Dollars ($200.00) per living unit as such amount is adjusted annually at the end of each Lease Year for CPI Increases. For purposes of this Section 5.1.3, the CPI Increase shall be determined by comparing the CPI in effect as of January 1, 1998 to the CPI in effect on January 1 of the calendar year during which the Upgrade Expenditures are to be made. The term "UPGRADE EXPENDITURES" is defined to mean upgrades or improvements to the Premises which have the effect of maintaining or improving the competitive position of the Premises in its marketplace. Non-exclusive examples of Upgrade Expenditures are new or replacement wallpaper, tiles, window coverings, lighting fixtures, painting, upgraded landscaping, carpeting, architectural adornments, common area amenities and the like. It is expressly understood that capital improvements or repairs (such as but not limited to repairs or replacements to the structural elements of the walls, parking area, or the roof or to the electrical, plumbing, HVAC or other mechanical or structural systems in the Premises) shall not be considered to be Upgrade Expenditures. If Tenant fails to make at least the above amount of Upgrade Expenditures, Tenant shall promptly on demand from Landlord (but in no event more than five days) pay to Landlord the applicable shortfall in Upgrade Expenditures. Such funds shall be the sole property of Landlord and Landlord may in its sole discretion provide such funds to Tenant to -13- 16 correct the shortfall in Upgrade Expenditures or may simply retain such funds as supplemental rent hereunder. 5.2 REGULATORY COMPLIANCE. 5.2.1 Tenant and the Premises shall comply with all federal, state and local licensing and other laws and regulations applicable to the operation of a Facility as well as with the certification requirements of Medicare and Medicaid (or any successor program), if applicable. Further, Tenant shall ensure that the Premises continue to be operated as at least a 60-unit Facility, all without any suspension, revocation, decertification or limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Premises. 5.2.2 The Facility license and all other licenses and certifications on or affecting the Property must be in the name of Tenant, or another operator (the "OPERATOR") approved in writing by Landlord, whose consent may not be unreasonably withheld, except for transfers between Tenant and BCC or a BCC Affiliate (provided Landlord receives at least 30 days prior written notice of such transfer). Neither Tenant, BCC, a BCC Affiliate, nor any such Operator may sell, transfer, assign, encumber, sublet, permit to lapse, expire, become suspended, or terminate any such licenses or certifications, operating rights associated with the Premises and certification without the prior written consent of Landlord which may not be unreasonably withheld, except for transfers between Tenant and BCC or a BCC Affiliate (provided Landlord receives at least 30 days prior written notice of such transfer). Tenant understands and agrees, and agrees to so direct Manager, any future manager, and/or such other Operator (as applicable), that all such licenses are an integral part of the Property and must remain at the Property unless approved in writing by Landlord, which approval may be unreasonably withheld. Tenant or such other Operator must provide photocopies of all such certifications and licenses, and any and all notices and reports requested by Landlord, within five (5) days of receipt of such request. 5.2.3 All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Tenant. Tenant shall at its sole cost make any additions or alterations to the Premises necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of the Premises from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's designee at the expiration or termination of the Term. 5.3 PERMITTED USE. Tenant shall continuously use and occupy the Premises during the Term, as a personal care/assisted living facility with at least 60 units or such additional units as may hereafter be permitted under this Lease, and for such ancillary health care uses as are permitted by law and acceptable to Landlord in the exercise of Landlord's reasonable discretion, including, without limitation, outpatient rehab and Alzheimer services. -14- 17 5.4 TENANT REPURCHASE OBLIGATION. If Tenant fails to comply with Section 5.3 of this Lease, if any certification of the Premises under Medicare or Medicaid (or any successor program) is ever granted and then later revoked, suspended or materially limited, or if any material license relating to the operation of the Premises is revoked, suspended or materially limited, then in addition to Landlord's other rights and remedies under this Lease, Landlord shall have the right, thirty (30) days after providing to Tenant written notice an opportunity to cure, to put the Premises to Tenant. If Landlord exercises such right, Tenant shall purchase the Premises from Landlord for a cash price equal to the greater of (a) Landlord's Adjusted Investment, or (b) the fair market value of the Premises on the date of Landlord's notice of exercise. Such fair market value shall be as agreed between Landlord and Tenant. However, failing such agreement within ten (10) days of Landlord's notice of exercise under this Section, such fair market value shall be determined by the appraisal process set forth in Exhibit "B" attached hereto. Within ninety (90) days of Landlord's exercise of its put under this Section 5.4, such purchase shall be consummated utilizing an escrow at a national title company selected by Landlord. Such escrow shall be documented on such title company's standard sale escrow instructions without representations or warranties and without any due diligence or other contingencies in favor of the buyer. Tenant shall pay all costs of such sale transaction. At the close of such sale, Landlord shall deliver to Tenant title to the Premises free and clear of any liens created by Landlord (other than liens, leases, subleases, and related instruments entered into, caused or created in whole or in part by BCC, Developer, Manager, or their respective Affiliates) subject only to those title exceptions shown on EXHIBIT "E" attached hereto and incorporated herein for all purposes and any additional title exceptions required or approved by Landlord in its sole discretion. 5.5 NO LIENS; PERMITTED CONTESTS. Tenant shall not cause or permit any liens, levies or attachments to be placed or assessed against the Premises or the operation thereof for any reason, other than the Permitted Encumbrances. For purposes of this Section 5.5, the term "PERMITTED ENCUMBRANCES" shall mean and include the Leasehold Mortgage and any recorded financing statements related thereto. Tenant acknowledges and agrees the interest of the Landlord in the Premises shall not be subject to liens for improvements made by Tenant to the Premises. However, Tenant shall be permitted in good faith and at its expense to contest the existence, amount or validity of any lien upon the Premises by appropriate proceedings sufficient to prevent the collection or other realization of the lien or claim so contested, as well as the sale, forfeiture or loss of any of the Premises or any rent to satisfy the same. Tenant shall provide Landlord with security satisfactory to Landlord in Landlord's reasonable judgment to assure the foregoing. Each contest permitted by this Section 5.5 shall be promptly and diligently prosecuted to a final conclusion by Tenant. 5.6 ALTERATIONS BY TENANT. Tenant shall have the right of altering, improving, replacing, modifying or expanding the facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises under this Lease; provided, however, that any alterations, improvements, replacements, expansions or modifications in excess of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) in any rolling twelve (12) month period shall require the prior written consent of the Landlord. The cost of all such alterations, improvements, replacements, modifications, expansions or other purchases, whether -15- 18 undertaken as an on-going licensing, Medicare or Medicaid (or any successor program) (if applicable), other regulatory requirement, or otherwise, shall be borne solely and exclusively by Tenant (unless funded by Landlord under Section 5.7 below) and shall immediately become a part of the Premises and the property of the Landlord subject to the terms and conditions of this Lease. All work done in connection therewith shall be done in a good and workmanlike manner and in compliance with all existing codes and regulations pertaining to the Premises and shall comply with the requirements of insurance policies required under this Lease. In the event any items of the Premises have become inadequate, obsolete or worn out or require replacement (by direction of any regulatory body or otherwise), Tenant shall remove such items and exchange or replace the same at Tenant's sole cost and the same shall become part of the Premises and property of the Landlord. 5.7 CAPITAL IMPROVEMENTS FUNDED BY LANDLORD. In the event Tenant desires to make a capital improvement or a related series of capital improvements to the Premises and if Tenant desires that Landlord fund the same, Landlord shall, in its discretion and without obligation, within thirty (30) days of Tenants' written request therefor, consider Tenant's request to fund such capital improvements. Each and every capital improvement funded by Landlord under this Section shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease. If Landlord funds any capital improvements, Landlord's Investment shall be increased for all purposes under this Lease by the amount of the funds provided by Landlord for capital improvements. 5.8 COMPLIANCE WITH IRS GUIDELINES. Any improvement or modification to the Premises shall satisfy the requirements set forth in Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves the right to refuse to consent to any improvement or modification to the Premises if, in its judgment, such improvement or modification does not meet the foregoing requirements. 6. CONDITION OF, AND TITLE TO, PREMISES. Tenant acknowledges that it is presently engaged in the operation of Facilities in the state in which the Premises is located and has expertise in the Facility industry. Tenant has thoroughly investigated the Premises, has selected the Premises to its own specifications, and has concluded that no other improvements or modifications to the Premises are required in order to operate the Premises for its intended use, except for the improvements to be constructed pursuant to the Development Agreement. Tenant accepts the Premises for use as a Facility under this Lease on an "AS IS, WHERE IS, WITH ALL FAULTS" basis and will assume all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. In making its decision to enter into this Lease, Tenant has not relied on any representations or warranties, express or implied, of any kind from Landlord. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. Notwithstanding any other provisions of this Lease to the contrary, Tenant accepts the Premises in their present condition, AS IS, WHERE IS, WITH ALL FAULTS, and without any representations or warranties whatsoever, express or implied, including, without limitation, any express or implied representations or warranties as to the fitness, use, suitability, or condition of the Premises. Tenant hereby represents and warrants to Landlord -16- 19 that Tenant is thoroughly familiar with the Premises and the condition thereof, that Tenant is relying on Tenant's own personal knowledge of the condition of the Premises, that neither Landlord nor any person or entity acting or allegedly acting for or on behalf of Landlord or any other person or entity having or claiming any interest in the Premises has made any representations, warranties, agreements, statements, or expressions of opinions in any way or manner whatsoever related to, connected with, or concerning the Premises, the condition of the Premises, or any other fact or circumstance whatsoever on which Tenant is relying, and, to the maximum extent not prohibited by applicable law, Tenant hereby releases and discharges Landlord and all other persons and entities having or claiming any interest in the Premises from all liability, damages, costs, and expenses of every kind and nature whatsoever in any way or manner arising out of, connected with, related to, or emanating from the condition of the Premises at any time during the Term of this Lease. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. 7. LANDLORD AND TENANT PERSONAL PROPERTY. 7.1 TENANT PERSONAL PROPERTY. Tenant shall install, affix or assemble or place on the Premises all items of furniture, fixtures, equipment and supplies not included as Landlord Personal Property as Tenant reasonably considers to be appropriate for Tenant's use of the Premises as contemplated by this Lease (the "TENANT PERSONAL PROPERTY"). Tenant shall provide and maintain during the entire Term all Tenant Personal Property as shall be necessary in order to operate the Premises in compliance with all requirements set forth in this Lease. All Tenant Personal Property shall be and shall remain the property of Tenant and may be removed by Tenant upon the expiration of the Term. However, if there is any Event of Default, Tenant will not remove the Tenant Personal Property from the Premises and will on demand from Landlord, convey the Tenant Personal Property to Landlord by executing a bill of sale in a form reasonably required by Landlord conveying all right, title, and interest Tenant has in Tenant Personal Property, including, without limitation, all rights under third party agreements regarding lease or purchase of Tenant Personal Property and all related cure rights and rights to receive notice of default thereunder. In any event, Tenant will repair all damage to the Premises caused by any removal of the Tenant Personal Property. 7.2 LANDLORD'S SECURITY INTEREST. 7.2.1 The parties intend that if Tenant defaults under this Lease, Landlord will control the Tenant Personal Property and the Intangible Property (as defined in Section 7.4 below) so that Landlord or its designee can operate or re-let the Premises intact for use as a Facility. 7.2.2 Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant's right, title and interest in and to the Tenant Personal Property and in and to the Intangible Property and in and to all of the property set forth on EXHIBIT "F" attached hereto -17- 20 and incorporated herein for all purposes and in or to any and all products and proceeds thereof in which Tenant now owns or hereafter acquires an interest or right, including any leased Tenant Personal Property. The schedule attached hereto as Exhibit "F" may be attached to any financing statement filed pursuant to Section 7.3 hereof. This Lease constitutes a security agreement covering all such Tenant Personal Property and the Intangible Property. The security interest granted to Landlord in this Section 7.2.2 is intended by Landlord and Tenant to be subordinate to any security interest granted in connection with the financing or leasing of all or any portion of the Tenant Personal Property so long as the lessor or financier of such Tenant Personal Property agrees to (a) give Landlord written notice of any default by Tenant under the terms of such lease or financing arrangement, (b) give Landlord the lesser of (i) five days after receipt of such notice to cure any such default or (ii) the same time period as given to Tenant to cure any such default, and (c) consent to Landlord's written assumption of such lease or financing arrangement upon Landlord's curing of any defaults thereunder. This security agreement and the security interest created herein shall survive the termination of this Lease if such termination results from the occurrence of an Event of Default. 7.3 FINANCING STATEMENTS. If required by Landlord at any time during the Term, Tenant will execute and deliver to Landlord, in form reasonably satisfactory to Landlord, additional security agreements, financing statements, fixture filings and such other documents as Landlord may reasonably require to perfect or continue the perfection of Landlord's security interest in the Tenant Personal Property and the Intangible Property and any and all products and proceeds thereof now owned or hereafter acquired by Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing such documents in public offices and in obtaining such record searches as Landlord may reasonably require. In the event Tenant fails to execute any financing statements or other documents for the perfection or continuation of Landlord's security interest, Tenant hereby appoints Landlord as its true and lawful attorney-in-fact to execute any such documents on its behalf, which power of attorney shall be irrevocable and is deemed to be coupled with an interest. 7.4 INTANGIBLE PROPERTY. The term "INTANGIBLE PROPERTY" means all accounts, proceeds of accounts, rents, profits, income or revenue derived from the use of rooms or other space within the Premises or the providing of services in or from the Premises; documents, chattel paper, instruments, contract rights, deposit accounts, general intangibles, chooses in action, now owned or hereafter acquired by Tenant (including any right to any refund of any taxes or other charges heretofore or hereafter paid to any governmental authority) arising from or in connection with Tenant's operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the Premises under this Lease, including, without limitation, if applicable, any certificate of need or other similar certificate; and the right to use any trade or other name now or hereafter associated with the operation of the Premises by Tenant, including, without limitation, the name "Outlook Pointe At Pensacola". The word "accounts" above shall include, without limitation and to the extent assignable, accounts to be paid by Medicaid or Medicare (or successor programs), if any. With respect to the above referenced trade name, Landlord and -18- 21 BCC each agree to cooperate to enter into a licensing agreement for the use of the trade name, in form and substance reasonably acceptable to both Landlord and BCC, which agreement shall include, without limitation, that the license shall be (i) perpetual (except in the event BCC or an Affiliate acquires the Premises in which case the license shall automatically terminate); (ii) at no cost to Landlord; (iii) assignable by Landlord to a successor operator of the Premises upon or after the occurrence of an Event of Default under the Lease, and (iv) solely applicable to the Premises. 8. REPRESENTATIONS AND WARRANTIES. Landlord and Tenant do hereby each for itself represent and warrant to each other as follows: 8.1 DUE AUTHORIZATION AND EXECUTION. This Lease and all agreements, instruments and documents executed or to be executed in connection herewith by either Landlord or Tenant were duly authorized and shall be binding upon the party that executed and delivered the same. 8.2 DUE ORGANIZATION. Landlord and Tenant are duly organized, validly existing and in good standing under the laws of the State of their respective formations and are duly authorized and qualified to do all things required of the applicable party under this Lease within the state in which the Premises is located. 8.3 NO BREACH OF OTHER AGREEMENTS. Neither this Lease nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which either Landlord or Tenant is a party. 9. FINANCIAL, MANAGEMENT AND REGULATORY REPORTS. 9.1 MONTHLY FACILITY REPORTS. Within thirty (30) days after the end of each calendar month during the Term, Tenant shall prepare and deliver monthly financial reports to Landlord consisting of a balance sheet, income statement, total patient days, occupancy and payor mix concerning the business conducted at the Premises. Without limitation, such reports shall clearly state Gross Revenues for the applicable period. These reports will be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President, Development, or other officer of Tenant or the current manager of the Facility as approved by Landlord in writing, certifying that said reports are true, correct, and complete in all material respects after due inquiry. 9.2 QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of Tenant's parent company, if any, Tenant shall deliver the quarterly consolidated or combined, as applicable, financial statements of Tenant's parent company to Landlord. 9.3 ANNUAL FINANCIAL STATEMENT. Within one hundred (100) days of the fiscal year end of Tenant, or if Tenant has a parent company, then of Tenant's parent company, Tenant shall deliver to Landlord the annual consolidated or combined, as applicable, financial statement of Tenant or Tenant's parent company, as applicable, audited by a reputable certified -19- 22 public accounting firm. Notwithstanding any of the other terms of this Section 9.3, if Tenant or Tenant's parent company becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, Tenant shall concurrently deliver to Landlord such reports as are delivered to the SEC pursuant to applicable securities laws. 9.4 ACCOUNTING PRINCIPLES. All of the reports and statements required hereby shall be prepared in accordance with GAAP and Tenant's accounting principles consistently applied. 9.5 REGULATORY REPORTS. In addition, Tenant shall within thirty (30) business days of receipt thereof deliver to Landlord all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to the Premises and the operation of business thereon, including, without limitation, state department of health licensing surveys, Medicare and Medicaid (and successor programs) certification surveys (if applicable), and life safety code reports. Within five (5) business days of receipt thereof, Tenant shall give Landlord written notice of any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including, without limitation, Medicare or Medicaid (or successor programs) (if applicable), any suspension, termination or restriction placed upon Tenant or the Premises, the operation of business thereon or the ability to admit residents or patients, or any violation of any other permit, approval or certification in connection with the Premises or its business, by any federal, state or local authority, including, without limitation, Medicare or Medicaid (or successor programs) (if applicable). 10. EVENTS OF DEFAULT AND LANDLORD'S REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant hereunder ("EVENT OF DEFAULT"): 10.1.1 The failure to pay within five (5) calendar days of the date when due any Minimum Rent, Additional Rent, Taxes (except for Taxes and other charges being contested in accordance with Sections 3.3 and 3.4 hereof), utilities, premiums for insurance or other charges or payments required of Tenant under this Lease; 10.1.2 A material breach by Tenant of any representation or warranty in this Lease; 10.1.3 A material default by Tenant, BCC, Developer, any future guarantor of this Lease, or their respective Affiliates under any obligation with respect to any of the Other Leases or any document concerning the Other Properties owed by such persons to Landlord or its Affiliates (including, without limitation, any development agreements regarding Other Properties, any financing agreements, and any of the Other Leases), which default is not cured within any applicable cure period provided in the documentation for such obligation; 10.1.4 A material default by Tenant, or any future guarantor of this Lease with respect to any obligation under any other lease or financing agreement with any -20- 23 other party, which default is not cured within any applicable cure period provided in the documentation for such obligation. For purposes of this Section 10.1.4, a default shall be deemed to be material if it does or could result in damages equal to or greater than One Million and No/100 Dollars ($1,000,000.00); 10.1.5 Any material misstatement or omission of fact in any written report, notice or communication from Tenant, BCC, Manager, or any future manager or guarantor of this lease to Landlord with respect to any of such persons or the Premises; 10.1.6 Any Change in Control (as defined below) of Tenant or BCC as of the date hereof. As used in this Section 10.1.6, the term "CHANGE IN CONTROL" shall mean the acquisition by any person, entity or group of persons or entities acting in concert (other than the current management of Tenant or BCC, respectively) of the beneficial interest in sufficient Voting Stock (defined below) of Tenant or BCC to permit the person, persons, entity, or entities acquiring such beneficial interests to vote for a majority of the board of directors of Tenant or BCC, respectively. For purposes of this Section 10.1.6, the term "VOTING STOCK" shall collectively mean (i) any and all classes of capital stock of a corporation to which any voting rights are ascribed to the holders thereof, at law or by contract, together with (ii) any contracts for the purchase of such stock already issued by that corporation, (iii) subscriptions for the purchase of such stock to be issued by that corporation, (iv) options to purchase such stock, (v) warrants for such stock, (vi) securities convertible into such stock, (vii) voting trusts, proxies, or other agreements or understandings with respect to the voting of such stock, or (viii) purchase rights, exchange rights, or other contracts or commitments that could require that corporation to sell, transfer, or otherwise dispose of any such stock or that could require that corporation to issue, sell, or otherwise cause to become outstanding any of such stock; 10.1.7 An assignment by Tenant, BCC, or any future guarantor of this Lease of all or substantially all of its property for the benefit of creditors; 10.1.8 The appointment of a receiver, trustee, or liquidator for Tenant, BCC Developer, Manager, or any future guarantor of this Lease (any such person being hereinafter individually referred to in this Section 10.1.8 as the "AFFECTED PERSON"), or any of the property of the Affected Person, if within ten (10) business days of such appointment the Affected Person does not inform Landlord in writing that the Affected Person intends to cause such appointment to be discharged or the Affected Person does not thereafter diligently prosecute such discharge to completion within sixty (60) days after the date of such appointment; 10.1.9 The failure to deliver evidence of insurance to Landlord as required by Section 4.1; 10.1.10 The filing by Tenant, BCC, Developer, Manager, or any future manager or guarantor of this Lease of a voluntary petition under any federal bankruptcy law or under the law of any state to be adjudicated as bankrupt or for any arrangement -21- 24 or other debtor's relief, or in the alternative, if any such petition is involuntarily filed against Tenant, BCC, Developer, Manager, or any future manager or guarantor of this Lease (any such person being hereinafter individually referred to in this Section 10.1.10 as the "BANKRUPT PERSON") by any other party and the Bankrupt Person, BCC, or Tenant does not within three (3) business days of any such filing inform Landlord in writing of the intent by the Bankrupt Person to cause such petition to be dismissed, or if the Bankrupt Person does not thereafter diligently prosecute such dismissal, or if such filing is not dismissed within ninety (90) days after filing thereof; 10.1.11 The failure to perform or comply with any other term or provision of this Lease not requiring the payment of money (except as provided in Section 10.1.9), including, without limitation, the failure to comply with the provisions hereof pertaining to the use, operation and maintenance of the Premises; provided, however, the default described in this Section 10.1.11 is curable and shall be deemed cured, if: (a) within ten (10) business days of Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (b) Tenant cures such default within thirty (30) days after such notice from Landlord, unless such default cannot with due diligence be cured within a period of thirty (30) days because of the nature of the default or delays beyond the control of Tenant, and cure after such thirty (30) day period will not have a material and adverse effect upon the Premises, in which case such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof, provided, however, no such default shall continue for more than one hundred twenty (120) days from Tenant's receipt of a notice of default from Landlord; 10.1.12 There shall be no cure period in the event of the breach by Tenant of (a) the obligation to provide replacement policies of insurance as required in Section 4.1 above, (b) the provisions of Section 20 below, or (c) the provisions of Section 22 below with respect to assignments and other related matters; and 10.1.13 All notice and cure periods provided herein shall run concurrently with any notice or cure periods provided by applicable law. 10.2 REMEDIES. Upon the occurrence of an Event of Default, Landlord may exercise all rights and remedies under this Lease and the laws of the state in which the Premises is located available to a lessor of real and personal property in the event of a default by its lessee, and as to the Tenant Personal Property and the Intangible Property all remedies granted under the laws of such State to a secured party under its Uniform Commercial Code. Without limiting the foregoing, Landlord shall have the right to do any of the following: 10.2.1 Sue for the specific performance of any covenant of Tenant under this Lease as to which Tenant is in breach; 10.2.2 Enter upon the Premises, terminate this Lease, dispossess Tenant from the Premises and/or collect money damages by reason of Tenant's breach, including, without limitation, the acceleration of all rent which would have accrued after -22- 25 such termination and all obligations and liabilities of Tenant under this Lease which survive the termination of the Term; 10.2.3 Elect to leave this Lease in place and sue for rent and/or other money damages as the same come due; 10.2.4 Before or after repossession of the Premises pursuant to Section 10.2.2, and whether or not this Lease has been terminated, Landlord shall have the right (but shall be under no obligation) to relet any portion of the Premises to such tenant or tenants, for such term or terms (which may be greater or less than the remaining balance of the Term), for such rent, or such conditions (which may include concessions) and for such uses, as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Tenant agrees to pay Landlord, immediately upon demand, all reasonable expenses incurred by Landlord in obtaining possession and in reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers. Although Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any of the Premises or for any failure to collect any rent due upon any such reletting, Landlord agrees that any rents actually received by Landlord from reletting the Premises shall be credited towards the amounts due hereunder. 10.2.5 Sell the Tenant Personal Property and/or the Intangible Property in a non-judicial foreclosure sale. 10.2.6 For the purpose of calculating rent loss damages payable to Landlord, Additional Rent for all periods after an Event of Default shall be calculated based on the higher of actual Gross Revenues or extrapolated Gross Revenues based on Gross Revenues performance prior to the Event of Default. 10.3 RECEIVERSHIP. Tenant acknowledges that one of the rights and remedies available to Landlord under applicable law is to apply to a court of competent jurisdiction for the appointment of a receiver to take possession of the Premises, to collect the rents, issues, profits and income of the Premises and to manage the operation of the Premises. Tenant further acknowledges that the revocation, suspension or material and adverse limitation of (i) certification of the Premises for provider status (in the event such certification is ever obtained) under Medicare or Medicaid (or successor programs) and/or (ii) a license relating to the operation of the Premises for its intended use as a Facility under the laws of the state in which the Premises is located will materially and irreparably impair the value of Landlord's investment in the Premises. Therefore, in any of such events, and in addition to any other right or remedy of Landlord under this Lease, Landlord may petition any appropriate court for, and Tenant hereby consents to, the appointment of a receiver to take possession of the Premises, to manage the operation of the Premises, to collect and disburse all rents, issues, profits and income generated thereby and to preserve or replace to the extent possible any such license for the Premises or to otherwise substitute the licensee or provider thereof. The receiver shall be entitled to a reasonable fee for its services as a receiver. All such fees and -23- 26 other expenses of the receivership estate shall be added to the monthly rent due to Landlord under this Lease (but shall not be considered for the purpose of calculating any amounts pursuant to Section 2.5 of this Lease). Tenant hereby irrevocably stipulates to the appointment of a receiver under such circumstances and for such purposes and agrees not to contest such appointment. 10.4 LATE CHARGES. Tenant acknowledges that the late payment of any Minimum Rent or Additional Rent will cause Landlord to lose the use of such money and incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, if any installment of Minimum Rent or Additional Rent is not paid within five (5) calendar days after the due date for such rent payment, then Tenant shall pay to Landlord on demand a late charge equal to ten percent (10%) of the amount of all installments of Minimum Rent or Additional Rent not paid on the due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. 10.5 REMEDIES CUMULATIVE; NO WAIVER. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No failure of Landlord to insist at any time upon the strict performance of any provision of this Lease or to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. A receipt by Landlord of any rent or other sum due hereunder (including any late charge) with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. 10.6 PERFORMANCE OF TENANT'S OBLIGATIONS BY LANDLORD. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant, and may enter upon the Premises for the purpose of taking all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Tenant. All sums so paid by Landlord and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Landlord, together with interest at the maximum interest rate allowable under the applicable statutes or law of the state in which the Real Property is located from the date of the making of such payment or the incurring of such costs and expenses by Landlord, shall be payable by Tenant to Landlord on demand. -24- 27 11. SECURITY DEPOSIT. On the date hereof, Tenant shall deposit with Landlord a sum equal to Sixty-Seven Thousand Five Hundred Eighty-Eight Dollars and Four Cents ($67,588.04) in cash representing a security deposit against the faithful performance of the terms and conditions contained in this Lease; and monthly after the Reset Date for four (4) months, Tenant shall deposit with Landlord a sum equal to Thirty-Three Thousand Seven Hundred Ninety-Four Dollars and Two Cents ($33,794.02) in cash representing additional security deposit against the faithful performance of the terms and conditions contained in this Lease. Landlord shall not be deemed a trustee as to such deposit and shall have the right to commingle any such security deposit with its own or other funds. Interest on any such cash deposit shall be paid by Landlord to Tenant on a quarterly basis in arrears at the average rate earned in such period on Landlord's cash and cash equivalent investments. In the event Tenant has fully complied with the terms of this Lease and no Event of Default exists, the remaining balance of the security deposit shall be returned to Tenant, without interest, within thirty (30) days after the expiration of the Term provided, however, Landlord shall have the right to retain and expend such remaining balance for cleaning and repairing the Premises if Tenant shall fail to deliver the Premises at the termination or expiration of this Lease in a neat and clean condition and in as good a condition as existed at the date of possession and occupancy of same, ordinary wear and tear only excepted. 12. DAMAGE BY FIRE OR OTHER CASUALTY. 12.1 RECONSTRUCTION USING INSURANCE. In the event of the damage or destruction of the Premises, Tenant shall forthwith notify Landlord and diligently repair or reconstruct the same to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be used for the repair or reconstruction of the Premises pursuant to reasonable disbursement controls in favor of Landlord. If such proceeds are insufficient for such purposes, Tenant shall provide the required additional funds. 12.2 SURPLUS PROCEEDS. If there remains any surplus of insurance proceeds after the completion of the repair or reconstruction of the Premises, such surplus shall belong to and be paid to Tenant. 12.3 NO RENT ABATEMENT. The rent payable under this Lease shall not abate by reason of any damage or destruction of the Premises by reason of an insured or uninsured casualty. Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such damage or destruction. 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by condemnation, terminate this Lease, and the current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such -25- 28 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by condemnation, terminate this Lease, and the current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such -25- 29 taking, the award shall be allocated between Landlord and Tenant pursuant to the appraisal procedure described on Exhibit "B" attached hereto. 13.2 PARTIAL TAKING. In the event such condemnation proceeding or right of eminent domain results in a taking of less than all or substantially all of the Premises, the Minimum Rent and Additional Rental thereto shall be abated to the same extent as the diminution in the fair market value of the Premises by reason of the condemnation. Such diminution in the fair market value shall be as agreed between Landlord and Tenant, but failing such agreement within thirty (30) days of the effective date of the condemnation such fair market value will be determined by appraisal pursuant to Exhibit "B" attached hereto. Landlord shall be entitled to receive and retain any and all awards for the partial taking and damage and Tenant shall not be entitled to receive or retain any such award for any reason. Landlord's Investment will be reduced for all purposes under this Lease by reason of any award paid to Landlord under this Section 13.2. 13.3 LEASE REMAINS IN EFFECT. Except as provided above, this Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. 14. PROVISIONS ON TERMINATION OF TERM. 14.1 SURRENDER OF POSSESSION. To the extent permitted by applicable law, Tenant shall, on or before the last day of the Term, or upon earlier termination of this Lease, surrender to Landlord the Premises (including all patient charts and resident records along with appropriate patient and resident consents if necessary) in good condition and repair, ordinary wear and tear excepted. 14.2 REMOVAL OF PERSONAL PROPERTY. If Tenant is not then in default hereunder Tenant shall have the right in connection with the surrender of the Premises to remove from the Premises all Tenant Personal Property but not the Landlord Personal Property (including the Landlord Personal Property replaced by Tenant or required by the state in which the Premises is located or any other governmental entity to operate the Premises for the purpose set forth in Section 5.3 above). Any such removal shall be done in a workmanlike manner leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal. At the end of the Term or upon the earlier termination of this Lease, Tenant shall return the Premises to Landlord with the Landlord Personal Property (or replacements thereof) in the same condition and utility as was delivered to Tenant at the commencement of the Term, normal wear and tear excepted. 14.3 TITLE TO PERSONAL PROPERTY NOT REMOVED. Title to any of Tenant Personal Property which is not removed by Tenant upon the expiration of the Term shall, at Landlord's election, vest in Landlord; provided, however, that Landlord may remove and dispose at Tenant's expense of any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to the Tenant. -26- 30 14.4 MANAGEMENT OF PREMISES. Upon the expiration or earlier termination of the Term, Landlord or its designee may elect, upon written notice to Tenant and to the extent permitted by applicable law, to assume the responsibilities and obligations for the management and operation of the Premises, and Tenant agrees to cooperate fully with Landlord or its designee to accomplish the transfer of such management and operation without interrupting the operation of the Premises. Tenant shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of the facility, and Tenant shall, at the time of any such surrender and to the extent permitted by applicable law, comply with all requests for an orderly transfer of (a) the Applicable Facility license, (b) any Medicare and Medicaid (or any successor program) certifications and (if applicable), and (c) possession of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall promptly deliver copies of all of Tenant's books and records relating to the Premises and its operations to Landlord. 14.5 CORRECTION OF DEFICIENCIES. Upon termination or cancellation of this Lease, Tenant shall indemnify Landlord for any loss, damage, cost or expense incurred by Landlord to correct all deficiencies of a physical nature identified by the governmental agency responsible for licensing Facilities in the state in which the Premises is located and/or the governmental agency responsible for administering Medicare or Medicaid payments or any other government agency or Medicare or Medicaid (or any successor programs) providers in the course of the change of ownership inspection and audit. 15. NOTICES AND DEMANDS. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Lease shall be in writing and shall be sent by personal delivery or by either (a) United States certified or registered mail, return receipt requested, postage prepaid, or (b) Federal Express or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows: -27- 31 To Tenant: To Landlord: ___________________________________ Nationwide Health Properties, Inc. 610 Newport Center Drive, Suite 1200 Attention: Gary E. Stark Newport Beach, California 92660 610 Newport Center Drive, Suite 1150 Attn: Kevin L. Sherry Newport Beach, California 92660 Facsimile: (949) 719-1212 Facsimile: (714) 759-6876 With Copy To: With Copy To: Balanced Care Corporation Cordray & Goodrich 5021 Louise Drive, Suite 200 Attn: Howard F. Cordray, Jr. Mechanicsburg, PA 17055 3306 Sul Ross Attn: Legal Department Houston, TX 77098 Facsimile: (717) 796-6150 Facsimile: (713) 630-0017 With Copy To: Kirkpatrick & Lockhart, LLP 1500 Oliver Building Pittsburgh, PA 15222 Attn: Steven Adelkoff Facsimile: (412) 355-6501 Any notice so given by mail shall be deemed to have been given as of the date of delivery (whether accepted or refused) established by U.S. Post Office return receipt or the overnight carrier's proof of delivery, as the case may be, whether accepted or refused. Any such notice not so given shall deemed given upon receipt of the same by the party to whom the same is to be given. Any party hereto may designate a different address for itself by notice to the other party in accordance with this Section 15. If Tenant is not an individual, notice may be made to any officer, general partner or principal thereof. Notice to any one co-Tenant shall be deemed notice to all co-Tenants. 16. RIGHT OF ENTRY; EXAMINATION OF RECORDS. Landlord and its representative may enter the Premises at any reasonable time after reasonable notice to Tenant for the purpose of inspecting the Premises for any reason, including, without limitation, Tenant's default under this Lease, or to exhibit the Premises for sale, lease or mortgage financing, or posting notices of default, or non-responsibility under any mechanic's or materialman's lien law or to otherwise inspect the Premises for compliance with the terms of this Lease. Any such entry shall not unreasonably interfere with residents, patients, patient care, or any other of Tenant's operations. During normal business hours and to the extent permitted by applicable law, Tenant will permit Landlord and Landlord's representatives, inspectors and consultants to examine all contracts, books and records relating to Tenant's operations at the Premises, whether kept at the Premises or at some other location, including, without limitation, Tenant's financial records. -28- 32 17. LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section 17, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Premises, or any portion thereof or interest therein (including this Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Any such Encumbrance shall provide that it is subject to the rights of Tenant under this Lease, and shall further provide that so long as no Event of Default shall have occurred under this Lease, Tenant's occupancy hereunder, including, but without limitation, Tenant's right of quiet enjoyment provided in Section 18, shall not be disturbed in the event any such lienholder or any other person takes possession of the Premises through foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant shall subordinate this Lease to the lien of a new Encumbrance on the Premises; provided, however, if Tenant is not then in default hereunder, then Tenant shall not be required to so subordinate this Lease unless the holder or beneficiary of such Encumbrance executes a nondisturbance agreement in conformity with the provisions of Section 18 hereof. 18. SUBORDINATION AND NON-DISTURBANCE. (a) Concurrently with the execution and delivery of any fee mortgage entered into after the date hereof, provided that the Tenant executes and delivers an agreement of the type described in the following paragraph, Landlord shall obtain and deliver to Tenant an agreement by the holder of such fee mortgage, pursuant to which, the applicable fee mortgagee (i) consents to this Lease, and (ii) agrees that, notwithstanding the terms of the applicable fee mortgage held by such fee mortgagee, or any default, expiration, termination, foreclosure, sale, entry or other act or omission under or pursuant to such fee mortgage, or any transfer in lieu of foreclosure, (A) Tenant's rights under this Lease shall not be disturbed so long as Tenant is not in default hereunder, nor shall this Lease be terminated or cancelled at any time, except in the event that Landlord shall have the right to terminate this Lease under the terms and provisions expressly set forth herein, (B) BCC's option to purchase the Premises shall remain in force and effect pursuant to the terms of the Master Agreement, and (C) in the event that BCC or its Affiliate elects its option to purchase the Premises and performs all of its obligations hereunder in connection with any such election, the holder of the fee mortgage shall release its fee mortgage upon payment by BCC or its Affiliate of the purchase price required under the Master Agreement. (b) At the request from time to time of any fee mortgagee, Tenant shall (i) subordinate this Lease and all of Tenant's rights and estate hereunder to the fee mortgage held by such fee mortgagee, and (ii) agree that Tenant will attorn to and recognize such fee mortgagee or the purchaser at any foreclosure sale or any sale under a power of sale contained in any such fee mortgage as Landlord under this Lease for the balance of the Term then remaining. To effect the intent and purpose of the immediately preceding sentence, Tenant agrees to execute and deliver such instruments in recordable form as are reasonably requested by Landlord or the applicable fee mortgagee; provided, however, that such fee mortgagee simultaneously executes, delivers and records a written agreement of the type described in Section 18(a) above. 19. QUIET ENJOYMENT. So long as there is no Event of Default by Tenant, Landlord covenants and agrees that Tenant shall peaceably and quietly have, hold and enjoy the -29- 33 Premises for the Term, free of any claim or other action not caused or created by Tenant (excepting, however, intrusion of Tenant's quiet enjoyment occasioned by condemnation or destruction of the property as referred to in Sections 12 and 13 hereof). 20. EASEMENTS, ETC.. Landlord will, from time to time, at the request of Tenant and at Tenant's cost and expense, but subject to the approval of Landlord (a) grant easements and other rights in the nature of easements, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Premises, (c) dedicate or transfer unimproved portions of the Premises for road, highway or other public purposes, (d) execute petitions to have the Premises annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Premises, and (f) execute and deliver to any person such instruments as may be necessary or appropriate to confirm or effect such grants, releases, dedications and transfers (to the extent of its interest in the Premises). Along with any such request, Tenant shall deliver to Landlord an Officer's Certificate stating (and such other confirming information as Landlord may reasonably require) that such grant, release, dedication, transfer, petition or amendment has no adverse effect on the intended use of the Premises and does not reduce the value thereof. 21. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the internal laws of the state in which the Premises is located without regard to the conflict of laws rules of such State. 22. PRESERVATION OF GROSS REVENUES. 22.1 Tenant acknowledges that a fair return to Landlord on its investment in the Premises is dependent, in part, on the concentration on the Premises during the Term of the Facility business of Tenant and its Affiliates in the geographical area of the Premises. Tenant further acknowledges that the diversion of residents and/or patient care activities from the Premises to other facilities owned or operated by Tenant or its Affiliates at or near the end of the Term will have a material adverse impact on the value and utility of the Premises. 22.1.1 Therefore, Tenant agrees that during the Term, and for a period of one (1) year thereafter, neither Tenant nor any of its Affiliates shall, without the prior written consent of Landlord, operate, own, participate in or otherwise receive revenues from any other facility or institution providing services or similar goods to those provided on or in connection with the Premises and the permitted use thereof as contemplated under this Lease, within a five (5) mile radius of the Premises; provided, however, that the provisions of this Section 22.1.1 shall not apply to the operation or ownership of any licensed skilled nursing facility or licensed acute care hospital facility. 22.1.2 In addition, Tenant hereby covenants and agrees that for a period of one (1) year following the expiration or earlier termination of this Lease, neither Tenant nor any of its Affiliates shall, without prior written consent of Landlord, solicit for hire, engage or otherwise employ any management or supervisory personnel working on or in connection with the Premises and not -30- 34 also working at any other facility owned or operated by BCC or any Affiliate of BCC. 22.2 Except as required for medically appropriate reasons, prior to and for a period of one (1) year after Lease termination, neither Tenant nor any of its Affiliates will recommend or solicit the removal or transfer of any resident or patient from the Premises to any other assisted living, senior housing, or retirement housing facility; provided, however, the provisions of this Section 22.2 shall not apply to the removal or transfer of a resident or patient to a licensed skilled nursing facility or licensed acute care hospital facility. 22.3 Tenant hereby specifically acknowledges and agrees that the temporal, geographical and other restrictions contained in this Section 22 are reasonable and necessary to protect the business and prospects of Landlord, and that the enforcement of the provisions of this Section 22 will not work an undue hardship on Tenant. Tenant further agrees that in the event either the length of time, geographical or any other restrictions, or portion thereof, set forth in this Section 22 is overly restrictive and unenforceable in any court proceeding, the court may reduce or modify such restrictions, but only to the extent necessary, to those which it deems reasonable and enforceable under the circumstances, and the parties agree that the restrictions of this Section 22 will remain in full force and effect as reduced or modified. Tenant further agrees and acknowledges that Landlord does not have an adequate remedy at law for the breach or threatened breach by Tenant of the covenants contained in this Section 22, and Tenant therefore specifically agrees that Landlord may, in addition to other remedies which may be available to Landlord hereunder, file a suit in equity to enjoin Tenant from such breach or threatened breach, without the necessity of posting any bond. Tenant further agrees, in the event that any provision of this Section 22 is held to be invalid or against public policy, the remaining provisions of this Section 22 and the remainder of this Lease shall not be affected thereby. 23. HAZARDOUS MATERIALS. 23.1 HAZARDOUS MATERIAL COVENANTS. Tenant's use of the Premises shall comply with all Hazardous Materials Laws. In the event any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws or if Tenant has received any Hazardous Materials Claim against the Premises, Tenant shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord's approval of the remediation plan (which approval shall not be unreasonably withheld or delayed), remedy any such problem to the satisfaction of Landlord and all applicable governmental authorities, in accordance with all Hazardous Materials Laws and good business practices. 23.2 TENANT NOTICES TO LANDLORD. Tenant shall immediately advise Landlord in writing of: 23.2.1 any Environmental Activities in violation of any Hazardous Materials Laws; 23.2.2 any Hazardous Materials Claims against Tenant or the Premises; -31- 35 23.2.3 any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about the Premises in violation of any Hazardous Materials Laws; 23.2.4 Tenant's discovery of any occurrence or condition on or in a one (1) mile radius of the Premises that materially increase the risk that the Premises will be exposed to Hazardous Materials; and 23.2.5 all communications to or from Tenant, any governmental authority or any other person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to the Premises, including copies thereof. 23.3 EXTENSION OF TERM. Notwithstanding any other provision of this Lease, in the event any Hazardous Materials are discovered on, under or about the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord, in accordance with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this Lease (which date may be subsequent to the date upon which the Term was to have expired). 23.4 PARTICIPATION IN HAZARDOUS MATERIALS CLAIMS. Landlord shall have the right, at Tenant's sole cost and expense (including, without limitation, Landlord's reasonable attorneys' fees and costs) and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. 23.5 ENVIRONMENTAL ACTIVITIES shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from the Premises or located on or present on or under the Premises. Nothing contained in the foregoing or elsewhere in this Section 21 is intended to, nor shall it, limit the liability of Tenant, if any, to Landlord with respect to any representation or warranty given to Landlord with respect to Hazardous Materials or environmental matters generally as set forth in the Purchase Agreement. 23.6 HAZARDOUS MATERIALS shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to the Premises or to persons on or about the Premises or cause the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards; (f) radon gas in excess -32- 36 of permissible state or federal guidelines; (g) underground storage tanks which pose a hazard to the property or to persons on or about the Property or cause the Property to be in violation of any Hazardous Materials Laws; and (h) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time. 23.7 HAZARDOUS MATERIALS CLAIMS shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. 23.8 HAZARDOUS MATERIALS LAWS shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, underground storage tanks, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters. 24. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, without the prior written consent of Landlord, which may be withheld at Landlord's sole discretion, voluntarily or involuntarily assign, mortgage, encumber or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof. For the purposes of this Lease, the following, without limitation, shall be considered an assignment of this Lease by Tenant: (i) a management or similar agreement (other than any such agreement between Tenant and BCC or an Affiliate of BCC), and (ii) any Change in Control (as such term is defined in Section 10.1.6 hereof) of Tenant. Any of the foregoing acts without such consent shall be void but shall, at the option of Landlord in its sole discretion, constitute an Event of Default giving rise to Landlord's right, among other things, to terminate this Lease. Without limiting the foregoing, this Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law without the prior written consent of Landlord which may be withheld at Landlord's sole discretion. Notwithstanding the foregoing, Tenant may without Landlord's consent assign this Lease or sublet all (but not less than all) of the Premises thereof to an Affiliate of Tenant, provided that such Affiliate fully assumes the obligations of Tenant under this Lease, BCC has approved such assignment in writing, Tenant remains fully liable under this Lease, the use of the Premises remains unchanged, and no such assignment or sublease shall be valid and no such Affiliate shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Premises or any part thereof on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. -33- 37 (b) If no Event of Default exists under this Lease and no event of default exists under the Master Agreement, the Development Agreement, the Deposit Pledge Agreement, or the Working Capital Assurance Agreement, then notwithstanding the provisions of Section 10.1.6 above or Section 24(a) above to the contrary, Tenant shall have the right, and Landlord hereby consents, to the transfer, assignment or sale to either BCC or an Affiliate of BCC of all the outstanding equity interests of Tenant pursuant to the Option Agreement or all of the assets of Tenant pursuant to the Asset Purchase Option (as defined in the Shortfall Funding Agreement); provided, however, should such purchase be made by an Affiliate of BCC, BCC shall provide to Landlord a guaranty in form and substance satisfactory to Landlord of all obligations of the successor Tenant under this Lease; and provided, further, that BCC must give Landlord thirty (30) days prior written notice of any such transfer, assignment or sale (without any obligation for BCC to obtain Landlord's approval of any such transfer). In such event, the initial Tenant and any guarantor of such Tenant's obligations to Landlord (exclusive of BCC or a BCC Affiliate) shall be relieved of all liability and obligations hereunder and to Landlord, and Landlord shall look solely to BCC (and, if applicable, the BCC Affiliate acting as Tenant hereunder) for the satisfaction of all such obligations owed to Landlord. 25. INDEMNIFICATION. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense loss, costs, deficiency, fine, penalty, or damage (including, without limitation, punitive or consequential damages) of any kind or nature, including reasonable attorneys' fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Lease (including, without limitation, the breach by Tenant of any of its obligations hereunder), the Premises, or the operations of Tenant on the Premises, including, without limitation, all Environmental Activities on the Premises, all Hazardous Materials Claims (including, without limitation, any Claims arising out of any Environmental Activities described in the "PHASE I REPORT", as defined in the Purchase Agreement) or any violation by Tenant of a Hazardous Materials Law with respect to the Premises. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Landlord believes is covered by this indemnity, Landlord shall give Tenant notice of the matter. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense (including, without limitation, Landlord's reasonable attorneys' fees and costs) with legal counsel reasonably satisfactory to Landlord. Landlord may elect to defend the matter with its own counsel at Tenant's expense. 26. HOLDING OVER. If Tenant shall for any reason remain in possession of the Premises after the expiration or earlier termination of this Lease, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental each month, one hundred fifty percent (150%) of the aggregate of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to the Premises. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease, nor shall anything contained herein be deemed -34- 38 to limit Landlord's remedies pursuant to this Lease or otherwise available to Landlord at law or in equity. 27. ESTOPPEL CERTIFICATES. Tenant or Landlord, as applicable, shall, at any time upon not less than five (5) days prior written request by the requesting party, execute, acknowledge and deliver to the requesting party or its designee a statement in writing, executed by an officer or general partner of Tenant or Landlord (as applicable), certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that this Lease is in full force and effect as modified, and setting forth such modifications), (b) the dates to which Minimum Rent, Additional Rent and additional charges hereunder have been paid, (c) that no default by either Landlord or Tenant exists hereunder or specifying each such default, and (d) as to such other matters as the requesting party may reasonably request. 28. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Premises shall convey the Premises in accordance with the terms hereof, Landlord or such successor owner shall thereupon be released from all future liabilities and obligations of Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Premises and all such future liabilities and obligations shall thereupon be binding upon the new owner. 29. ACCESS TO RECORDS. To the extent required by applicable law and until the expiration of four (4) years after the furnishing of services pursuant to this Lease, the Landlord shall make available (and, if Landlord carries out any of the duties under this Lease on behalf of Landlord or Tenant through a subcontract with a related organization, and such subcontract has a value or cost of Ten Thousand Dollars ($10,000.00) or more during any twelve (12) month period, then such subcontract shall contain a clause to the effect that the applicable subcontractor shall make available) the books, documents and records of the Landlord (or such subcontractor) that are necessary to verify the nature and extent of such costs in connection with said services, upon request by the Secretary of Health and Human Services, the U.S. Comptroller General, or their respective duly authorized representatives. 30. ATTORNEYS' FEES. If Landlord or Tenant brings any action to interpret or enforce this Lease, or for damages for any alleged breach hereof, the prevailing party in any such action shall be entitled to reasonable attorneys' fees and costs as awarded by the court in addition to all other recovery, damages and costs. 31. SEVERABILITY. In the event any part or provision of the Lease shall be determined to be invalid or unenforceable, the remaining portion of this Lease shall nevertheless continue in full force and effect. 32. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. -35- 39 33. BINDING EFFECT. Subject to the provisions of Section 24 above, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective successors in interest and assigns. 34. WAIVER AND SUBROGATION. Landlord and Tenant hereby waive to each other all rights of subrogation which any insurance carrier, or either of them, may have as to the Landlord or Tenant by reason of any provision in any policy of insurance issued to Landlord or Tenant, provided such waiver does not thereby invalidate the policy of insurance. 35. MEMORANDUM OF LEASE. If requested by Landlord or Tenant, then Landlord and Tenant shall execute a memorandum or notice of lease in which reference to this Lease shall be made, in form suitable for recording under the laws of the state in which the Premises is located. Tenant shall pay all costs and expenses of preparing and recording such memorandum or notice of this Lease. 36. INCORPORATION OF RECITALS AND ATTACHMENTS. The recitals and exhibits, schedules, addenda and other attachments to this Lease are hereby incorporated into this Lease and made a part hereof. 37. TITLES AND HEADINGS. The titles and headings of sections of this Lease are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Lease. 38. USURY SAVINGS CLAUSE. The parties intend that their relationship be that of lessor and lessee only. Nothing contained in this Lease shall be deemed or construed to constitute an extension of credit by Landlord to Tenant, nor shall this Lease be deemed to be a partnership or venture agreement between Landlord and Tenant. Notwithstanding the foregoing, in the event any payment made to Landlord hereunder is deemed to violate any applicable laws regarding usury, the portion of any payment deemed to be usurious shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and, in the event Tenant discharges and performs all obligations hereunder, such funds will be reimbursed to Tenant upon the expiration of the Term. No interest shall be paid on any such funds held by Landlord. 39. JOINT AND SEVERAL. If more than one person or entity is the Tenant hereunder, the liability and obligations of such persons or entities under this Lease shall be joint and several. 40. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the obligations, representations, warranties and covenants of Tenant under this Lease shall survive the expiration or earlier termination of the Term, including, without limitation, Tenant's obligations to pay rent and other sums under this Lease following the occurrence of an Event of Default and the termination of this Lease pursuant to Section 10.2.2 above. 41. INTERPRETATION. Both Landlord and Tenant have been represented by counsel and this Lease has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. -36- 40 42. SUBSTITUTION OF PROPERTY FOR THE PREMISES. In the event Landlord accepts an offer by Tenant to substitute other property for the Premises, and provided that no Event of Default shall have occurred and be continuing, Tenant shall have the right (subject to such conditions as Landlord may reasonably require, and upon notice to Landlord) to substitute one or more properties (collectively referred to as "SUBSTITUTE PROPERTIES" or individually as a "SUBSTITUTE PROPERTY") for the Premises on a monthly payment date specified in such notice (the "SUBSTITUTION DATE") occurring not less than ninety (90) days after receipt by Landlord of such notice. The notice shall be in the form of an Officer's Certificate and shall specify the reason(s) for the proposed substitution and the proposed Substitution Date. Notwithstanding anything contained herein to the contrary, any substitution for the Premises shall require the prior written consent of Landlord which shall be within the sole discretion of Landlord. [FOLLOWING PAGE IS SIGNATURE PAGE] -37- 41 Executed as of the date indicated above. TENANT: --------------------------------------- By: --------------------------------- Name: --------------------------------- Title: --------------------------------- LANDLORD: --------------------------------------- By: --------------------------------- Name: --------------------------------- Title: --------------------------------- -38- EX-10.15 15 BALANCED CARE CORPORATION 1 Exhibit 10.15 SCHEDULE TO FORM OF NHP SECOND SERIES LEASE AND SECURITY AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Facility Tenant Property Location Manager Land Cost Tradename Security Additional Location Deposit Security Deposit - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Pensacola, C&G North Davis Highway - Balanced $395,000 Outlook $67,588.04 $33,794.02 FL Healthcare at State Road No. 291 and Care at Pointe at Pensacola, Abbie Lane, Pensacola, Pensacola, Pensacola LLC Escambia County, Florida Inc. - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Tallahassee, C&G Fleischmann Road, Balanced $675,000 Outlook None None FL Healthcare at Tallahassee, Leon County, Care at Pointe at Tallahassee, Florida Tallahassee, Tallahassee LLC Inc. - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Hagerstown, C&G 1175 Professional Court, Balanced $25,000 Balanced $60,465.00 $30,232.50 MD Healthcare at Hagerstown, Washington Care at Care, Hagerstown, County, Maryland Hagerstown, Hagerstown LLC Inc. - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Johnson City, C&G 406 E. Mountain View Road, Balanced $400,000 Outlook None None TN Healthcare at Johnson City, 10th Civil Care at Pointe at Johnson City, District of Washington Johnson Johnson City LLC County, Tennessee City, Inc. - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------ Teay's Valley, C&G West Virginia State Route Balanced $700,000 Outlook $71,935.30 $35,967.65 WV Healthcare of 34, being known numbered Care at Pointe at Teay's and designated as Lot No. Teay's Teay's Valley Valley, LLC 4, Stonegate Plaza, Scott Valley, Inc. Depot, in or near Teay's Valley, in the Scott District of Putnam County, West Virginia - --------------- -------------- ---------------------------- -------------- ----------- --------------- ------------- ------------
EX-10.16 16 BALANCED CARE CORPORATION 1 Exhibit 10.16 FORM OF DEVELOPMENT AGREEMENT BETWEEN _______ AND BCC DEVELOPMENT AND MANAGEMENT CO. ________________ _________ __________________ 2 TABLE OF CONTENTS TO DEVELOPMENT AGREEMENT Page ---- R E C I T A L S.............................................................. 1. ENGAGEMENT AND GENERAL DUTIES OF DEVELOPER.......................... 1.1. Engagement of Developer.................................... 1.2. Term of Agreement.......................................... 1.3. Performance of Developer................................... 1.4. Project Manager............................................ 1.5. Developer's Responsibilities for Costs and Expenses........ 1.6. Description of Improvements................................ 2. SERVICES TO BE PROVIDED BY DEVELOPER................................ 2.1. Project Plans.............................................. 2.2. Construction Schedule...................................... 2.3. Ownership of Improvement Plans............................. 2.4. Progress Meetings and Reports.............................. (a) Meetings.......................................... (b) Progress Report................................... 2.5. Compliance with Construction Schedule and Budget........... 2.6. Approvals and Permits...................................... 2.7. Consultant Contracts....................................... 2.8. Construction Contract...................................... 2.9. Developer's Construction Supervision....................... (a) Staffing and Supervision.......................... (b) Coordination of Consultants....................... (c) Hazardous and Toxic Wastes........................ 2.10. Change Orders.............................................. 2.11. Payment Applications....................................... (a) Delivery of Documents............................. (b) Construction Schedule............................. (c) Utilities......................................... (d) Entitlements...................................... (e) Application for Payment........................... (f) No Default........................................ (g) Insurance......................................... (h) Property Located Off-Site......................... 2.12. Inspections and Construction Punch List.................... 2.13. Financial Records.......................................... i 3 2.14. Protection and Safety...................................... 2.15. As-Built Survey............................................ 3. REPRESENTATIONS AND WARRANTIES...................................... 3.1. Developer's Representations and Warranties................. 4. COMPENSATION OF DEVELOPER........................................... 4.1. Reimbursable Expenses...................................... 4.2. Development Fees........................................... 4.3. Owner's Funding of Land Acquisition Costs and Improvement Costs.......................................... 4.4. Satisfaction of Initial Disbursement Conditions............ 4.5. Shortages.................................................. 4.6. Third-Party Servicer....................................... 5. RESPONSIBILITIES OF OWNER........................................... 5.1. Cooperation................................................ 5.2. Costs...................................................... 6. TERMINATION......................................................... 6.1. Events of Default.......................................... 6.2. Take Over.................................................. 6.3. Termination Upon Event of Default.......................... 6.4. Actions Subsequent to Termination.......................... 7. INSURANCE PROVISIONS................................................ 7.1. General Insurance Requirements............................. 7.2. Deductible Amounts......................................... 7.3. Insurance Types............................................ (a) Workers' Compensation............................. (b) Comprehensive General Liability Insurance......... (c) Comprehensive Automobile Liability Insurance...... (d) Improvements Insurance Coverage................... (e) Boiler and Machinery Insurance.................... 7.4. Continued Coverage......................................... 7.5. Waiver of Subrogation...................................... 8. MISCELLANEOUS PROVISIONS............................................ 8.1. Assignment................................................. 8.2. Amendment.................................................. 8.3. Notices.................................................... 8.4. Attorneys' Fees............................................ 8.5. Entire Agreement........................................... 8.6. Governing Law.............................................. 8.7. Severability............................................... 8.8. No Waiver.................................................. ii 4 8.9. No Joint Venture........................................... 8.10. Successors and Assigns..................................... 8.11. Indemnity.................................................. 8.12. Additional Documents....................................... 8.13. Subsurface Conditions...................................... 8.14. Force Majeure.............................................. 8.15. Counterparts............................................... EXHIBITS A - Legal Description of Real Property B - Site Plan of Improvements C - Budget iii 5 DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT ("AGREEMENT") is made as of the ____ day of March, 1998 ("EXECUTION DATE") by and between _____________________________ ____________________________ ("OWNER"), and BCC DEVELOPMENT AND MANAGEMENT CO., a Delaware corporation ("DEVELOPER"), with respect to the following Recitals: R E C I T A L S: A. Owner is or will be, prior to the commencement of the undertakings contained herein, the owner of that certain real property located along _____ _____________________________________________ being more specifically described in Exhibit "A" attached hereto and by this reference incorporated herein, together with all improvements thereon and all appurtenances thereto (the "REAL PROPERTY"). B. Pursuant to that certain Lease and Security Agreement (the "LEASE") of even date herewith by and between Owner, as landlord, and __________ _______________________ ("TENANT"), a Delaware limited liability company, as tenant, Owner has agreed to lease to Tenant, and Tenant has agreed to lease from Owner, inter alia, the Real Property, on terms and conditions as more specifically set forth in the Lease. C. Owner and Developer desire to construct on the Real Property a two (2) story, 106 unit personal care home/assisted living facility (such type of facility being hereinafter sometimes referred to as a "FACILITY"), all as more particularly described in Paragraph 1.6 below (the "IMPROVEMENTS"). D. _____________________________ a Delaware corporation and an Affiliate of Developer ("MANAGER") will act as manager of the Facility to be constructed on the Real Property, pursuant to a management agreement by and between Tenant and Manager. E. Developer is experienced in the planning, development and operation of the type and quality of Facility contemplated by this Agreement. F. Owner and Developer desire to enter into this Agreement whereby Developer shall undertake certain duties in connection with the planning, design and development of the Improvements on the terms and conditions set forth in this Agreement. G. BALANCED CARE CORPORATION, a Delaware corporation ("GUARANTOR"), has agreed to guarantee Developer's duties and obligations under the Agreement, pursuant to that certain Guaranty of even date herewith by and between Guarantor and Owner. NOW, THEREFORE, with references to the foregoing Recitals and information, all of which are incorporated herein by this reference, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: -1- 6 1. ENGAGEMENT AND GENERAL DUTIES OF DEVELOPER. 1.1. ENGAGEMENT OF DEVELOPER. Owner hereby engages Developer, subject to the terms and conditions set forth in this Agreement, to perform the duties and obligations set forth in this Agreement, and Developer agrees to accept such engagement. 1.2. TERM OF AGREEMENT. The term of this Agreement shall commence on the Execution Date and shall continue until the date on which all work, improvements and services described herein have been completed in accordance with the terms and provisions hereof. Notwithstanding the foregoing, this Agreement shall be subject to early termination in accordance with the terms and provisions of Paragraph 6.3 below. 1.3. PERFORMANCE OF DEVELOPER. Developer accepts the relationship of trust and confidence established between Developer and Owner by this Agreement. Developer covenants with Owner to furnish its best skill and judgment and to cooperate with Owner, the Contractor (as defined in Paragraph 2.8 below) and any other contractors or subcontractors performing work on the Improvements, and the Architect (as defined in Paragraph 1.6 below) and any other designers, surveyors, engineers or consultants performing design or consulting services relating to the Improvements. Developer agrees to use its best efforts to perform its duties and obligations under this Agreement in an efficient, expeditious and economical manner, consistent with the best interests of Owner, and in such a manner so as to effect completion of the planning and construction of the Improvements within the time periods set forth herein and in the Lease. 1.4. PROJECT MANAGER. Developer shall provide a project manager for the development of the Improvements who shall work such time on the development of the Improvements as shall be necessary or desirable to adequately perform the duties of Developer pursuant to this Agreement and shall be primarily responsible for keeping Owner informed as to the progress and status of the design, planning and construction of the Improvements. 1.5. DEVELOPER'S RESPONSIBILITIES FOR COSTS AND EXPENSES. Except as otherwise specifically provided in this Agreement, Developer shall be responsible for payment of salaries, fringe benefit contributions, payroll taxes, withholding taxes and other taxes or levies in connection with Developer's employees, and Developer's accounting fees, office overhead, general and administrative fees and charges, legal fees and travel expenses not of direct benefit to the Improvements, telephone, facsimile and other telecommunication expenses, and document reproduction expenses. 1.6. DESCRIPTION OF IMPROVEMENTS. The Improvements shall consist of the construction of the new building(s), depicted on the Design Drawings (as hereinafter defined), together with all site improvements, including, without limitation, parking, all as more particularly described in those certain plans and specifications (the "DESIGN DRAWINGS") prepared by _______________ (the "ARCHITECT"), dated ________________________, 1998 the drawing index of which is attached hereto as Exhibit "B" and by this reference incorporated herein. Developer covenants and agrees to cause the Improvements to be completed in compliance with all requirements of this Agreement. -2- 7 2. SERVICES TO BE PROVIDED BY DEVELOPER. 2.1. PROJECT PLANS. Owner acknowledges and agrees that Developer has delivered to it the Design Drawings and the budget (the "BUDGET") totaling $____________ attached hereto as Exhibit "C" (collectively, the "PROJECT PLANS"). Owner has approved the Design Drawings and the Budget delivered to Owner as of the date hereof. Developer agrees to construct the Improvements in accordance with the Project Plans, subject to such changes thereto as may be made in accordance with the procedures for change orders set forth in Paragraph 2.10 below; provided, however, Owner further agrees that any changes in the Project Plans which are intended to reduce the cost of construction but which will not have an adverse effect on the appearance of the buildings or the value or integrity of the Improvements shall not require Owner's approval but shall only require notice to Owner. 2.2. CONSTRUCTION SCHEDULE. Developer has provided to Owner a construction schedule (the "CONSTRUCTION SCHEDULE"), which schedule shall include a detailed schedule indicating the projected timing and sequence of all matters relating to the development and construction of the Improvements, and the estimated completion dates for construction of the various components and improvements comprising the Improvements (the "WORK"). Developer agrees to construct the Improvements on a schedule consistent with that set forth in the Construction Schedule, subject to such changes thereto as may be made in accordance with the procedures for change orders set forth in Paragraph 2.10 below; provided, however, that Owner further acknowledges and agrees that any changes in the Construction Schedule which are intended to shorten the construction period shall not require Owner's approval but shall only require notice to Owner. 2.3. OWNERSHIP OF IMPROVEMENT PLANS. All documents, plans, drawings and specifications prepared by or at the request of Developer in connection with the preparation of the Project Plans and the Construction Schedule, or otherwise in connection with the preliminary planning and development of the Improvements (collectively, the "IMPROVEMENT PLANS") shall be and remain the sole and exclusive property of Developer; provided, however, that Owner shall have the license and right to use the Design Drawings, Improvement Plans, and/or Project Plans with respect to the Work, the Facilities, the Improvements, and the Real Property. Owner shall not construct or cause to be constructed or participate in the construction of any improvements or facility based in whole or in part on the Improvement Plans or the Project Plans anywhere other than on the Real Property. Notwithstanding the foregoing, Owner may retain copies of the Improvement Plans and the Project Plans, and may distribute the same on a need to know and confidential basis to architects, engineers, attorneys and other agents of Owner for use in connection with the completion, maintenance, repair, alteration, modification or replacement of the Improvements built or to be built on the Real Property. Developer shall retain all rights to use all plans referred to herein for any other projects in its sole and absolute discretion. 2.4. PROGRESS MEETINGS AND REPORTS. (a) MEETINGS. Developer shall schedule telephonic meetings with Owner as may be requested by Owner, but no more frequently than once per calendar month, to discuss the progress of the development and construction of the Improvements and to assess Developer's performance under and compliance with the requirements of this Agreement, including, without -3- 8 limitation, compliance with the approved Improvement Plans, and each component part thereof (including the Budget). (b) PROGRESS REPORT. From time to time as may be requested by Owner, but no more frequently than once per calendar month, Developer shall provide Owner with a progress report (a "PROGRESS Report") in a form acceptable to Owner. The Progress Report shall be submitted within 15 days of Owner's request therefor and shall contain at least the following information: (i) the status of all governmental permits and entitlements required for the development and construction of the Improvements (the "ENTITLEMENTS"); (ii) the status of all contracts to which Developer is a party, including, without limitation, agreements with architects, consultants and contractors performing or to perform work on or in connection with the Improvements; (iii) the status of construction of the Improvements, including any updates to the construction schedules and key dates noted therein; (iv) the status of compliance with the terms, contents and requirements of the approved Improvement Plans, including, without limitation, any variations or deviations (current or projected) from the Budget (Developer shall maintain and make available to Owner all supporting receipts, disbursement ledgers, journal entries and such other documents as may be requested by Owner); and (v) such other information relating to the Improvements as Owner may reasonably require. 2.5. COMPLIANCE WITH CONSTRUCTION SCHEDULE AND BUDGET. Developer shall promptly advise Owner if at any time it appears that development or construction of the Improvements may not be finished on or before the Completion Date (as hereinafter defined), or if it appears that the Budget will be exceeded. In such event, Developer shall make recommendations to Owner as to any appropriate corrective action to be taken, and will implement any such corrective action reasonably approved by Owner. For purposes of this Agreement, the term "COMPLETION DATE" shall refer to the date established for substantial completion of the construction of the Improvements in the schedule component of the Construction Schedule, which date shall be no later than thirteen (13) months after the Execution Date (exclusive only of customary and immaterial punch list items to be completed by the Contractor in the ordinary course). The Improvements shall be deemed substantially complete on the day that Developer and/or Manager provide to Owner evidence reasonably satisfactory to Owner of (i) the certification of the Architect that the Improvements have been constructed substantially in compliance with the Design Drawings approved by Owner, (ii) a governmental certificate of occupancy for human use and habitation or its equivalent for the Improvements, (iii) all licenses necessary for operation of the Improvements for its intended use as a Facility, and (iv) the delivery to Owner of the As-Built Survey (as defined in Paragraph 2.15 below). -4- 9 2.6. APPROVALS AND PERMITS. Developer shall process in a timely manner and diligently pursue all applications, plans and maps and all other Entitlements relating to the development and construction of the Improvements and obtain all necessary approvals and permits and other Entitlements required by governmental agencies having jurisdiction over the Real Property and/or any aspect of the construction and development of the Improvements, and shall cooperate and coordinate with Tenant, Manager, and applicable governmental authorities with respect to Tenant's obtaining of an operating license and other licenses or permits necessary for the operation of the Improvements as a Facility, including, without limitation, any related inspections and required alterations of the Improvements. 2.7. CONSULTANT CONTRACTS. (a) In addition to the Architect, Developer shall select such other engineers, consultants or designers whose services are necessary or desirable in connection with the development and construction of the Improvements, including, without limitation, a landscape architect, soils engineer, structural engineer, mechanical engineer and civil engineer (such designers, consultants and engineers being collectively referred to in this Agreement as "CONSULTANTS"). Developer shall negotiate with the Consultants on an arms-length basis, on the most advantageous terms possible not in excess of industry standards, and shall prepare the contracts to be entered into between Developer and the various Consultants. No payment or reimbursement for work or services performed by any Consultant shall be made by Owner before a contract with such Consultant has been executed and delivered to Owner. (b) Unless Owner otherwise agrees in writing, the Architect and all Consultants shall be required to maintain Professional Liability insurance (errors and omissions) in amounts no less than One Million and No/100 Dollars ($1,000,000) each and subject to deductibles no greater than Fifty Thousand and No/100 Dollars ($50,000.00), including prior acts and contractual liability. Unless such policies are written on an "occurrence" basis, the contracts with the Architect and the Consultants shall require the Architect and the Consultants to maintain such Professional Liability coverage in force for a period of five (5) years following substantial completion of the Improvements. 2.8. CONSTRUCTION CONTRACT. Developer has selected ______________ ____ (the "CONTRACTOR") to undertake the construction of the Improvements. The construction contract(s) to be entered into between Developer and the Contractor (the "CONSTRUCTION CONTRACT") shall provide for a guaranteed maximum price and shall be in form and substance acceptable to Owner. The terms of the Construction Contract shall, unless otherwise consented by Owner, include, without limitation, the following provisions: (a) The Contractor shall not be entitled to the payment of any fees relating to costs in excess of the guaranteed maximum cost unless based on approved change orders; (b) Requests for change orders must be submitted and processed in accordance with the system for reviewing and processing change order requests approved by Owner pursuant to Paragraph 2.10 below; -5- 10 (c) Application for payment must be submitted in accordance with the payment application procedures approved by Owner pursuant to Paragraph 2.11 below; (d) Provision shall be made for customary hold-back of not less than ten percent (10%) of sums due the Contractor, and each subcontractor and material supplier, until completion of the work which is the subject of the contract pursuant to which payment is to be made; and (e) Subject to the more specific provisions of the Construction Contract, Developer shall cause Contractor to procure and maintain at Contractor's own cost and expense, the following policies of insurance, with limits and deductibles (to the extent not specifically set forth herein) reasonably acceptable to Owner: (i) Workers' Compensation Insurance and Employer's Liability Insurance, each with statutorily proscribed limits of coverage and otherwise in accordance with applicable law; (ii) Comprehensive General Liability Insurance, including, but not limited to, coverage for bodily injury, property damage, personal injury (employee and contractual liability exclusions deleted), products and completed operations, blanket contractual liability, owned, hired or non-owned vehicles, owner's protective liability, broad form property damage and severability of interest clause with limits of liability of $1,000,000.00 for each occurrence, combined single limit or current limit carried, whichever is greater; (iii) The limits of liability of the insurance coverage specified in this Paragraph 2.8(e) may be provided by any combination of primary insurance policies and excess liability ("umbrella") insurance policies; (iv) Contractor shall procure an endorsement naming Owner and Developer as additional named insureds; (v) Contractor shall procure an Owner/Contractor Protective Endorsement insuring the interests of Owner and Developer; and (vi) The Comprehensive General Liability insurance policy specified above shall provide that none of the required coverage may be reduced, modified, cancelled or terminated without thirty (30) days prior written notice to Owner. 2.9. DEVELOPER'S CONSTRUCTION SUPERVISION. (a) STAFFING AND SUPERVISION. Developer shall maintain a competent and sufficient staff in accordance with the staffing plan to monitor, supervise and administer the progress of the Work in order, inter alia, to ensure compliance of the Work with the approved Improvement Plans, and in full compliance with applicable laws, rules and regulations affecting such Work. -6- 11 (b) COORDINATION OF CONSULTANTS. Developer shall coordinate the activities of Architect, Contractor and all other Consultants performing work or services related to the Improvements so as to avoid any unnecessary duplication of effort or any unnecessary delay in the progress of the Work. (c) HAZARDOUS AND TOXIC WASTES. Developer shall retain such consultants and specialists as well as use its best efforts to ensure that no materials or substances classified as hazardous or toxic under current federal or state laws, rules, regulations and ordinances are used in the construction of the Improvements, other than bonding materials, solvents, asphalt, diesel and gasoline fuel, paint, varnish, shellac and similar materials permitted by law in such construction. Developer shall use its best efforts to ensure compliance with all federal and state laws regulating the release, discharge, use, handling, storage, removal and/or transportation of toxic and hazardous wastes, substances and materials in connection with the construction of the Improvements, and each part thereof, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C., Section 9601 et seq.), and the Occupational Safety and Health Act (OSHA) (29 C.F.R. Part 1910). In furtherance of the foregoing, prior to commencement of the design or construction of the Improvements, Developer shall develop and implement such hazardous materials program with which it shall make the Contractor, Architect, all Consultants and each subcontractor and material supplier employed or under contract in any capacity in connection with the design, construction and operation of the Improvements aware, and shall regularly monitor the performance of such persons and use its best efforts to ensure that all such persons comply with such hazardous materials program, including, without limitation, the clean up, removal or other remedial work required as a result of any use, release or discharge of toxic or hazardous wastes, substances or materials. Developer shall include a provision in each contract with any of the aforementioned persons requiring that such persons immediately report all incidents or occasions involving the release or discharge of any toxic or hazardous wastes, substances or materials on the Real Property. 2.10. CHANGE ORDERS. Developer shall develop and implement, subject to Owner's reasonable approval, a system for reviewing and processing construction change order requests, which system shall: (i) employ a written change order request form, and (ii) provide for prior written approval by Owner (except in emergencies, in which event any oral authorization by Owner shall subsequently be confirmed in writing). Developer shall make recommendations to Owner concerning necessary or desirable changes to the Work, shall review requests for change orders, shall submit recommendations to Owner concerning changes and shall, subject to Owner's approval, negotiate change orders with the Contractor. Except as specifically provided below, Developer shall not be authorized to issue change orders on behalf of Owner. Developer may issue a change order which (i) is required by a governmental authority (provided, however, that if compliance with the order or direction of a governmental authority may be accomplished in more than one manner, then selection of the manner of compliance with the order of the governmental authority shall be subject to Owner's prior written approval), or (ii) does not (a) extend the Completion Date, (b) involve a change to the Budget of more than Fifty Thousand and No/100 Dollars ($50,000.00) for any one item or Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate, (c) materially and adversely affect the exterior of the Improvements or otherwise materially and adversely affect any aspect of the aesthetics of the -7- 12 Improvements. Notwithstanding anything else in this Paragraph 2.10 to the contrary or any approvals by Owner of any such change orders, Owner shall not under any circumstances be required to spend or disburse more than the total Development Advance amount authorized by Owner pursuant to Paragraph 4.3 below. 2.11. PAYMENT APPLICATIONS. No disbursements shall be made by Owner to Developer unless Developer shall have satisfied all of the following conditions: (a) DELIVERY OF DOCUMENTS. Developer shall provide Owner with a fully executed original of each of the following documents (unless otherwise indicated), in form and substance acceptable to Owner in the exercise of its reasonable discretion: (i) the Construction Contract, all other direct contracts with respect to any work in connection with the Improvements which have been executed as of the date of such Application for Payment (as defined in Paragraph 2.11(e) below), and, if requested by Owner, each material subcontract (as determined by Owner) with respect to the Improvements which has been executed as of the date of such Application for Payment; (ii) an assignment of permits, licenses, franchises and authorizations executed by Developer, as assignor, in favor of Owner, as assignee. (iii) an assignment of project agreements ("ASSIGNMENT OF PROJECT AGREEMENTS") executed by Developer, as assignor, in favor of Owner, as assignee, together with any consents to such Assignment of Project Agreements to be executed in favor of Owner pursuant to the terms therein; and (iv) if requested by Owner, such other collateral assignments in favor of Owner of all other project agreements to which Developer is a party relating to the construction of the Improvements, together with consents to such assignments as are deemed appropriate by Owner. (b) CONSTRUCTION SCHEDULE. Developer shall have provided Owner with the Construction Schedule, in form and substance acceptable to Owner in the exercise of its reasonable discretion. (c) UTILITIES. Developer shall have obtained, and provided to Owner, evidence satisfactory to Owner that all utilities necessary for the construction and operation of the Improvements are available and are adequate to serve the Improvements for the intended use thereof and that all conditions to Developer's ability to utilize such utilities have been satisfied. (d) ENTITLEMENTS. Developer shall have obtained, and provided to Owner, evidence satisfactory to Owner that all applicable Entitlements required from time to time have been obtained, and all applicable Entitlements required from time to time shall remain in full force and effect. -8- 13 (e) APPLICATION FOR PAYMENT. Each application for payment shall be submitted on a form previously approved by Owner (the "APPLICATION FOR PAYMENT") and shall include a duly executed Architect's certification in favor of Owner that the Architect has examined such application for payment and has determined that the work for which such application was made was performed, to its best knowledge, in conformity with the Design Drawings and that the amount contained in such application is proper. Developer shall not deliver any such Application for Payment more than once per calendar month and each such Application for Payment shall request not less than Twenty-Five Thousand and No/100 Dollars ($25,000.00) (including retainage), provided, however, the last disbursement may be in the amount of remaining funds in the Development Advance (as defined in Paragraph 4.2 below). Each such Application for Payment shall include the following: (i) a statement of the amount of the requested payment; (ii) an itemized account of expenditures to be paid or reimbursed from the requested disbursement, certified by an officer of Developer to be true and correct expenditures which have already been paid or are due and owing and for which no previous disbursement was made hereunder; (iii) copies of invoices or purchase orders from each payee with an identifying reference to the Improvements, which invoices or purchase orders shall support the full amount of costs contained in the requested disbursement; (iv) a statement from Developer confirming that the construction of the Improvements is proceeding in accordance with the Construction Schedule, the Design Drawings and the Budget, certified by an officer of Developer to be true and correct in all material respects; (v) unconditional mechanic's lien waivers and releases from the Contractor and each subcontractor or material supplier providing work or materials for the Improvements which was the subject of the immediately preceding Application for Payment (on such form as may be required by Owner or Owner's title insurer for the Improvements); (vi) a conditional lien waiver and release (conditioned solely upon payment) from the Contractor as to the current Application for Payment; and (vii) any other information or documentation Owner shall reasonably require. (f) NO DEFAULT. No Event of Default or no event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall exist under this Agreement as of the date of Developer's Application for Payment, or as of the date of disbursement, which disbursement shall be made by Owner within ten (10) calendar days of Owner's receipt of an Application for Payment. (g) INSURANCE. All insurance required hereunder shall remain in full force and effect. -9- 14 (h) PROPERTY LOCATED OFF-SITE. Each Application for Payment containing a request for funds to pay for any item which is not then located on the Real Property shall specifically note the fact that the item(s) in question are located off-site, and Owner may decline to disburse funds in the exercise of Owner's reasonable discretion with respect to the same unless and until Owner has received all documentation required by Owner to assure Owner of its ownership interest therein. 2.12. INSPECTIONS AND CONSTRUCTION PUNCH LIST. Developer shall conduct periodic inspections of the Work as necessary to process Applications for Payment or as may be necessary to monitor compliance of the Work with the requirements of the Design Drawings, the requirements of the Construction Schedule and the requirements of any applicable laws, codes, ordinances and regulations. Prior to processing Developer's final Application for Payment, Developer shall conduct a thorough inspection of the Improvements, shall prepare a detailed "punch list" which shall state any items which require installation or repair and shall name the party responsible for undertaking such maintenance or repair. Developer shall be responsible for ensuring that all punch list work is promptly and properly completed. 2.13. FINANCIAL RECORDS. If and when requested by Owner, Developer shall provide to Owner detailed financial records relating to the costs incurred by, on account of or for the benefit of Owner in connection with the development and construction of the Improvements. All such financial records and reports shall be prepared in such form and detail as Owner may reasonably require. 2.14. PROTECTION AND SAFETY. Developer shall take such reasonable actions as are necessary to maintain adequate protection of the Improvements and other property at the site or adjacent thereto from damage, injury or loss, and shall coordinate with the Contractor in taking all reasonable precautions for the safety of persons performing work on the Improvements or visiting the construction site for any purpose in connection with the development of the Improvements. Developer shall require the Contractor and all subcontractors to comply with all applicable provisions of federal, state and local safety laws and building codes and standards. 2.15. AS-BUILT SURVEY. Upon completion of construction of the Improvements, Developer shall, at Developer's sole cost and expense, provide Owner with an as-built survey showing the Improvements (the "AS-BUILT SURVEY"). 3. REPRESENTATIONS AND WARRANTIES. 3.1. DEVELOPER'S REPRESENTATIONS AND WARRANTIES. Developer hereby represents and warrants the following for the benefit of Owner as of the Execution Date: (a) Developer is experienced in managing the construction of real estate projects similar in kind and nature to the Improvements and has all the necessary licenses, if any, for the undertaking of such activities and the performance of its obligations hereunder; (b) The services performed by Developer and Developer's employees, agents, representatives and subcontractors, shall be performed in a prompt, diligent, competent, -10- 15 professional and workmanlike manner, and shall be performed by and under the supervision of qualified personnel utilizing professionally accepted standards; and (c) All materials and equipment to be furnished for the Improvements will be new unless otherwise agreed to in writing by Owner and shall be of quality and workmanship equal to or better than the quality of the materials and equipment incorporated in the Facility known as "Outlook Pointe at Harrisburg", located at 3560 North Progress Avenue, Harrisburg, Pennsylvania 17110. (d) Developer hereby represents and warrants that it is duly licensed, qualified, and insured to provide the services (as defined herein) in the state where the Real Property is located, and will at all times during the Term of this Agreement, remain so licensed, qualified, and insured as required under the terms of this Agreement. (e) The Developer is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, the Developer has the power, corporate and otherwise, to own or lease and operate its business and assets and conduct its business as such business is conducted. The Developer is duly qualified to do business as a domestic or foreign corporation and is in good standing in the State in which the Real Property is located. (f) The Developer has all necessary corporate power and authority and has taken all corporate action necessary to enter into this Agreement and to consummate the transactions contemplated hereby and to perform its obligations hereunder. This agreement has been duly executed and delivered by the Developer and is the legal, valid and binding obligation of the Developer enforceable against the Developer in accordance with its terms. (g) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result (with or without the giving of notice or the passage of time, or both) in (a) a breach of, or a default under, any material term or provision of the Articles of Incorporation or Bylaws of the Developer, each as amended to date and presently ln effect, or any material agreement, lease, license, financial commitment or other document or arrangement to which the Developer is a party or by which the Developer is bound or affected, or (b) a violation by the Developer of any statute, rule, regulation, ordinance, code, order, judgment, writ, injunction, decree or award applicable to the Developer. (h) Except for the Entitlements and other approvals and permits contemplated in Paragraph 2.6 above, no other consent, approval or authorization of, or declaration, filing or registration with any governmental entity or any other person is required to be made or obtained by the Developer in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. (i) There is no action, suit, inquiry, proceeding or investigation by or for any court or governmental or other regulatory or administrative agency or commission pending or threatened against or involving the Developer, which might undermine the validity of this Agreement or any action taken or to be taken by the Developer pursuant to this Agreement or in -11- 16 connection with the transactions contemplated by this Agreement, or which would have a material affect on this Agreement. (j) All financial data concerning the Developer furnished to Owner is true and correct and fairly presents the financial position of the Developer as of the dates and for such periods represented. The Developer has sufficient financial ability and resources to permit the Developer to perform, when due, all of its obligations hereunder, and has provided satisfactory evidence of such ability and resources to Owner. 4. COMPENSATION OF DEVELOPER. 4.1. REIMBURSABLE EXPENSES. Subject to the terms and conditions under this Agreement, including, without limitation, the Application for Payment procedures in Paragraph 2.11 above, Owner agrees to reimburse Developer for all amounts paid to third parties on Owner's behalf pursuant to the fulfillment of the terms of this Agreement, provided that the amounts paid by Developer are consistent with the Budget, as it may be amended from time to time (the "REIMBURSABLE EXPENSES"). 4.2. DEVELOPMENT FEES. Owner shall pay to Developer Development Fees in accordance with this Paragraph 4.2. For purposes of this agreement, the term "DEVELOPMENT FEES" shall mean an amount equal to __________________ _________________________________________. The Development Fees shall be payable by Owner to Developer in accordance with the following schedule: (i) an amount equal to sixty-five percent (65%) of the Development Fees shall be paid on the Execution Date, and (ii) the remaining Development Fees shall be paid no later than the thirtieth (30th) day following Owner's receipt of written notice from Developer that the Improvements have been substantially completed together with all evidence of substantial completion required pursuant to the last sentence of Paragraph 2.5 of this Agreement; provided, however, if Owner determines, in its reasonable discretion, that the Improvements have not been substantially completed, Owner shall have the right to withhold payment of the remaining Development Fees until such time as the Improvements have, in Owner's reasonable discretion, been substantially completed. 4.3. OWNER'S FUNDING OF LAND ACQUISITION COSTS AND IMPROVEMENT COSTS. Subject to the provisions of this Agreement and the Lease, Owner agrees to disburse up to but no more than the sum of ________________________________ ______________________________ toward the total of (a) the cost of the Improvements, inclusive of the accrual of rent with respect thereto as provided under the Lease, all Reimbursable Expenses attributable for such Improvements, and the Development Fees (collectively, the "DEVELOPMENT ADVANCE") and (b) the costs associated with the acquisition of the Real Property (the "LAND ACQUISITION COSTS"). The Development Advance shall not be increased for any reason without the express written consent of Owner, which consent shall be at the sole discretion of Owner, and Owner's approvals of any change orders as contemplated in Paragraph 2.10 above shall not constitute a consent to increase the Development Advance. Owner reserves the right to make disbursements of the Development Advance directly to Developer, jointly to Developer and to its vendors, subcontractors and materialman and/or directly to Developer's vendors, subcontractors and materialmen. Owner reserves the right to pay -12- 17 the Land Acquisition Costs directly to the seller of the Real Property and to other appropriate parties. 4.4. SATISFACTION OF INITIAL DISBURSEMENT CONDITIONS. The conditions set forth in Paragraphs 2.11(a), (b), (c) and (d) above shall be satisfied by Developer no later than the Execution Date, except as otherwise permitted by Owner in Owner's sole and absolute discretion. Any such conditions not required to be satisfied on or before the Execution Date shall be satisfied within ten (10) calendar days after written request therefor made by Owner to Developer. 4.5. SHORTAGES. Owner shall have the right at any time and in the reasonable exercise of Owner's judgment to determine whether the actual costs for construction (including, without limitation, all accrual of rent with respect thereto as provided under the Lease) of the Improvements are greater than Owner has approved, and Developer shall, within ten (10) days after notice from Owner that the Development Advance will be insufficient to fully complete the Improvements and pay all costs for such completion, deposit with Owner cash in the amount of the shortage. Interest shall be paid by Owner at prevailing money market rates on amounts deposited with Owner pursuant to this Paragraph 4.5. Any cash deposited by Developer pursuant to this Paragraph 4.5 shall be fully disbursed by Owner prior to disbursing any portion of the Development Advance. 4.6. THIRD-PARTY SERVICER. Developer hereby acknowledges and agrees that Owner may, at its election, require that any or all disbursements of the Development Advance be made through a third-party disbursement and inspection service. If Owner so elects, Owner shall provide written notice to Developer and all reasonable costs and expenses relating to such third-party service, including, without limitation, all administration and inspection charges, shall be paid by Developer. Owner shall provide Developer with an invoice detailing the costs, expenses and charges of such third-party service. 5. RESPONSIBILITIES OF OWNER. 5.1. COOPERATION. Owner shall reasonably cooperate with Developer by executing any and all documents, agreements, contracts, permits, applications and other documentation approved by Owner in accordance with the terms of this Agreement and reasonably necessary in connection with procuring the necessary Entitlements and accomplishing the planning and design of the Improvements. Whenever pursuant to this Agreement the consent or approval of Owner is required, Owner shall either designate a representative to act on its behalf or use its best efforts to examine documents submitted by Developer and to render decisions pertaining thereto promptly, in order to avoid unreasonable delay in the progress of the work hereunder. In the event Owner fails to approve or consent to any matter requiring its consent, Owner shall notify Developer in writing in reasonable detail the reasons for such disapproval together with a statement of what, if anything, could be done to obtain the consent or approval of Owner. Unless indicated otherwise, wherever in this Agreement the consent or approval of Owner is required, Owner agrees not to unreasonably withhold such consent or approval. -13- 18 5.2. COSTS. Owner shall not be responsible for any costs in excess of the Development Advance or that are not expressly provided for herein, reflected in the approved Budget or otherwise approved in advance by Owner. 6. TERMINATION. 6.1. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "EVENT OF Default" under this Agreement: (a) Developer shall fail to observe, perform or comply with any material term, covenant, agreement or condition of this Agreement which is to be observed, performed or complied with by Developer hereunder, including, without limitation, failure to develop or construct the Improvements in substantial accordance with this Agreement, including, without limitation, the Improvement Plans or the Budget, if such failure shall continue uncured for fifteen (15) business days after Owner gives Developer written notice of any failure and specifies the nature of such failure. If such failure is not susceptible of being cured within said fifteen (15) business day period, such failure shall not constitute an Event of Default if Developer commences curative action within said fifteen (15) business day period and thereafter diligently prosecutes such curative action to completion; provided, however, no such default shall continue for more than ninety (90) calendar days from Developer's deemed receipt of a notice of default from Owner. (b) Developer shall commit any fraud, misrepresentation, breach of fiduciary duty, willful misconduct or intentional breach of a provision of this Agreement; (c) Developer or Guarantor shall (i) apply for or consent in writing to the appointment of a receiver, trustee, or liquidator of all or substantially all of its assets; (ii) file a voluntary petition in bankruptcy or admit in writing its inability to pay its debts as they become due; (iii) make a general assignment for the benefit of creditors; (iv) file a petition or an answer seeking reorganization or an arrangement with creditors or take advantage of any insolvency law; or (v) file an answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization, or insolvency proceeding; or if any voluntary petition in bankruptcy or similar proceeding shall be filed against Developer or Guarantor seeking its reorganization, liquidation, or appointment of a receiver, trustee, or liquidator for all or substantially all of its assets, and such petition shall not be dismissed within sixty (60) calendar days after the filing thereof; or (d) The occurrence of a default under the Lease which is not cured within any applicable cure period provided for therein. (e) Developer fails to make prompt payment to the contractor, subcontractors, laborers, or material suppliers for labor performed on or materials furnished with respect to the Improvements; provided, however, Developer or Owner shall have the right, but not the obligation, to protest the amount or payment of any such liabilities; provided, further, that in the event of any such protest by Developer, Owner shall not incur any expense because of any such protest and Developer shall diligently and continuously prosecute any such protest. In the event Owner pays such liability directly to the applicable third party, Developer hereby agrees to pay -14- 19 to the Owner an amount equal to the amount of such payment by Owner, which payment by Developer shall be due and payable to Owner on or before the thirtieth (30th) calendar day following Developer's deemed receipt of a written notice from Owner (pursuant to the notice provisions under this Lease) that Owner has made such payment. Developer shall have the right, but not the obligation, to protest the amount or payment of such liability (in whole or in part) against the applicable third-party recipient of such payment, and Owner will cooperate fully with Developer in regard to such protest; provided, however, that in the event of any protest by Developer, Owner shall not incur any expense because of such protest; provided, further Developer shall diligently and continuously prosecute any such protest. To the fullest extent permitted by law, Developer agrees to protect, indemnify, defend and save harmless Owner, its Affiliates and their respective directors, officers, shareholders, agents, and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, costs, deficiency, fine, penalty, interest, or other damages (including, without limitation, punitive or consequential damages, reasonable attorneys' fees, and expenses) arising out of or due to any protest by Developer pursuant to this Paragraph 6.1(e), regardless of whether such items arise from the sole liability of Owner or from the joint liability of Owner and Developer. Upon receiving notice of or information concerning any suit, claim or demand asserted by a third party that Owner believes is covered by the indemnity set forth in this Paragraph 6.1(e), Owner shall give Developer notice of same. Developer shall defend Owner against such matter at Developer's sole cost and expense with legal counsel reasonably satisfactory to Owner; or (f) Developer persistently disregards or fails to comply with any law or ordinance relating to the Improvements or the completion of the Improvements; or (g) Developer suspends or fails to perform work relating to construction of the Improvements for fifteen (15) consecutive business days for any reason other than acts of God or other causes or events described in Paragraph 8.14 below or such work ceases for sixty (60) consecutive calendar days for any reason; or (h) Developer is enjoined by any court or other government agency from constructing the Improvements or performing any obligations hereunder and such injunction continues unreleased and unstayed for forty-five (45) consecutive calendar days; or (i) Developer or Guarantor is dissolved or liquidated or merged with or into any other person or entity; or for any period of more than ten days Developer or Guarantor ceased to exist in its present form and (where applicable) in good standing and duly qualified under the laws of the jurisdiction of its incorporation or formation, or ceased to be authorized to do business and in good standing in the State in which the Real Property is located; or all or substantially all of the assets of the Developer or Guarantor are sold or otherwise transferred. 6.2. TAKE OVER. If an Event of Default occurs, Owner shall have the right, but not the obligation, without relieving Developer of its obligation to pay any shortage pursuant to Paragraph 4.5 above, to assume control of the construction activities needed to meet any governmental conditions for issuance of a certificate of occupancy for the Improvements. -15- 20 6.3. TERMINATION UPON EVENT OF DEFAULT. In addition to any other rights or remedies available to Owner under the Lease, at law or in equity, Owner shall have the right to terminate this Agreement upon written notice to Developer upon the occurrence of an Event of Default. 6.4. ACTIONS SUBSEQUENT TO TERMINATION. Within thirty (30) days after any termination of this Agreement, Developer shall promptly account for and deliver to Owner any monies due Owner under this Agreement and shall deliver to Owner or to such other person as Owner shall designate in writing, to the extent permitted by applicable law, (i) all permits, plans, licenses, warranties, contracts and other documents pertaining to the Improvements and in the possession or control of Developer; (ii) all insurance policies, bills of sale or other documents evidencing title or rights of Owner; and (iii) any other materials, supplies, equipment, keys, books and records pertaining to this Agreement or to the Improvements, whether in possession of Developer or a party engaged by Developer pursuant to the provisions hereof. Developer shall also furnish all such information, take all such other action and shall cooperate with Owner as Owner shall reasonably require in order to effectuate an orderly and systematic termination of Developer's duties and activities hereunder. All personal property (including capital equipment, hardware, trade and non-trade fixtures, materials and supplies) acquired pursuant to this Agreement, whether paid for directly by Owner or by way of reimbursement to Developer, shall at all times be the personal property of Owner and shall remain on the Real Property after such termination. 7. INSURANCE PROVISIONS. 7.1. GENERAL INSURANCE REQUIREMENTS. All insurance provided for in this Agreement shall be maintained under valid and enforceable policies issued by insurers or reinsurers of recognized responsibility, licenses (either admitted or not admitted) to do business in the State of Pennsylvania, having a general policyholders rating of not less than "A-11", and a financial rating of not less than XII in the then most current Best's Insurance Report, and an overall performance rating of "excellent." Any and all policies of insurance required under this Agreement shall name Owner as an additional insured and shall be on an "occurrence" basis. In addition, Owner shall be shown as the loss payable beneficiary under the property insurance policy maintained by Developer pursuant to Paragraph 7.3 below. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name Owner and Developer as their interests may appear and allocate to the Real Property the full amount of insurance required hereunder. Original policies or satisfactory certificates from the insurers evidencing the existence of all policies of insurance required by this Agreement and showing the interest of Owner shall be filed with Owner prior to the commencement of the term of this Agreement and shall provide that the subject policy may not be canceled except upon not less than thirty (30) calendar days prior written notice to Owner. Originals of the renewal policies or certificates therefor from the insurers evidencing the existence thereof shall be deposited with Owner not less than thirty (30) calendar days prior to the expiration dates of the policies. Any claims under any policies of insurance described in this Agreement shall be adjudicated by and at the expense of Developer or of its insurance carrier, but shall be subject to joint control of Developer and Owner. Developer shall not commence any work or perform any services, or permit any other person to commence any work or perform any services, under this Agreement or in connection with the development or construction of the Improvements until Developer obtains and maintains all insurance required to be obtained by Developer under this Agreement, and requires all others performing work in -16- 21 connection with the Improvements to obtain all insurance such persons are required to obtain and maintain pursuant to this Agreement. Developer shall obtain and provide to Owner evidence of insurance carried by all persons contracting with or for the benefit of Developer or Owner in connection with the development and construction of the Improvements. 7.2. DEDUCTIBLE AMOUNTS. The policies of insurance which Developer is required to provide or to cause to be provided under this Agreement will not have deductibles or self-insured retentions in excess of Fifty Thousand Dollars ($50,000). 7.3. INSURANCE TYPES. Developer shall maintain insurance coverage which complies with the following minimum requirements: (a) WORKERS' COMPENSATION. Developer shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain workers' compensation insurance against claims for injuries sustained by Developer's employees in the course of their employment. (b) COMPREHENSIVE GENERAL LIABILITY INSURANCE. Developer shall maintain comprehensive general liability insurance, on an "occurrence" basis, with deductibles approved by Owner, with a combined single limit of Five Million Dollars ($5,000,000) (or current limit carried, whichever is greater, including coverage for bodily injury or death, property damage, personal injury (employee and contractual liability exclusions deleted), products and completed operations (renewed annually for ten (10) years after completion of the construction of the Improvements), blanket contractual liability, owner's protective liability, broad form property damage, cross liability and severability of interest clauses, personal injury for groups of offenses A, B and C with exclusion (c) deleted, and explosion, collapse and underground hazards (X,C.U). (c) COMPREHENSIVE AUTOMOBILE LIABILITY INSURANCE. Developer shall maintain comprehensive automobile liability insurance covering all owned, hired, leased and non-owned vehicles, including automobiles, trucks and all other motor vehicles utilized by Developer in connection with the Improvements and the services required or performed pursuant to this Agreement, with a combined single limit for bodily injury and property damage of Five Million Dollars ($5,000,000) or current limit carried, whichever is greater. (d) IMPROVEMENTS INSURANCE COVERAGE. Developer shall maintain or cause to be maintained an "all risk" builder's risk policy covering loss or damage to the Improvements, and including, without limitation, loss or damage to materials in storage and while in transit. The policy shall include as insured property scaffolding, false work and temporary buildings located at the Real Property, in the amount of the full replacement cost thereof, together with loss of earnings coverage insuring against delays in occupancy of the Improvements. (e) BOILER AND MACHINERY INSURANCE. Developer shall maintain or cause to be maintained boiler and machinery insurance covering loss or damage to covered objects when such fixtures and equipment, if any, are connected and ready for use. -17- 22 7.4. CONTINUED COVERAGE. Notwithstanding the expiration or early termination of this Agreement, Developer shall maintain insurance coverage such that the insurance provisions of this Agreement shall survive such expiration or early termination of this Agreement and Developer's insurance carriers shall remain obligated under the policies for all occurrences that arise that are within the scope of the requirements of insurance coverage set forth in this Agreement. 7.5. WAIVER OF SUBROGATION. Owner and Developer hereby waive any rights each may have against the other on account of any loss or damage occasioned to Owner or Developer, as the case may be, arising from any risk covered by the insurance maintained under this Agreement. Owner and Developer each, on behalf of their respective insurance companies, waive any right of subrogation that such insurance company may have against Owner or Developer, as the case may be. The foregoing waivers of subrogation shall be operative only so long as available in the State of Pennsylvania and so long as such waivers do not invalidate any such policy. Such waivers of subrogation shall not extend to Owner's or Developer's rights (i) to the proceeds of such insurance, or (ii) to payment for damages as set forth in Paragraph 8.11 below in connection with the indemnification of Owner or Developer therein contained. 8. MISCELLANEOUS PROVISIONS. 8.1. ASSIGNMENT. Developer acknowledges the relationship of trust and confidence created by this Agreement between Developer and Owner, and covenants and agrees that it will not voluntarily or involuntarily, directly or indirectly, sell, assign, hypothecate, pledge or otherwise transfer or dispose of all or any portion of its interest in this Agreement to any third party without the prior written consent of Owner, which may be withheld in Owner's sole discretion. Any sale of controlling interest in Developer to any third party without the prior written consent of Owner shall be deemed an assignment of this Agreement. Any attempted sale, assignment, hypothecation, pledge or other transfer without such consent shall be void. 8.2. AMENDMENT. This Agreement may be amended from time to time only by a writing executed by Owner and Developer. 8.3. NOTICES. All notices, demands, certificates, requests, consents, approvals and other communications required or provided by this Agreement shall be in writing and shall be sent by personal delivery or by either (i) United States registered or certified mail, return receipt requested, postage prepaid, or (ii) Federal Express or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows: If to Owner: ____________________________________ 610 Newport Center Drive, Suite 1150 Newport Beach, California 92660 Attn: President and General Counsel -18- 23 With a copy to: Cordray & Goodrich 3306 Sul Ross Houston, Texas 77019 Attn: Howard F. Cordray, Jr. If to Developer: BCC Development and Management Co. c/o Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: Brian L. Barth, Vice President Development With a copy to: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: Legal Department With a copy to: Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, PA 15222 Attn: Steven J. Adelkoff Any notice so given by mail shall be deemed to have been given as of the date of delivery (whether accepted or refused) established by U.S. Post Office return receipt or the overnight carrier's proof of delivery, as the case may be, whether accepted or refused. Any such notice not so given shall be deemed given upon receipt of the same by the party to whom the same is to be given. Such addresses may be changed by notice to the other parties given in the same manner as provided above. If any party is not an individual, notice may be made to any officer, general partner or principal thereof. 8.4. ATTORNEYS' FEES. In any judicial action between the parties to enforce any of the provisions of this Agreement or any right of any party under this Agreement, regardless of whether such action or proceeding is prosecuted to judgment and in addition to any other remedy, the unsuccessful party shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees and charges, incurred therein by the prevailing party. 8.5. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and negotiations between the parties with respect thereto. 8.6. GOVERNING LAW. This Agreement shall be enforced, governed by, and construed in accordance with the laws of the state in which the Real Property is located. 8.7. SEVERABILITY. If any term or provision of this Agreement is declared by a court of competent jurisdiction to be invalid or unenforceable, then the remainder of this Agreement, including the application of such term or provision to persons or circumstances other than those -19- 24 to which it is held invalid or unenforceable, shall not be affected thereby; provided, however, if the foregoing would produce a result which is clearly contrary to the intentions of the parties as reflected in this Agreement, then the invalid or unenforceable term or provision shall be deemed modified to the extent necessary in the court's opinion to render such term or provision enforceable consistent with the intentions of the parties and, as so modified, such portion and the remainder of this Agreement shall continue in full force and effect. 8.8. NO WAIVER. No failure or delay of a party in the exercise of any right given to such party hereunder or by law shall constitute a waiver thereof, nor shall any single or partial exercise of any such right preclude other further exercise thereof or of any other right. The waiver by a party of any breach of any provision hereof shall not be deemed to be a waiver of any subsequent breach thereof, or of any breach of any other provision hereof. 8.9. NO JOINT VENTURE. Owner shall not and does not by this Agreement in any way or for any purpose become a partner of Developer in the conduct of its business, or otherwise, or a joint venturer of or a member of a joint enterprise with Developer, or an Employer of Developer, it being understood and agreed between Owner and Developer that Developer is and shall be, for all purposes of this Agreement, an independent contractor of Owner. Developer agrees that, upon request of Owner, Developer shall execute and deliver to Owner a quitclaim deed in recordable form pursuant to which Developer remises, releases and forever quitclaims to Owner the Real Property and the improvements located thereon (other than its leasehold interest therein arising out of the Lease). Owner shall have the right to record such quitclaim deed in the Official Records of the county in which the Real Property is located. 8.10. SUCCESSORS AND ASSIGNS. Subject to the provisions of Paragraph 8.1 above, this Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. 8.11. INDEMNITY. To the fullest extent permitted by law, each of the parties agrees to indemnify, hold harmless and defend the other party (the "INDEMNITEE") (through legal counsel reasonably approved by the Indemnitee) from any and all liability, loss, cost, expense, damage and attorneys' fees resulting from or arising out of the negligent acts or omissions, willful misconduct or Events of Default, of such indemnifying party, its staff members, employees, agents and representatives, in connection with the performance by such indemnifying party of its services under this Agreement, including, without limitation, any claim, liability, loss or expense arising out of the use, release, discharge, storage, handling, transportation or clean up of any toxic or hazardous wastes, substances, materials, or underground storage tanks, in the construction of the Improvements. 8.12. ADDITIONAL DOCUMENTS. Developer and Owner will, whenever and as often as requested by the other party hereto, execute or cause to be executed all such instruments or agreements as may be reasonably necessary in order to carry out the purpose of this Agreement and shall take such other actions as are reasonably necessary to carry out the intent and purpose of this Agreement. -20- 25 8.13. SUBSURFACE CONDITIONS. Developer acknowledges that Owner is relying on Developer for the identification of all subsurface conditions and aspects of site geology that should be taken into account in the design and construction of the Improvements. 8.14. FORCE MAJEURE. Any time limits provided for either party's performance under this Agreement shall be extended for and throughout such period of time as such performance is prevented or delayed due to strikes, lockouts, acts of government, acts of God, wars, riots, civil insurrection or abnormal force of elements or other causes (except financial) beyond the parties' reasonable control and which the affected party could not have reasonably foreseen and provided against; provided, however, that in no event shall any such extension be deemed to have occurred unless (a) the party whose performance is delayed shall have given notice to the other party within ten (10) days after the occurrence of the event of delay, setting forth the facts giving rise to such extension, and (b) the applicable period or periods of time within which such other party may exercise its rights hereunder shall be commensurately extended. The party whose performance is delayed shall give prompt written notice to the other party of the cessation of the event or condition giving rise to such delay. 8.15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. IN WITNESS WHEREOF, this Agreement is executed as of the day and year first above written. "DEVELOPER" "OWNER" BCC DEVELOPMENT AND _____________________________ MANAGEMENT CO., _____________________________ a Delaware corporation By:_______________________________ By:_________________________________ Name:_____________________________ ____________________________________ Title:____________________________ -21- EX-10.17 17 BALANCED CARE CORPORATION 1 Exhibit 10.17 SCHEDULE TO FORM OF NHP DEVELOPMENT AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Facility Location Owner Execution Date Property Address Tenant - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Pensacola, FL Nationwide Health June 26, 1998 North Davis Highway - C&G Healthcare at Properties, Inc. State Road No. 291 and Pensacola, LLC Abbie Lane, Pensacola, Escambia County, Florida - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Tallahassee, FL Nationwide Health June 26, 1998 Fleischmann Road, C&H Healthcare at Properties, Inc. Tallahassee, Leon Tallahassee, LLC County, Florida - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Hagerstown, MD Nationwide Health June 26, 1998 1175 Professional C&G Healthcare at Properties, Inc. Court, Hagerstown, Hagerstown, LLC Washington County, Maryland - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Akron, OH Nationwide Health March 31, 1998 South Hawkins Avenue in Elder Care Operators of Properties, Inc. Akron, Summit County, Akron, LLC Ohio - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Hilliard, OH Nationwide Health March 27, 1998 Heritage Club Drive in Elder Care Operators of Properties, Inc. Hilliard, Franklin Hilliard, LLC County, Ohio - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Lakemont Farms, MLD Delaware Trust March 27, 1998 Washington Pike in Elder Care Operators of PA South Fayette Township, Lakemont Farms, LLC Allegheny County, Pennsylvania - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- York, PA MLD Delaware Trust March 27, 1998 Knob Hill Road in York Elder Care Operators of Township, York County, York, LLC Pennsylvania - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Bristol, TN Nationwide Health March 31, 1998 Meadow View Road in Elder Care Operators of Properties, Inc. Bristol, 5th Civil Bristol, LLC District of Sullivan County, Tennessee - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Johnson City, Nationwide Health June 26, 1998 406 E. Mountain View C&G Healthcare at TN Properties, Inc. Road, Johnson City, Johnson City, LLC 10th Civil District of Washington County, Tennessee - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Murfreesboro, TN Nationwide Health March 27, 1998 U.S. Highway 231 in Elder Care Operators of Properties, Inc. Murfreesboro, the 9th Murfreesboro, LLC Civil District of Rutherford County, Tennessee - ----------------------- ---------------------- ------------------ ------------------------- -------------------------- Teay's Valley, Nationwide Health June 26, 1998 West Virginia State C&G Healthcare at Teay's WV Properties, Inc. Route 34, being known Valley, LLC numbered and designated as Lot No. 4, Stonegate Plaza, Scott Depot, in or near Teay's Valley, in the Scott District of Putnam County, West Virginia - ----------------------- ---------------------- ------------------ ------------------------- --------------------------
2
- -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Facility Location Manager Architect Budget Contractor Development Fees - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Pensacola, FL Balanced Care at Bullock Tice $4,602,000 -- $350,000 Pensacola, Inc. Associates - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Tallahassee, Balanced Care at Charles D. Foster, $7,825,000 -- $450,000 FL Tallahassee, Inc. Architect, P.A. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Hagerstown, Balanced Care at Scholl Sowers Garner $4,117,000 -- $300,000 MD Hagerstown, Inc. Saylor Architectural Associates, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Akron, OH Balanced Care at KWM Group, Inc. $7,050,000 John Deklewa & $450,000 Akron, Inc. Sons - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Hilliard, OH Balanced Care at Scholl Sowers Garner $7,700,000 CCI Construction $450,000 Hilliard, Inc. Saylor Architectural Company, Inc. Associates, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Lakemont Farms, Balanced Care at Charles D. Foster, $8,600,000 John Deklewa & $450,000 PA Lakemont Farms, Inc. Architect, P.A. Sons - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- York, PA Balanced Care at Scholl Sowers Garner $4,450,000 Richard D. $350,000 York, Inc. Saylor Architectural Poole, Inc. Associates, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Bristol, TN Balanced Care at Ken Ross Architects, $4,550,000 J.A. Street & $350,000 Bristol, Inc. Inc. Associates, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Johnson City, Balanced Care at Ken Ross Architects, $4,458,000 J.A. Street & $350,000 TN Johnson City, Inc. Inc. Associates, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Murfreesboro, TN Balanced Care at KWM, Inc. $4,500,000 May Construction $350,000 Murfreesboro, Inc. Company - -------------------- ----------------------- ----------------------- ---------------- ------------------ ------------------- Teay's Valley, Balanced Care at Charles D. Foster, $4,898,000 Westra $350,000 WV Teay's Valley, Inc. Architect, P.A. Construction, Inc. - -------------------- ----------------------- ----------------------- ---------------- ------------------ -------------------
EX-10.18 18 BALANCED CARE CORPORATION 1 Exhibit 10.18 FIRST SERIES MASTER INVESTMENT AGREEMENT ---------------------------------------- THIS FIRST SERIES MASTER INVESTMENT AGREEMENT (this "AGREEMENT") is made by and between BALANCED CARE CORPORATION ("BCC"), BCC DEVELOPMENT AND MANAGEMENT CO. ("DEVELOPER"), a Delaware corporation, ELDER CARE OPERATORS, LLC ("ELDER CARE"), a Delaware limited liability company, Oakhaven Elder Living, Inc. ("OAKHAVEN"), a California corporation (Elder Care and Oakhaven being hereinafter collectively referred to as "ELDER"), and NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation ("NHP") and MLD DELAWARE TRUST ("MLD"), a Delaware business trust. RECITALS: A. NHP, MLD, Elder, Developer, and BCC have agreed to enter into a series of six (6) transactions, two (2) of which are to be entered into by MLD and four (4) of which are to be entered into by NHP, as specifically set forth in EXHIBIT "A" attached hereto and included herein for all purposes as though fully set forth (hereinafter individually referred to as a "TRANSACTION" and collectively referred to as the "TRANSACTIONS"), each of which will include the purchase, lease, and development of certain tracts or parcels of real property, together with all improvements thereon, all personal property to be leased therewith, and all appurtenances thereto (hereinafter individually referred to as a "PROPERTY" and collectively referred to as the "PROPERTIES"), with the sum of the aggregate purchase prices and aggregate development fees and costs for the Properties ("NHP'S MAXIMUM INVESTMENT") to be limited to Thirty-Six Million Eight Hundred Fifty Thousand and No/100 Dollars ($36,850,000.00). B. The Transactions are generally expected to take the following form: (A) each of the Properties are to be located, identified, and chosen by BCC or its Affiliates (defined below), which will enter into option or purchase agreements (hereinafter individually referred to as a "PURCHASE CONTRACT" and collectively referred to as the "PURCHASE CONTRACTS") by and between various third parties, as seller, and BCC, as buyer; (B) following the exercise of an option or the firm decision by BCC to proceed with a purchase pursuant to a Purchase Contract, BCC will assign all its rights, duties, and obligations under such Purchase Contract to NHP or MLD, pursuant to an assignment of purchase contract agreement (the "PURCHASE CONTRACT ASSIGNMENTS"); (C) NHP or MLD will purchase the respective Properties upon the terms and conditions set forth in the applicable Purchase Contracts, and any amendments thereto required by NHP; (D) simultaneously with the closing of each Purchase Contract, a subsidiary or other Affiliate of Elder will lease from NHP or MLD the applicable Property, pursuant to the terms and conditions set forth in a lease and security agreement (hereinafter individually referred to as a "LEASE" and collectively referred to as the "LEASES"), which Leases will typically provide for an initial term of eleven (11) years and for three (3) separate renewal terms of six (6) years each; (E) Elder Care will guarantee the obligations of any tenant under the Leases or of any subtenant under a sublease of a Lease (hereinafter individually referred to as a "TENANT" and collectively referred to as the "TENANTS") pursuant to a lease guaranty (the "LEASE GUARANTIES"); (F) as additional security for the obligations of Tenants under each respective Lease, BCC will enter into working capital assurance agreements with NHP or MLD (the "CAPITAL AGREEMENTS"), whereby BCC agrees to make 2 working capital loans to the applicable Tenant, and as further security, NHP or MLD will be a party to deposit pledge agreements (the "DEPOSIT AGREEMENTS") whereby each applicable Tenant pledges a minimum amount of capital as a working capital reserve for its operations; (G) each Property will be developed, used, and licensed (by the State in which such Property is located) as an assisted living facility, personal care home, independent living facility, or similar adult care facility (hereinafter individually referred to as a "FACILITY" and collectively referred to as the "FACILITIES"), including (at BCC's option) such ancillary services for independent living, skilled nursing, rehabilitation, or Alzheimer's or dementia care as are permitted by law and may be necessary or incidental thereto; (H) Developer will act as developer of each of the Properties, pursuant to the terms and conditions of development agreements (hereinafter individually referred to as a "DEVELOPMENT AGREEMENT" and collectively referred to as the "DEVELOPMENT AGREEMENTS") to be entered into by and between Developer and NHP or MLD, with the aggregate development fees paid to Developer under the Development Agreements being funded out of NHP's Maximum Investment and limited to an amount equal to six and one-half percent (6.5%) of NHP's Maximum Investment; (I) BCC will guarantee the obligations of Developer under each respective Development Agreement and the completion of all improvements contemplated in such Development Agreements, pursuant to a guaranty agreement with NHP or MLD (the "DEVELOPMENT GUARANTIES"), (j) each of the Tenants will enter into a management agreement with a newly formed subsidiary of BCC, whereby such BCC subsidiary agrees to manage the respective Facility on behalf of the respective Tenant (such BCC subsidiaries being hereinafter collectively referred to as the "MANAGERS"), (K) BCC will indemnify NHP or MLD with respect to possible environmental hazards on each applicable Property by means of environmental indemnification agreements (the "ENVIRONMENTAL INDEMNIFICATIONS"), and (L) NHP or MLD, as applicable, will grant rights of first refusal to BCC with respect to any proposed sales of the Properties, by means of right of first refusal agreements ("REFUSAL AGREEMENTS"). C. BCC, Elder, and Developer each acknowledges and agrees that this Agreement is given as an inducement to NHP and MLD to consummate the Transactions and to enter into the Purchase Contract Assignments, Purchase Contracts, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, that neither NHP nor MLD would enter into the Purchase Contract Assignments, Purchase Contracts, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements without the execution and delivery by Elder, BCC and Developer of this Agreement, that such execution and delivery is a condition precedent to NHP's or MLD's respective obligations under the Purchase Contract Assignments, Purchase Contracts, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and that the Transactions are each subject to final approval by NHP. NOW, THEREFORE, taking the foregoing paragraphs A through C (the "RECITALS") into account, and in consideration of the mutual covenants, agreements, and conditions set forth herein and in the Purchase Contract Assignments, Purchase Contracts, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and for other good and valuable -2- 3 consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITION OF AFFILIATE. For purposes of any of the Transactions, this Agreement, the Purchase Contracts, Purchase Contract Assignments, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and any other documents executed by any of the parties hereto, any Tenants or their respective Affiliates (as defined herein) with respect to the Transactions:(a) the term "AFFILIATE" is defined to mean with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity, and the term "AFFILIATES" is defined to mean any group of such persons or entities; (b) the term "CONTROL" is expressly deemed to include any actual discretion or power to direct the affairs of the controlled person or entity, either directly or through a chain of ownership or control (regardless of actual ownership); (c) a general partner, manager, or managing member of a partnership or limited liability company, and any owner of thirty percent (30%) or more of such general partner or managing member, is expressly deemed to control such partnership or limited liability company; (d) a person or entity owning thirty percent (30%) or more of the common stock of a corporation or thirty percent (30%) or more of the voting interest in any other type of entity, is expressly deemed to control such corporation or other entity; (e) a trustee of a trust is expressly deemed to control such trust; (f) Tenants and Elder, and any entity which is an Affiliate of any of the aforementioned entities in this clause (f), are all expressly deemed to be Affiliates of each other, and (g) BCC, Developer, Managers and any entity which is an Affiliate of any of the aforementioned entities in this clause (g) are all expressly deemed to be Affiliates of each other. Notwithstanding the foregoing, the term "Affiliate" shall not include any person or entity that is an equity owner or parent entity of Elder Care Operators, LLC, a Delaware limited liability company; provided, however, this exclusion provision shall not exclude BCC, Developer, Manager, or Tenant as an Affiliate. 2. CROSS DEFAULT PROVISIONS. BCC, Elder, and Developer each hereby acknowledges and agrees that a material default by BCC, Developer, Elder, any Tenant, or their respective Affiliates under any obligation owed by BCC, Developer, Elder, any Tenant, or their respective Affiliates to NHP, MLD or any Affiliate of NHP or MLD arising under or in connection with the Transactions, including, without limitation, a material default under the Purchase Contract Assignments, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements and any related financing statements, collateral assignments, or security agreements (hereinafter individually referred to as an "OBLIGATION" and collectively referred to in this Agreement as the "OBLIGATIONS"), which default is not cured within any applicable cure period provided in the documentation for such Obligation, shall, in the NHP's sole, absolute, and uncontrolled discretion, constitute an event of default for purposes of and under (A) such Obligation, and (B) any or all of the other Obligations under the Transactions. 3. CROSS RENEWAL PROVISIONS. The Lease or Leases (in the case of Leases with identical effective dates) with the earliest effective date for any of the Transactions entered into by and between NHP, MLD or their respective Affiliates and a Tenant are hereinafter sometimes individually referred to -3- 4 as an "INITIAL LEASE" and sometimes collectively referred to as the "INITIAL LEASES". All other Leases (excluding the Initial Leases) and all subleases of such other Leases (not including subleases to residents of Facilities) for any of the Transactions are hereinafter sometimes individually referred to as an "OTHER Lease" and collectively referred to as the "OTHER LEASES". Any renewal or extension options at any time made a part of any of the Leases for any of the Transactions are hereinafter sometimes individually referred to as a "RENEWAL OPTION" and collectively referred to as the "RENEWAL OPTIONS". BCC, Elder, and Developer each hereby agrees that: (A) if any Renewal Option under any Initial Lease or any sublease of an Initial Lease is exercised by any person having the legal authority to exercise such Renewal Option (hereinafter referred to as the "EXERCISED RENEWAL OPTION"), then all Specified Renewal Options (defined below) in the other Initial Leases and Other Leases (whether or not previously exercised) for any of the Transactions shall be deemed to have been automatically exercised, without any additional actions being required to be taken by BCC, Elder, Developer, any Tenants, NHP, MLD, or their respective Affiliates; and (B) if any Renewal Option under any Initial Lease or any sublease of an Initial Lease is not timely exercised by a person having the legal authority to exercise such Renewal Option or has not been automatically deemed exercised pursuant to Section 3(a) hereof (hereinafter referred to as an "UNEXERCISED RENEWAL OPTION"), then all Specified Renewal Options in the other Initial Leases and Other Leases (whether or not previously exercised) and all subsequent Renewal Options contained in any of the Leases for any of the Transactions shall be deemed to have automatically terminated and shall thereupon be null and void. For purposes of this Agreement, and with regard to the Transactions, "SPECIFIED RENEWAL OPTIONS" means all Renewal Options in the other Initial Leases and Other Leases which by their terms may be exercised within three (3) years prior to or following the beginning date of the renewal term of the Initial Lease to which the Exercised Renewal Option or an Unexercised Renewal Option, as applicable, relates. Upon the occurrence of an Exercised Renewal Option, BCC, Elder, Developer, the Tenants and any of their Affiliates each hereby irrevocably appoints NHP as their true and lawful attorney-in-fact for the sole purpose of executing any documents necessary, advisable or convenient, in NHP's sole discretion, to evidence the exercise of any and all Specified Renewal Options under this Agreement, and, more specifically, they each hereby (AA) authorize NHP to execute on their behalf all documents necessary to exercise any or all of the Specified Renewal Options, (BB) agree this power of attorney shall be irrevocable and uncontestable by the BCC, Elder, Developer, the Tenants, or their respective Affiliates, successors, or assigns, and (CC) acknowledge and agree this power of attorney is given as security and coupled with an interest. 4. RENEWAL OPTION CURE PROVISIONS. Notwithstanding anything else in this Agreement to the contrary, in the event of an Unexercised Renewal Option, the Specified Renewal Options in the other Initial Leases and the Other Leases (whether or not previously exercised) for any of the Transactions shall not be deemed to have automatically terminated and shall not thereupon be null and void, until and unless: (A) NHP gives written notice (in the manner required under Section 8 hereof) to BCC and Elder of the occurrence of an Unexercised Renewal Option, and (B) NHP does not receive, within ten (10) calendar days from the deemed receipt date of the notice required under Section 4(a) hereof, a written and signed notice (in the manner required under Section 8 hereof) (hereinafter referred to as a "LATE RENEWAL NOTICE") from BCC, Elder or the Tenant under the applicable Initial Lease which states that the Tenant under the applicable Initial Lease desires to exercise the Renewal Option to which such Unexercised Renewal Option relates. Nothing in this Section 3 shall be construed as extending the time period set forth -4- 5 in any Initial Lease or Other Lease for exercising a Renewal Option. In the event NHP receives a Late Renewal Notice, then (AA) NHP (as applicable) shall have the option, at its sole discretion, to either renew or not renew any or all Expired Leases, and (BB) all Specified Renewal Options shall be deemed to have been automatically exercised (as otherwise provided in Section 2 hereof). For purposes of this Agreement and with regard to the Transactions, the term "EXPIRED LEASES" means the Initial Lease and all Other Leases for which the otherwise applicable Renewal Option has expired, whether or not the Term (as defined in each Initial Lease or Other Lease) has expired. 5. BCC PURCHASE OPTION. Provided that (i) all the Leases are still in effect, and (ii) no Event of Default (as defined in the respective Leases and subject to Section 2 hereof) under any of the Leases remains uncured as of (A) BCC's exercise of its option to purchase the Properties pursuant to this Section 5, and (B) the closing date established to consummate the purchase of the Properties pursuant to BCC's exercise of such option, BCC shall have the option to purchase (or cause a BCC Affiliate to purchase) all but not less than all of the Properties upon the following terms and conditions: (a) Not more than thirty (30) days before or after the date which is twelve (12) months prior to the end of the then current Term (as defined in the Initial Leases) of the Initial Leases, BCC may, but is not obligated to, exercise an option to purchase all but not less than all of the Properties by giving NHP written notice thereof; (b) The purchase price for the Properties shall be payable in cash by BCC and shall be equal to the greater of (i) the aggregate fair market value of the Properties on the date of BCC's exercise of its option pursuant to this Section 5 (the "OPTION DATE"), or (ii) the aggregate Landlord's Investment (as defined in each Lease) for all the Leases on the Option Date. If within ten (10) days of the date of BCC's exercise of its option under this Section 5 BCC and NHP are unable to agree on the fair market value of the Properties, such fair market value shall be established by the appraisal process prescribed in each of the Leases with respect to the setting of fair market value for purposes of determining Minimum Rent (as defined in each Lease) for any Renewal Term (as defined in each Lease). Such fair market value must be finally determined no later than ninety (90) calendar days after BCC's exercise of its option under this Section 5 or BCC shall lose its right to purchase the Properties unless the failure to determine value was caused by the willful acts or omissions of NHP; (c) Once the purchase price is established pursuant to the above, NHP, as seller (hereinafter sometimes collectively referred to as "SELLERS"), and BCC and/or its designated Affiliates, as buyer (hereinafter sometimes collectively referred to as "BUYERS"), shall immediately open an escrow to consummate such purchase at a national title company selected by NHP on the following terms: (i) the form of such instructions to be then signed by Sellers and Buyers shall be such title company's standard sale escrow instructions without any representations or warranties and without due diligence or other contingencies in favor of Buyers, (ii) the purchase price shall be payable in cash by Buyers upon the expiration of the then current Term of the Initial Leases (as defined therein), (iii) Buyers shall pay all transaction costs, (iv) at close, Sellers shall deliver title to the Properties subject only to those title exceptions agreed to by NHP and free and clear of any -5- 6 liens created by Sellers (other than liens, Leases, subleases, and related instruments entered into, caused, or created in whole or in part by BCC, Elder, Developer, Manager, Buyers, Tenants, or their respective Affiliates), (v) the sale escrow instructions shall provide for a deposit equal to five percent (5%) of the purchase price and shall provide that the deposit may be retained by Sellers as liquidated damages in the event of any breach by Buyers of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Sellers' damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Sellers' damages by reason of a breach of this Lease), (vi) the escrow shall close on the last day of the then current Term or the Initial Lease, and (vii) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to NHP; (d) If BCC fails to close the escrow for any reason other than a breach by NHP, then NHP shall have the right to extend the then current Term (as defined in each Lease) of each of the Leases for the Transactions for an additional year. The Additional Rent (as defined in each Lease) and Minimum Rent (as defined in each Lease) during such year extension period shall be calculated as if on the Option Date BCC had instead exercised its right under each Lease to extend the Term for a Renewal Term; and (e) On such terms as may be mutually agreed to by and between NHP and BCC, and subject to the requirement that all of the Properties in connection with the Transaction be purchased in the event BCC exercises its option under this Section 5, NHP agrees to permit BCC to designate (i) pools of Properties ("POOLS") to be purchased, and (ii) joint venture partners to invest with BCC in such Pools. Each of such Pools shall be subject to the requirements otherwise set forth in this Section 5. 6. DEVELOPMENT FEES AND BUDGETS. (a) Notwithstanding any provisions of the Development Agreements to the contrary, BCC and Developer hereby acknowledge and agree that the aggregate development fees (the "DEVELOPMENT FEES") paid to Developer by NHP and MLD with respect to the development of the Properties in connection with the Transaction pursuant to the Development Agreements, shall be a part of NHP's Maximum Investment and shall be limited to six and one-half percent (6.5%) of NHP's Maximum Investment. In the event the aggregate Development Fees paid by NHP and its Affiliates ever exceeds NHP's Maximum Investment, Developer hereby agrees to refund the amount of such excess to NHP within ten (10) calendar days of Developer's deemed receipt of written notice from NHP of the fact and amount of such excess (the "REFUND AMOUNT"); provided, further, in the event Developer fails to refund the Refund Amount to NHP within the Refund Period, BCC hereby agrees to reimburse to NHP the Refund Amount, within ten (10) days of BCC's receipt of written notice from NHP of the facts of Developer's failure to refund the Refund Amount, which payment shall directly offset the Refund Amount due from Developer. (b) Notwithstanding any provisions of this Agreement or the Development Agreements for any of the Transactions to the contrary, if the Development Advance amount defined in a Development Agreement is greater than the aggregate amounts paid -6- 7 by NHP with respect to all Applications for Payment made by Developer pursuant to such Development Agreement (the "TOTAL FACILITY FUNDINGS"), then any such excess (the "UNDER BUDGET AMOUNT") may be applied, to the extent of such Under Budget Amount, in payment of any Over Budget Application for Payment submitted to NHP or its Affiliate with respect to another Development Agreement. For purposes of this Agreement, the term "OVER BUDGET APPLICATION FOR PAYMENT" shall mean any Application for Payment (as defined in the applicable Development Agreement) which, if paid, would cause the Total Facility Fundings paid pursuant to a Development Agreement to exceed the Development Advance amount defined in such Development Agreement. To determine whether there is an available Under Budget Amount, the Total Facility Fundings may only be calculated following the later of (i) the date on which the Improvements are deemed substantially complete (as determined under the applicable Development Agreement), (ii) the deemed receipt date by NHP or its Affiliate of the Final Application for Payment. For purposes of this Agreement, the term "FINAL APPLICATION FOR PAYMENT" shall mean an Application for Payment identified by the Developer as the final Application for Payment to be submitted by Developer with respect to the applicable Development Agreement. Nothing in this Paragraph 6 shall be construed so as to require NHP and its Affiliates to pay any amount which would cause the aggregate payments made by them (pursuant to this Agreement and the Development Agreements) to exceed NHP's Maximum Investment. 7. ESTOPPEL CERTIFICATES. All the Properties in connection with the Transactions shall be subject to this Master Agreement. Prior to entering into any Lease or sublease of a Lease (except with respect to any resident agreements), the proposed Tenant under such Lease or sublease, must execute an estoppel certificate in the form attached hereto as EXHIBIT "B", acknowledging and agreeing that Tenant's leasehold interest under the applicable Lease is subject to the terms and conditions of this Agreement, and the proposed Manager of any Facility located on the Property which is the subject of such Lease or sublease must execute an estoppel certificate in the form attached hereto as EXHIBIT "C", acknowledging and agreeing that Manager shall comply with and not take any actions which violate the terms and conditions of this Agreement or the applicable Lease. 8. NOTICE. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Agreement shall be in writing and shall be deemed to have been properly given upon actual receipt thereof or within three (3) business days of being placed in the United States certified or registered mail, return receipt requested, postage prepaid (a) if to BCC, Elder, or Developer, addressed to: Balanced Care Corporation, 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, Attn: President, Facsimile No. (717) 796-6150; with a copy to Balanced Care Corporation, 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, Attn: Legal Department; with a copy to Elder Care Operators, LLC, 1350 Bayshore Highway, Suite 300, Burlingame, CA 94010, Attn: President and General Counsel, Facsimile No. (415) 348-6943; with a copy to Kirkpatrick & Lockhart, LLP, 1500 Oliver Building, Philadelphia, PA 15222, Attn: Steven J. Adelkoff, Facsimile No. (412) 355-6501; and with a copy to Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, California 94111, Attn: Barry Graynar, Facsimile No. (415) 951-3699; or at such other address as BCC, Elder, or Developer from time to time may have designated by written notice to NHP, and (b) if to NHP, addressed to Nationwide Health Properties, Inc., 610 Newport Center Drive, Suite 1150, Newport Beach, CA 92660, Attention: President, Fax No. (714) 759-6876 with a copy to Cordray & Goodrich, -7- 8 3306 Sul Ross, Houston, Texas 77098, Attention: Howard F. Cordray, Jr., Fax No. (713) 630-0017, or at such address as NHP may from time to time have designated by written notice to Developer. Refusal to accept delivery shall be deemed delivery. If the addressee is not an individual, notice may be made to any officer, general partner or principal of such addressee. 9. REPRESENTATIONS AND WARRANTIES. BCC, Elder, and Developer each understands and acknowledges that NHP is relying upon the respective representations of such parties set forth in this Agreement, and that NHP may rely on such party's representations for all purposes, including without limitation all the Transactions, all the Development Agreements, and all the Leases. The Recitals set forth above are hereby incorporated by this reference and made a part of this Agreement. BCC, Elder, and Developer each hereby acknowledges, represents and warrants that the Recitals are true and correct. 10. MISCELLANEOUS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. This Agreement shall be binding upon the successors and permitted assigns of the parties hereto (and the Affiliates of such parties, successors, and permitted assigns). For purposes of the Transactions and this Agreement, the term "NHP" shall include NHP or its Affiliates and any subsequent owner of NHP's or its Affiliate's interest in any of the Leases or Properties, or any assignee of NHP's or its Affiliate's rights under any instruments or agreements memorializing or evidencing the Obligations in connection with the Transactions. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Texas, without regard to the rules governing choice of law. The parties hereto agree that venue for any and all lawsuits related to this Agreement shall be in Harris County, Texas. 11. NO JOINT VENTURE. The parties to this Agreement do not intend by this Agreement to in any way or for any purpose become partners of each other or in the conduct of any business, joint venturers of each other, or members of a joint enterprise with each other, it being understood and agreed between the parties that each party is and shall be, for all purposes of this Agreement, acting independently of each other and/or as independent contractors. 12. INCREASES IN NHP'S MAXIMUM INVESTMENT. The parties may in the future mutually agree in writing, by amendment of this Agreement, to (i) increase the number of Properties or Facilities governed by this Agreement (ii) apply any Under Budget Amount to the development of improvements on such additional Properties or Facilities, and/or (iii) increase NHP's Maximum Investment; provided, however, if and when BCC or its Affiliates have received assignment of and/or assumed the rights, duties, and obligations of the Tenants under all the Leases for all the Transactions, then (A) BCC and its Affiliates hereby agree that all similar transactions by and between NHP and its Affiliates and BCC and its Affiliates, shall be defined as Transactions for purposes of this Agreement and be subject to this Agreement for all purposes, and (B) for purposes of this sentence, Elder Care, Oakhaven, and such Tenants shall cease to be parties to this Agreement. NHP's Maximum Investment shall not be increased for any reason without the express written consent of NHP, which consent shall be at the sole discretion of NHP, and no application of an Under Budget Amount as contemplated in Paragraph 6(b) above shall constitute a consent to increase NHP's Maximum Investment. This Agreement is made effective as of March 27, 1998. -8- 9 "NHP" NATIONWIDE HEATH PROPERTIES, INC., a Maryland corporation By: /s/ GARY E. STARK -------------------------------- Gary E. Stark, Vice President "MLD" MLD DELAWARE TRUST, a Delaware business trust By: /s/ MARK L. DESMOND -------------------------------- Mark L. Desmond, Trustee "BCC" BALANCED CARE CORPORATION, a Delaware corporation By: /s/ ROBIN L. BARBER ---------------------------------- Name: Robin L. Barber -------------------------------- Title: Assistant Secretary ------------------------------- "DEVELOPER" BCC DEVELOPMENT AND MANAGEMENT CO., a Delaware corporation By: /s/ ROBIN L. BARBER ----------------------------------- Name: Robin L. Barber --------------------------------- Title: Secretary -------------------------------- -9- 10 "ELDER CARE" ELDER CARE OPERATORS, LLC, a Delaware limited liability company By: /s/ signature missing ----------------------------------- Name: --------------------------------- Title: -------------------------------- "OAKHAVEN" OAKHAVEN ELDER LIVING, INC. By: /s/ signature missing ----------------------------------- Name: --------------------------------- Title: -------------------------------- -10- 11 EXHIBIT "A" SCHEDULE OF PROJECTS
Maximum NHP Name of Facility Location Investment ------------------------ ------------------ ------------ Outlook Pointe at York Knob Hill Road, York Township $4,450,000.00 York County, Pennsylvania Outlook Point at Lakemont Washington Pike, South Fayette $8,600,000.00 Farms Township, Allegheny County, Pennsylvania Outlook Pointe at Murfreesboro U.S. Hwy 231, Murfreesboro, $4,500,000.00 Rutherford County, Tennessee Outlook Pointe at Bristol Meadow View Road, Bristol, $4,550,000.00 Sullivan County, Tennessee Outlook Pointe at Hilliard Constitution Blvd., Hilliard, $7,700,000.00 Franklin County, Ohio Outlook Pointe at Akron South Hawkins Avenue, Akron $7,050,000.00 Summit County, Ohio TOTAL: $36,850,000.00 ==============
-11- 12 OMITTED EXHIBITS Exhibit B Tenant Estoppel Certificate Exhibit C Manager Estoppel Certificate EX-10.19 19 BALANCED CARE CORPORATION 1 Exhibit 10.19 SECOND SERIES MASTER INVESTMENT AGREEMENT ----------------------------------------- THIS SECOND SERIES MASTER INVESTMENT AGREEMENT (this "AGREEMENT") is made by and between BALANCED CARE CORPORATION ("BCC"), BCC DEVELOPMENT AND MANAGEMENT CO. ("DEVELOPER"), a Delaware corporation, C&G HEALTHCARE AT PENSACOLA, L.L.C., C&G HEALTHCARE AT TALLAHASSEE, L.L.C., C&G HEALTHCARE AT HAGERSTOWN, L.L.C., C&G HEALTHCARE AT JOHNSON CITY, L.L.C., and C&G HEALTHCARE AT TEAY'S VALLEY, L.L.C. (such Delaware limited liability companies being hereinafter individually referred to as a "Tenant" and collectively as "TENANTS"), and NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation ("NHP"). RECITALS: A. NHP, Tenants, Developer, and BCC have agreed to enter into a series of five (5) transactions, as specifically set forth in EXHIBIT "A" attached hereto and included herein for all purposes as though fully set forth (hereinafter individually referred to as a "TRANSACTION" and collectively referred to as the "TRANSACTIONS"), each of which will include the purchase, lease, and development of certain tracts or parcels of real property, together with all improvements thereon, all personal property to be leased therewith, and all appurtenances thereto (hereinafter individually referred to as a "PROPERTY" and collectively referred to as the "PROPERTIES"), with the sum of the aggregate purchase prices and aggregate development fees and costs for the Properties ("NHP'S MAXIMUM INVESTMENT") to be limited to Twenty-Five Million Nine Hundred Thousand and No/100 Dollars ($25,900,000.00). B. The Transactions are generally expected to take the following form: (a) each of the Properties are to be located, identified, and chosen by BCC or its Affiliates (defined below), which will enter into option or purchase agreements (hereinafter individually referred to as a "PURCHASE CONTRACT" and collectively referred to as the "PURCHASE CONTRACTS") by and between various third parties, as seller, and BCC, as buyer; (b) following the exercise of an option or the firm decision by BCC to proceed with a purchase pursuant to a Purchase Contract, BCC will assign all its rights, duties, and obligations under such Purchase Contract to NHP, pursuant to an assignment of purchase contract agreement (the "PURCHASE CONTRACT ASSIGNMENTS"); (c) NHP will purchase the respective Properties upon the terms and conditions set forth in the applicable Purchase Contracts, and any amendments thereto required by NHP; (d) simultaneously with the closing of each Purchase Contract, one of the Tenants will lease from NHP the applicable Property, pursuant to the terms and conditions set forth in a lease and security agreement (hereinafter individually referred to as a "LEASE" and collectively referred to as the "LEASES"), which Leases will typically provide for an initial term of eleven (11) years and for three (3) separate renewal terms of six (6) years each; (e) as additional security for the obligations of Tenants under each respective Lease, BCC will enter into working capital assurance agreements with NHP (the "CAPITAL AGREEMENTS"), whereby BCC agrees to make working capital loans to the applicable Tenant, and as further security, NHP will be a party to deposit pledge agreements (the "DEPOSIT AGREEMENTS") whereby each applicable Tenant pledges a minimum amount of capital as a working capital reserve for its operations; (f) each -1- 2 property will be developed, used, and licensed (by the State in which such Property is located) as an assisted living facility, personal care home, independent living facility, or similar adult care facility (hereinafter individually referred to as a "FACILITY" and collectively referred to as the "FACILITIES"), including (at BCC's option) such ancillary services for independent living, skilled nursing, rehabilitation, or Alzheimer's or dementia care as are permitted by law and may be necessary or incidental thereto; (g) Developer will act as developer of each of the Properties, pursuant to the terms and conditions of development agreements (hereinafter individually referred to as a "DEVELOPMENT AGREEMENT" and collectively referred to as the "DEVELOPMENT AGREEMENTS") to be entered into by and between Developer and NHP, with the aggregate development fees paid to Developer under the Development Agreements being funded out of NHP's Maximum Investment and limited to an amount equal to six and one-half percent (6.5%) of NHP's Maximum Investment; (h) BCC will guarantee the obligations of Developer under each respective Development Agreement and the completion of all improvements contemplated in such Development Agreements, pursuant to a guaranty agreement with NHP (the "DEVELOPMENT GUARANTIES"), (i) each of the Tenants will enter into a management agreement with a newly formed subsidiary of BCC, whereby such BCC subsidiary agrees to manage the respective Facility on behalf of the respective Tenant (such BCC subsidiaries being hereinafter collectively referred to as the "MANAGERS"), (j) BCC will indemnify NHP with respect to possible environmental hazards on each applicable Property by means of environmental indemnification agreements (the "ENVIRONMENTAL INDEMNIFICATIONS"), and (k) NHP will grant rights of first refusal to BCC with respect to any proposed sales of the Properties, by means of right of first refusal agreements ("REFUSAL AGREEMENTS"). C. BCC, each of the Tenants, and Developer each acknowledges and agrees that this Agreement is given as an inducement to NHP to consummate the Transactions and to enter into the Purchase Contract Assignments, Purchase Contracts, Leases, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, that NHP would not enter into the Purchase Contract Assignments, Purchase Contracts, Leases, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements without the execution and delivery by Tenants' Owner, BCC and Developer of this Agreement, that such execution and delivery is a condition precedent to NHP's obligations under the Purchase Contract Assignments, Purchase Contracts, Leases, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and that the Transactions are each subject to final approval by NHP. NOW, THEREFORE, taking the foregoing paragraphs A through C (the "RECITALS") into account, and in consideration of the mutual covenants, agreements, and conditions set forth herein and in the Purchase Contract Assignments, Purchase Contracts, Leases, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITION OF AFFILIATE. For purposes of any of the Transactions, this -2- 3 agreement, the Purchase Contracts, Purchase Contract Assignments, Leases, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements, and any other documents executed by any of the parties hereto, any Tenants or their respective Affiliates (as defined herein) with respect to the Transactions:(a) the term "AFFILIATE" is defined to mean with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity, and the term "AFFILIATES" is defined to mean any group of such persons or entities; (b) the term "CONTROL" is expressly deemed to include any actual discretion or power to direct the affairs of the controlled person or entity, either directly or through a chain of ownership or control (regardless of actual ownership); (c) a general partner, manager, or managing member of a partnership or limited liability company, and any owner of thirty percent (30%) or more of such general partner or managing member, is expressly deemed to control such partnership or limited liability company; (d) a person or entity owning thirty percent (30%) or more of the common stock of a corporation or thirty percent (30%) or more of the voting interest in any other type of entity, is expressly deemed to control such corporation or other entity; (e) a trustee of a trust is expressly deemed to control such trust; (f) Tenants and any entity which is an Affiliate of any of the Tenants, are all expressly deemed to be Affiliates of each other, and (g) BCC, Developer, Managers and any entity which is an Affiliate of any of the aforementioned entities in this clause (g) are all expressly deemed to be Affiliates of each other. Notwithstanding the foregoing, the term "Affiliate" shall not include any person or entity that is an equity owner or parent entity of any of the Tenants; provided, however, this exclusion provision shall not exclude BCC, Developer, Manager, or any Tenant as an Affiliate. 2. CROSS DEFAULT PROVISIONS. BCC, each of the Tenants, and Developer each hereby acknowledges and agrees that a material default by BCC, Developer, any Tenant, or their respective Affiliates under any obligation owed by BCC, Developer, any Tenant, or their respective Affiliates to NHP or any Affiliate of NHP arising under or in connection with the Transactions, including, without limitation, a material default under the Purchase Contract Assignments, Leases, Lease Guaranties, Capital Agreements, Deposit Agreements, Development Agreements, Development Guaranties, Environmental Indemnifications, and Refusal Agreements and any related financing statements, collateral assignments, or security agreements (hereinafter individually referred to as an "OBLIGATION" and collectively referred to in this Agreement as the "OBLIGATIONS"), which default is not cured within any applicable cure period provided in the documentation for such Obligation, shall, in NHP's sole, absolute, and uncontrolled discretion, constitute an event of default for purposes of and under (A) such Obligation, and (B) any or all of the other Obligations under the Transactions. 3. CROSS RENEWAL PROVISIONS. The Lease or Leases (in the case of Leases with identical effective dates) with the earliest effective date for any of the Transactions entered into by and between NHP, their respective Affiliates and a Tenant are hereinafter sometimes individually referred to as an "INITIAL LEASE" and sometimes collectively referred to as the "INITIAL LEASES". All other Leases (excluding the Initial Leases) and all subleases of such other Leases (not including subleases to residents of Facilities) for any of the Transactions are hereinafter sometimes individually referred to as an "OTHER LEASE" and collectively referred to as the "OTHER LEASES". Any renewal or extension options at any time made a part -3- 4 of any of the Leases for any of the Transactions are hereinafter sometimes individually referred to as a "RENEWAL OPTION" and collectively referred to as the "RENEWAL OPTIONS". BCC, each of the Tenants, and Developer each hereby agrees that: (A) if any Renewal Option under any Initial Lease or any sublease of an Initial Lease is exercised by any person having the legal authority to exercise such Renewal Option (hereinafter referred to as the "EXERCISED RENEWAL OPTION"), then all Specified Renewal Options (defined below) in the other Initial Leases and Other Leases (whether or not previously exercised) for any of the Transactions shall be deemed to have been automatically exercised, without any additional actions being required to be taken by BCC, Developer, any Tenants, NHP, or their respective Affiliates; and (B) if any Renewal Option under any Initial Lease or any sublease of an Initial Lease is not timely exercised by a person having the legal authority to exercise such Renewal Option or has not been automatically deemed exercised pursuant to Section 3(a) hereof (hereinafter referred to as an "UNEXERCISED RENEWAL OPTION"), then all Specified Renewal Options in the other Initial Leases and Other Leases (whether or not previously exercised) and all subsequent Renewal Options contained in any of the Leases for any of the Transactions shall be deemed to have automatically terminated and shall thereupon be null and void. For purposes of this Agreement, and with regard to the Transactions, "SPECIFIED RENEWAL OPTIONS" means all Renewal Options in the other Initial Leases and Other Leases which by their terms may be exercised within three (3) years prior to or following the beginning date of the renewal term of the Initial Lease to which the Exercised Renewal Option or an Unexercised Renewal Option, as applicable, relates. Upon the occurrence of an Exercised Renewal Option, BCC, Developer, each of the Tenants and any of their Affiliates each hereby irrevocably appoints NHP as their true and lawful attorney-in-fact for the sole purpose of executing any documents necessary, advisable or convenient, in NHP's sole discretion, to evidence the exercise of any and all Specified Renewal Options under this Agreement, and, more specifically, they each hereby (AA) authorize NHP to execute on their behalf all documents necessary to exercise any or all of the Specified Renewal Options, (BB) agree this power of attorney shall be irrevocable and uncontestable by the BCC, Developer, any of the Tenants, or their respective Affiliates, successors, or assigns, and (CC) acknowledge and agree this power of attorney is given as security and coupled with an interest. 4. RENEWAL OPTION CURE PROVISIONS. Notwithstanding anything else in this Agreement to the contrary, in the event of an Unexercised Renewal Option, the Specified Renewal Options in the other Initial Leases and the Other Leases (whether or not previously exercised) for any of the Transactions shall not be deemed to have automatically terminated and shall not thereupon be null and void, until and unless: (A) NHP gives written notice (in the manner required under Section 8 hereof) to BCC and the Tenants of the occurrence of an Unexercised Renewal Option, and (B) NHP does not receive, within ten (10) calendar days from the deemed receipt date of the notice required under Section 4(a) hereof, a written and signed notice (in the manner required under Section 8 hereof) (hereinafter referred to as a "LATE RENEWAL NOTICE") from BCC or the Tenant under the applicable Initial Lease which states that the Tenant under the applicable Initial Lease desires to exercise the Renewal Option to which such Unexercised Renewal Option relates. Nothing in this Section 3 shall be construed as extending the time period set forth in any Initial Lease or Other Lease for exercising a Renewal Option. In the event NHP receives a Late Renewal Notice, then (AA) NHP (as applicable) shall have the option, at its sole discretion, to either renew or not renew -4- 5 any or all Expired Leases, and (BB) all Specified Renewal Options shall be deemed to have been automatically exercised (as otherwise provided in Section 2 hereof). For purposes of this Agreement and with regard to the Transactions, the term "EXPIRED LEASES" means the Initial Lease and all Other Leases for which the otherwise applicable Renewal Option has expired, whether or not the Term (as defined in each Initial Lease or Other Lease) has expired. 5. BCC PURCHASE OPTION. Provided that (i) all the Leases are still in effect, and (ii) no Event of Default (as defined in the respective Leases and subject to Section 2 hereof) under any of the Leases remains uncured as of (A) BCC's exercise of its option to purchase the Properties pursuant to this Section 5, and (B) the closing date established to consummate the purchase of the Properties pursuant to BCC's exercise of such option, BCC shall have the option to purchase (or cause a BCC Affiliate to purchase) all but not less than all of the Properties upon the following terms and conditions: (a) Not more than thirty (30) days before or after the date which is twelve (12) months prior to the end of the then current Term (as defined in the Initial Leases) of the Initial Leases, BCC may, but is not obligated to, exercise an option to purchase all but not less than all of the Properties by giving NHP written notice thereof; (b) The purchase price for the Properties shall be payable in cash by BCC and shall be equal to the greater of (i) the aggregate fair market value of the Properties on the date of BCC's exercise of its option pursuant to this Section 5 (the "OPTION DATE"), or (ii) the aggregate Landlord's Investment (as defined in each Lease) for all the Leases on the Option Date. If within ten (10) days of the date of BCC's exercise of its option under this Section 5 BCC and NHP are unable to agree on the fair market value of the Properties, such fair market value shall be established by the appraisal process prescribed in each of the Leases with respect to the setting of fair market value for purposes of determining Minimum Rent (as defined in each Lease) for any Renewal Term (as defined in each Lease). Such fair market value must be finally determined no later than ninety (90) calendar days after BCC's exercise of its option under this Section 5 or BCC shall lose its right to purchase the Properties unless the failure to determine value was caused by the willful acts or omissions of NHP; (c) Once the purchase price is established pursuant to the above, NHP, as seller (hereinafter sometimes collectively referred to as "SELLERS"), and BCC and/or its designated Affiliates, as buyer (hereinafter sometimes collectively referred to as "BUYERS"), shall immediately open an escrow to consummate such purchase at a national title company selected by NHP on the following terms: (i) the form of such instructions to be then signed by Sellers and Buyers shall be such title company's standard sale escrow instructions without any representations or warranties and without due diligence or other contingencies in favor of Buyers, (ii) the purchase price shall be payable in cash by Buyers upon the expiration of the then current Term of the Initial Leases (as defined therein), (iii) Buyers shall pay all transaction costs, (iv) at close, Sellers shall deliver title to the Properties subject only to those title exceptions agreed to by NHP and free and clear of any liens created by Sellers (other than liens, Leases, subleases, and related instruments entered into, caused, or created in whole or in part -5- 6 by BCC, Developer, Manager, Buyers, the Tenants, or their respective Affiliates), (v) the sale escrow instructions shall provide for a deposit equal to five percent (5%) of the purchase price and shall provide that the deposit may be retained by Sellers as liquidated damages in the event of any breach by Buyers of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Sellers' damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Sellers' damages by reason of a breach of this Lease), (vi) the escrow shall close on the last day of the then current Term or the Initial Lease, and (vii) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to NHP; (d) If BCC fails to close the escrow for any reason other than a breach by NHP, then NHP shall have the right to extend the then current Term (as defined in each Lease) of each of the Leases for the Transactions for an additional year. The Additional Rent (as defined in each Lease) and Minimum Rent (as defined in each Lease) during such year extension period shall be calculated as if on the Option Date BCC had instead exercised its right under each Lease to extend the Term for a Renewal Term; and (e) On such terms as may be mutually agreed to by and between NHP and BCC, and subject to the requirement that ALL of the Properties in connection with the Transaction be purchased in the event BCC exercises its option under this Section 5, NHP agrees to permit BCC to designate (i) pools of Properties ("POOLS") to be purchased, and (ii) joint venture partners to invest with BCC in such Pools. Each of such Pools shall be subject to the requirements otherwise set forth in this Section 5. Anything in this Agreement to the contrary notwithstanding, the provisions of this Section 5 and the rights and obligations contained herein shall automatically expire on June 30, 2027. 6. DEVELOPMENT FEES AND BUDGETS. (a) Notwithstanding any provisions of the Development Agreements to the contrary, BCC and Developer hereby acknowledge and agree that the aggregate development fees (the "DEVELOPMENT FEES") paid to Developer by NHP with respect to the development of the Properties in connection with the Transaction pursuant to the Development Agreements, shall be a part of NHP's Maximum Investment and shall be limited to six and one-half percent (6.5%) of NHP's Maximum Investment. In the event the aggregate Development Fees paid by NHP and its Affiliates ever exceeds six and one-half percent (6.5%) of NHP's Maximum Investment, Developer hereby agrees to refund the amount of such excess to NHP within ten (10) calendar days of Developer's deemed receipt of written notice from NHP of the fact and amount of such excess (the "REFUND AMOUNT"); provided, further, in the event Developer fails to refund the Refund Amount to NHP within the Refund Period, BCC hereby agrees to reimburse to NHP the Refund Amount, within ten (10) days of BCC's receipt of written notice from NHP of the facts of Developer's failure to refund the Refund Amount, which payment shall directly offset the Refund Amount due from Developer. -6- 7 (b) Notwithstanding any provisions of this Agreement or the Development Agreements for any of the Transactions to the contrary, if the Development Advance amount defined in a Development Agreement is greater than the aggregate amounts paid by NHP with respect to all Applications for Payment made by Developer pursuant to such Development Agreement (the "TOTAL FACILITY FUNDINGS"), then any such excess (the "UNDER BUDGET AMOUNT") may be applied, to the extent of such Under Budget Amount, in payment of any Over Budget Application for Payment submitted to NHP or its Affiliate with respect to another Development Agreement. For purposes of this Agreement, the term "OVER BUDGET APPLICATION FOR PAYMENT" shall mean any Application for Payment (as defined in the applicable Development Agreement) which, if paid, would cause the Total Facility Fundings paid pursuant to a Development Agreement to exceed the Development Advance amount defined in such Development Agreement. To determine whether there is an available Under Budget Amount, the Total Facility Fundings may only be calculated following the later of (i) the date on which the Improvements are deemed substantially complete (as determined under the applicable Development Agreement), (ii) the deemed receipt date by NHP or its Affiliate of the Final Application for Payment. For purposes of this Agreement, the term "FINAL APPLICATION FOR PAYMENT" shall mean an Application for Payment identified by the Developer as the final Application for Payment to be submitted by Developer with respect to the applicable Development Agreement. Nothing in this Paragraph 6 shall be construed so as to require NHP and its Affiliates to pay any amount which would cause the aggregate payments made by them (pursuant to this Agreement and the Development Agreements) to exceed NHP's Maximum Investment. 7. ESTOPPEL CERTIFICATES. All the Properties in connection with the Transactions shall be subject to this Master Agreement. Prior to entering into any Lease or sublease of a Lease (except with respect to any resident agreements), the proposed Tenant under such Lease or sublease must execute an estoppel certificate in the form attached hereto as EXHIBIT "B", acknowledging and agreeing that Tenant's leasehold interest under the applicable Lease is subject to the terms and conditions of this Agreement, and the proposed Manager of any Facility located on the Property which is the subject of such Lease or sublease must execute an estoppel certificate in the form attached hereto as EXHIBIT "C", acknowledging and agreeing that Manager shall comply with and not take any actions which violate the terms and conditions of this Agreement or the applicable Lease. 8. NOTICE. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Agreement shall be in writing and shall be deemed to have been properly given upon actual receipt thereof or within three (3) business days of being placed in the United States certified or registered mail, return receipt requested, postage prepaid (a) if to BCC, a Tenant or the Tenants, or the Developer, addressed to: Balanced Care Corporation, 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, Attn: President, Facsimile No. (717) 796-6150; with a copy to Balanced Care Corporation, 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, Attn: Legal Department; with a copy to C&G Healthcare, c/o Cordray & Goodrich, 3306 Sul Ross, Houston, Attn: President and General Counsel, Facsimile No. (713) 630-0017; and with a copy to Kirkpatrick & Lockhart, LLP, 1500 Oliver Building, Pittsburgh, PA 15222, Attn: Steven J. Adelkoff, Facsimile No. (412) 355-6501; or at such other address as BCC, any Tenant, or Developer from time to time may -7- 8 have designated by written notice to NHP, and (b) if to NHP, addressed to Nationwide Health Properties, Inc., 610 Newport Center Drive, Suite 1150, Newport Beach, CA 92660, Attention: President, Fax No. (714) 759-6876 with a copy to Cordray & Goodrich, 3306 Sul Ross, Houston, Texas 77098, Attention: Howard F. Cordray, Jr., Fax No. (713) 630-0017, or at such address as NHP may from time to time have designated by written notice to Developer. Refusal to accept delivery shall be deemed delivery. If the addressee is not an individual, notice may be made to any officer, general partner or principal of such addressee. 9. REPRESENTATIONS AND WARRANTIES. BCC, each of the Tenants, and Developer each understands and acknowledges that NHP is relying upon the respective representations of such parties set forth in this Agreement, and that NHP may rely on such party's representations for all purposes, including without limitation all the Transactions, all the Development Agreements, and all the Leases. The Recitals set forth above are hereby incorporated by this reference and made a part of this Agreement. BCC, each of the Tenants, and Developer each hereby acknowledges, represents and warrants that the Recitals are true and correct. 10. MISCELLANEOUS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. This Agreement shall be binding upon the successors and permitted assigns of the parties hereto (and the Affiliates of such parties, successors, and permitted assigns). For purposes of the Transactions and this Agreement, the term "NHP" shall include NHP or its Affiliates and any subsequent owner of NHP's or its Affiliate's interest in any of the Leases or Properties, or any assignee of NHP's or its Affiliate's rights under any instruments or agreements memorializing or evidencing the Obligations in connection with the Transactions. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Texas, without regard to the rules governing choice of law. The parties hereto agree that venue for any and all lawsuits related to this Agreement shall be in Harris County, Texas. 11. NO JOINT VENTURE. The parties to this Agreement do not intend by this Agreement to in any way or for any purpose become partners of each other or in the conduct of any business, joint venturers of each other, or members of a joint enterprise with each other, it being understood and agreed between the parties that each party is and shall be, for all purposes of this Agreement, acting independently of each other and/or as independent contractors. 12. INCREASES IN NHP'S MAXIMUM INVESTMENT. The parties may in the future mutually agree in writing, by amendment of this Agreement, to (i) increase the number of Properties or Facilities governed by this Agreement (ii) apply any Under Budget Amount to the development of improvements on such additional Properties or Facilities, and/or (iii) increase NHP's Maximum Investment; provided, however, if and when BCC or its Affiliates have received assignment of and/or assumed the rights, duties, and obligations of the Tenants under all the Leases for all the Transactions, then (A) BCC and its Affiliates hereby agree that all similar transactions and/or leases by and between NHP and its Affiliates and BCC and its Affiliates, shall be defined as Transactions and/or Other Leases for purposes of this Agreement and be subject to this Agreement for all purposes, including, without -8- 9 limitation, the cross default and cross renewal provisions set forth herein, and (B) for purposes of this sentence, Tenants' Owner and such Tenants shall cease to be parties to this Agreement. NHP's Maximum Investment shall not be increased for any reason without the express written consent of NHP, which consent shall be at the sole discretion of NHP, and no application of an Under Budget Amount as contemplated in Paragraph 6(b) above shall constitute a consent to increase NHP's Maximum Investment. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in their names under seal by duly authorized officers, managers or representatives effective as of __________________________, 1998. "NHP" NATIONWIDE HEATH PROPERTIES, INC., a Maryland corporation By: /s/ JOHN J. SHEEHAN, JR. (SEAL) -------------------------------- Name: John J. Sheehan, Jr. Title: Vice President "BCC" BALANCED CARE CORPORATION, a Delaware corporation By: /s/ BRIAN L. BARTH (SEAL) -------------------------------- Name: Brian L. Barth Title: Chief Development Officer "DEVELOPER" BCC DEVELOPMENT AND MANAGEMENT CO., a Delaware corporation By: /s/ BRIAN L. BARTH (SEAL) -------------------------------- Name: Brian L. Barth Title: Vice President "TENANTS" C&G HEALTHCARE AT PENSACOLA, L.L.C., a Delaware corporation
-9- 10 By: /s/ KEVIN L. SHERRY (SEAL) ------------------------------------- Name: Kevin L. Sherry Title: Sole Member and Manager C&G HEALTHCARE AT TALLAHASSEE, L.L.C., a Delaware corporation By: /s/ KEVIN L. SHERRY (SEAL) ------------------------------------- Name: Kevin L. Sherry Title: Sole Member and Manager C&G HEALTHCARE AT HAGERSTOWN, L.L.C., a Delaware corporation By: /s/ KEVIN L. SHERRY (SEAL) ------------------------------------- Name: Kevin L. Sherry Title: Sole Member and Manager C&G HEALTHCARE AT JOHNSON CITY, L.L.C., a Delaware corporation By: /s/ KEVIN L. SHERRY (SEAL) ------------------------------------- Name: Kevin L. Sherry Title: Sole Member and Manager C&G HEALTHCARE AT TEAY'S VALLEY, L.L.C., a Delaware corporation By: /s/ KEVIN L. SHERRY (SEAL) ------------------------------------- Name: Kevin L. Sherry Title: Sole Member and Manager
-10- 11 EXHIBIT "A" SCHEDULE OF PROJECTS
Maximum NHP Name of Facility Location Investment - ------------------------------ ------------------------------------- -------------- Outlook Pointe at Johnson City Mountain View Road, Johnson $ 4,458,000.00 City, 10th Civil District of Washington County, Tennessee Balanced Care, Hagerstown Professional Court, Hagerstown, $ 4,117,000.00 Washington County, Maryland Outlook Pointe at Teay's Valley Outlook Drive, Hurricane, $ 4,898,000.00 Putnam County, West Virginia Outlook Pointe at Tallahassee Fleischman Road, Tallahassee, $ 7,825,000.00 Leon County, Florida Outlook Pointe at Pensacola 2310 Abbie Lane, Pensacola, $ 4,602,000.00 Escambia County, Florida ------------------ TOTAL: $ 25,900,000.00 =================
A-1 12 OMITTED EXHIBITS Exhibit B Tenant Estoppel Certificate Exhibit C Manager Estoppel Certificate EX-10.20 20 BALANCED CARE CORPORATION 1 Exhibit 10.20 FORM OF FIRST SERIES OPTION AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of the Documentation Date, between Elder Care Operators, LLC, a Delaware limited liability company and Oakhaven Elder Living, Inc., a California corporation (collectively, the "OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, collectively, Optionor is the owner of 100% of the equity interests (the "EQUITY INTERESTS") of ______________________________ a Delaware limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate numbers 1 & 2 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company executed and delivered that certain Lease and Security Agreement dated as of the Documentation Date (the "LEASE") whereby the Company leased from Nationwide Health Properties, Inc., a Maryland corporation (the "LESSOR") property, together with all improvements built or to be built thereon, located in _______________________ as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and ____________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionor and the Company have entered into that certain Shortfall Funding Agreement dated as of the Documentation Date (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests shall be paid to Optionor on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor: (1) on the earlier of one day after the issuance of the certificate of occupancy for the Facility or twelve months following the closing of 2 construction financing under the Development Agreement (the "First Payment Date"), an amount equal to the Current Yield (as hereinafter defined) on the Working Capital Reserve actually funded by Optionor through such date, payable in arrears for the period commencing on such funding date or dates through the First Payment Date, plus an amount equal to the Current Yield on the Working Capital Reserve actually funded by Optionor through such date for the next succeeding 12 month period, payable in advance, (2) on that date which is twelve months after the First Payment Date (the "Second Payment Date"), an amount calculated as 25% of the Current Yield on the Working Capital Reserve actually funded by the Optionor through such date, representing the first quarterly installment of the annual Current Yield for the following 12 month period, payable in advance, and (3) thereafter, on the first day of each three-month period following the Second Payment Date and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), 25% of the Current Yield on the Working Capital Reserve actually funded from time to time by the Optionor, compounded on an annual basis, representing quarterly installments of the annual Current Yield, payable in advance. "Current Yield" as used in this Agreement means an annual return equal to 27.5% of the Working Capital Reserve actually funded from time to time through the date of such calculation. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. (d) The "PURCHASE PRICE" as used herein shall mean (i) an amount equal to the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, plus (ii) an amount calculated as the Current Yield on the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, compounded annually through the Closing Date (as defined below), plus (iii) the aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement), minus (iv) any Option Payments. The aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. To avoid any doubt, BCC shall receive a credit against the Purchase Price for Option Payments paid as Current Yield in advance, to the extent that such advanced Option Payments are attributable to Current Yield accruing after the Closing Date. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), pursuant to the exercise of the Option, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionor shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably 2 3 request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents and without in any way implying that such actions are permissible under the Transaction Documents, if and to the extent that the funding of the Working Capital Reserve is advanced in the form of a loan to the Company (such advances, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Optionor shall give BCC prior written notice before authorizing the Company to make any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. 3. COVENANTS OF OPTIONOR/LEGEND/PLEDGE. (a) Optionor shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute Equity Interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF MARCH 27, 1998. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionor shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionor's ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionor shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not, and shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of Optionor or the 3 4 Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company or Optionor (provided, however, this restrictions shall not be construed to prohibit Optionor's Members or shareholders from receiving Option Payments in accordance with the terms and conditions of this Agreement), (iii) engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of Optionor or the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests in the Company or options, warrants or other rights to purchase any equity interests in the Company or any securities convertible or exchangeable for equity interests in the Company, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative or management service for the benefit of either Optionor or the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owners of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) each Optionor is validly organized and in good standing under the jurisdiction of its formation, this Agreement and the other Transaction Documents to which the Optionors are a party have been duly authorized by all requisite action and this Agreement and the other Transaction Documents to which each Optionor is a party constitutes the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws, (iii) no Person or Entity holds any Equity Interests in the Company, other than the Optionor, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (v) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vi) Optionor (and each person or Entity that has an ownership in Optionor) has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) Optionor (and each person or Entity that has an ownership interest in Optionor) has the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and has not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionor's investment in the Company and (viii) Optionor (and each person or Entity that has an ownership interest in Optionor) understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and Optionor (and each person or Entity that has an 4 5 ownership interest in Optionor) must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 6. ASSIGNMENT. Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC. BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor; provided, however, no such transfer or assignment shall relieve BCC of its obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. (c) Notwithstanding the provisions of Section 7(b) and so long as no Event of Default has occurred under any Transaction Document or Lease Document which was caused by either Optionor or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, Optionor shall have the following remedies and rights, which remedies and rights shall be the sole and exclusive remedies and rights of Optionor in the case of such failure: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Company pursuant to the Shortfall Agreement shall automatically be amended to provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Option Payments and an opportunity to cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as Optionors may reasonably request to effect the provisions of Subsections (c)(i), (c)(ii) and (c)(iii) above. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or 5 6 sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 Attention: F. David Carr (ii) If to BCC at 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 9. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. WITNESS: ELDER CARE OPERATORS, LLC ______________________________________ By:________________________________ Title:_____________________________ ATTEST/WITNESS: OAKHAVEN ELDER LIVING, INC. By:___________________________________ By:________________________________ Title:________________________________ Title:_____________________________ ATTEST/WITNESS: BALANCED CARE CORPORATION By:___________________________________ By:________________________________ Title:________________________________ Title:_____________________________ S - 1 [Option Agreement] EX-10.21 21 BALANCED CARE CORPORATION 1 Exhibit 10.21 SCHEDULE TO FORM OF NHP FIRST SERIES OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Company Management Firm - -------- ------- ---------------- Akron, OH Elder Care Operators Balanced Care at Akron, Inc. of Akron, LLC Hilliard, OH Elder Care Operators Balanced Care at Hilliard, Inc. of Hilliard, LLC Lakemont Farms, PA Elder Care Operators Balanced Care at Lakemont Farms, Inc. of Lakemont Farms, LLC York, PA Elder Care Operators Balanced Care at York, Inc. of York, LLC Bristol, TN Elder Care Operators Balanced Care at Bristol, Inc. of Bristol, LLC Murfreesboro, TN Elder Care Operators Balanced Care at Murfreesboro, Inc. of Murfreesboro, LLC
EX-10.22 22 BALANCED CARE CORPORATION 1 Exhibit 10.22 FORM OF SECOND SERIES OPTION AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of the Documentation Date, between THE PARTIES LISTED ON Schedule 1 attached hereto (collectively, the "OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, collectively, Optionor is the owner of 100% of the equity interests (the "EQUITY INTERESTS") of _________________________________, a Delaware limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate number 1 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company executed and delivered that certain Lease and Security Agreement dated as of the Documentation Date (the "LEASE") whereby the Company leased from Nationwide Health Properties, Inc., a Maryland corporation (the "LESSOR") property, together with all improvements built or to be built thereon, located in ___________________________, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and _________________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionor and the Company have entered into that certain Shortfall Funding Agreement dated as of the Documentation Date (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests shall be paid to Optionor on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). 2 (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor: (1) on the earlier of one day after the issuance of the certificate of occupancy for the Facility or twelve months following the Documentation Date (the "First Payment Date"), an amount equal to the Current Yield (as hereinafter defined) on the Working Capital Reserve actually funded under the Senior Note to or for the benefit of the Company through such date, payable in arrears for the period commencing on such funding date or dates through the First Payment Date, plus an amount equal to the Current Yield on the Working Capital Reserve actually funded under the Senior Note to or for the benefit of the Company through the First Payment Date for the next succeeding 12 month period, payable in advance, (2) on that date which is twelve months after the First Payment Date (the "Second Payment Date"), an amount calculated as 25% of the Current Yield on the Working Capital Reserve actually funded under the Senior Note to or for the benefit of the Company through the Second Payment Date, representing the first quarterly installment of the annual Current Yield for the following 12 month period, payable in advance, and (3) thereafter, on the first day of the month of each calendar quarter following the Second Payment Date (i.e. January 1, April 1, July 1 and October 1, as applicable) and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), 25% of the Current Yield on the Working Capital Reserve actually funded from time to time under the Senior Note to or for the benefit of the Company, compounded on an annual basis, representing quarterly installments of the annual Current Yield, payable in advance. "Current Yield" as used in this Agreement means an annual return equal to 27.5% of the Working Capital Reserve actually funded from time to time through the date of such calculation. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. (d) The "PURCHASE PRICE" as used herein shall mean (i) an amount equal to the Working Capital Reserve actually funded pursuant to the Senior Note to or for the benefit of the Company, plus (ii) an amount calculated as the Current Yield on the Working Capital Reserve actually funded under the Senior Note to or for the benefit of the Company, compounded annually through the Closing Date (as defined below), plus (iii) the aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement), minus (iv) any Option Payments. The aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. To avoid any doubt, BCC shall receive a credit against the Purchase Price for Option Payments paid as Current Yield in advance, to the extent that such 2 3 advanced Option Payments are attributable to Current Yield accruing after the Closing Date. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), pursuant to the exercise of the Option, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionor shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents and without in any way implying that such actions are permissible under the Transaction Documents, if and to the extent that the funding of the Working Capital Reserve is advanced in the form of a loan to the Company, including advances made under the Senior Note to or for the benefit of the Company (such advances, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Optionor shall give BCC prior written notice before authorizing the Company to make any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. 3. COVENANTS OF OPTIONOR/LEGEND/PLEDGE. (a) Optionor shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute Equity Interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET 3 4 FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF JUNE 26, 1998. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionor shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionor's ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionor shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of the Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company or Optionor (provided, however, this restrictions shall not be construed to (A) prohibit Optionor from receiving Option Payments in accordance with the terms and conditions of this Agreement and distributing Option Payments without restriction or (B) prohibit distributions for the purpose of paying tax liabilities as provided in Section 1 of the Management Agreement), (iii) engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests in the Company or options, warrants or other rights to purchase any equity interests in the Company or any securities convertible or exchangeable for equity interests in the Company, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative 4 5 or management service for the benefit of the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owner of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) this Agreement and the other Transaction Documents to which the Optionors are a party have been duly authorized by all requisite action and this Agreement and the other Transaction Documents to which each Optionor is a party constitutes the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws; provided, however, notwithstanding any provision to the contrary contained herein or in the other Transaction Documents, if the foregoing is false or misleading (through no fault of Optionor or the Company), in no event shall BCC fail to fund Advances under the Shortfall Agreement as and when required or raise as a defense to the consequences of failing to make Option Payments that the foregoing was not true and correct, but neither the Company nor the Optionor shall raise as a defense to the obligations of the Company or the Optionor hereunder or under any other Transaction Document the failure of the foregoing from being true and correct in all material respects, (iii) no Person or Entity holds any Equity Interests in the Company, other than the Optionor, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (v) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vi) Optionor (and each person or Entity that has an ownership in Optionor) has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) Optionor (and each person or Entity that has an ownership interest in Optionor) has the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and has not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionor's investment in the Company and (viii) Optionor (and each person or Entity that has an ownership interest in Optionor) understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the transferability of the Equity Interests is restricted and Optionor (and each person or Entity that has an ownership interest in Optionor) must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 6. ASSIGNMENT. Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC; provided, however, Optionor shall be entitled to assign all or a portion of its rights to receive payments hereunder, but such assignment shall in no event relieve Optionor from its liabilities and obligations hereunder. BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor; provided, 5 6 however, no such transfer or assignment shall relieve BCC of its obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. (c) Notwithstanding the provisions of Section 7(b) and so long as no Event of Default has occurred under any Transaction Document or Lease Document which was caused by either Optionor or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, Optionor shall have the following remedies and rights, which remedies and rights shall be the sole and exclusive remedies and rights of Optionor in the case of such failure: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Company pursuant to the Shortfall Agreement shall automatically be amended to provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Option Payments and an opportunity to cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as Optionors may reasonably request to effect the provisions of Subsections (c)(i), (c)(ii) and (c)(iii) above. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: Sherry, Coleman & Holthouse LLP 610 Newport Center Drive Suite 1200 6 7 Newport Beach, CA 92660 (ii) If to BCC at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 9. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 7 8 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. WITNESS: OPTIONORS: - ------------------------------- ------------------------------- WITNESS: - ------------------------------- ------------------------------- ATTEST/WITNESS: BALANCED CARE CORPORATION By: By: ---------------------------- ---------------------------- Title: Title: ------------------------- ------------------------- 9 OMITTED SCHEDULE LIST OF MEMBERS/OPTIONORS EX-10.23 23 BALANCED CARE CORPORATION 1 Exhibit 10.23 SCHEDULE TO FORM OF NHP SECOND SERIES OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Company Management Firm - -------- ------- ---------------- Pensacola, FL C&G Healthcare Balanced Care at Pensacola, Inc. of Pensacola, LLC Tallahassee, FL C&G Healthcare Balanced Care at Tallahassee, Inc. of Tallahassee, LLC Hagerstown, MD C&G Healthcare Balanced Care at Hagerstown, Inc. of Hagerstown, LLC Johnson City, TN C&G Healthcare Balanced Care at Johnson City, Inc. of Johnson City, LLC Teay's Valley, WV C&G Healthcare Balanced Care at Teay's Valley, Inc. of Teay's Valley, LLC
EX-10.24 24 BALANCED CARE CORPORATION 1 Exhibit 10.24 FORM OF FIRST SERIES SHORTFALL FUNDING AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of the Documentation Date by and among __________________________________, a Delaware limited liability company (the "LESSEE"), the members of Lessee listed on Schedule A attached hereto (collectively, the "MEMBER") and Balanced Care Corporation, a Delaware corporation ("BCC"). W I T N E S S E T H WHEREAS, the Member constitutes the holder of all equity interests in the Lessee; and WHEREAS, Lessee executed and delivered the Lease dated as of the Documentation Date (the "LEASE") between Lessee and Nationwide Health Properties, Inc., a Maryland corporation (the "LESSOR"), whereby Lessee leased from Lessor property, together with all improvements built or to be built thereon, located in ___________________ as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Lessee and Balanced Care at Akron, Inc., a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, Lessor and BCC Development and Management Company, Inc., a Delaware corporation ("Developer") have entered into a Development Agreement dated as of the Documentation Date (the "Development Agreement") for the purpose of developing the Facility; and WHEREAS, the Developer and the Management Firm are wholly-owned subsidiaries of BCC; and WHEREAS, Lessee will deposit with Lessor immediately available funds from time to time as specifically provided in this Agreement to fund the Working Capital Reserve (to be used to fund Shortfalls); and WHEREAS, upon depletion of the Working Capital Reserve, BCC intends to make Advances to the Lessee, on the terms and conditions herein stated, to fund continuing Shortfalls; and WHEREAS, BCC is willing to fund Advances to Lessee covering Shortfalls upon depletion of the Working Capital Reserve only on the terms and conditions provided in this Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 2 ARTICLE I FUNDING SHORTFALLS SECTION 1.01 FUNDING; CAPITALIZATION OF LESSEE; WORKING CAPITAL RESERVE. (a) Each Member (jointly and severally if more than one) hereby agrees to contribute as capital to the Lessee the following capital contributions: (i) On the date hereof the Member shall deposit into the Collateral Account no less than the sum of ________; and (ii) on or before March 1, 1999 the Member shall deposit into the Collateral Account funds sufficient to make to the total amounts contributed to Lessee equal the sum of ________. Time is of the essence with respect to each contribution described in this Section 1.01(a). (b) The contributions described in Section 1.01 (a) shall be made directly into the Cash Collateral Account. Each contribution of funds into the Cash Collateral Account as provided in this Section 1.01 is referred to herein as a "FUNDING", and the aggregate of all Fundings made is collectively referred to as the "WORKING CAPITAL RESERVE"). (c) In the event that the Member defaults in the timely payment of Fundings into the Working Capital Reserve as provided in Section 1.01 (a), BCC shall have the right at any time thereafter, but not the obligation, to require that the Member sell all of the Equity Interests to BCC or its designee in the manner provided for in the Option Agreement; provided, however, the purchase price for the Equity Interests (as the case may be) shall be the amount of Fundings actually deposited by the Member into the Collateral Account, plus an amount calculated on a pro-rata basis as 27.5% per annum of the amount of funds actually contributed into the Working Capital Reserve from the date of deposit through the date of Closing. In such event, all terms and conditions of the sale applicable to the Option shall be equally applicable to the sale under this Section 1.01(c), and the failure by the Member (as the case may be) to close on such sale within 3 days after written notice from BCC (time being of the essence) shall constitute an Event of Default. (d) The Member and the Lessee acknowledge and agree that (i) each Funding constitutes the capital contribution of the Member to the Lessee, (ii) each Funding is not in any way to be construed as Indebtedness of Lessee nor to be construed as evidence of a loan from any Member to the Lessee and (iii) Lessor and the Management Firm may (without notice to Lessee or Member, and whether acting alone or together) withdraw funds from the Working Capital Reserve to fund Shortfalls with respect to the Facility as provided in the Transaction Documents and the Lease Documents. SECTION 1.02 ADVANCES. Upon complete depletion of the Working Capital Reserve, and to the extent thereafter of any Shortfall, BCC hereby agrees to advance from time to time funds to the Lessee upon no less than three (3) days prior written notice, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes issued by the 2 3 Lessee in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall mature on the anniversary of the fifth year after issuance of the first Note issued under this Agreement. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants under the Transaction Documents applicable to Lessee and the Member (including the obligations of each Member under the Option Agreement), together with all interest payable under the Transaction Documents and all other costs and expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC Affiliate (including indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.02, and any Notes issued hereunder, shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement. SECTION 1.03 ASSET PURCHASE OPTION. (a) The Lessee and the Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase all of the assets of the Lessee (including the option to take an assignment of the Lease) for the Asset Purchase Price. The Asset Purchase Option may be exercised by BCC by providing written notice to the Lessee at any time during the term of the Lease. The closing of the purchase of the assets of the Lessee shall take place within 30 days after BCC exercises the Asset Purchase Option at such location in Pennsylvania as BCC may designate. At the closing of the asset purchase, the Lessee shall transfer, assign and convey to BCC (or its designee) all assets of Lessee, free and clear of all Liens and restrictions of any kind or nature, except for Liens or restrictions in favor of the Lessor pursuant to the Lease Documents or in favor of BCC pursuant to the Transaction Documents (provided, however, Liens in favor of BCC securing Advances or other Obligations shall be paid in full by Lessee and the Member at the closing of the asset purchase). The Lessee (and the Member if requested by BCC) shall execute and deliver at the closing of the asset purchase an assignment of lease (assigning the Lease to the purchaser), a bill of sale conveying all other assets of the Lessee and such other documents and instruments as BCC may reasonably request, all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE PRICE" as used herein shall mean (i) all amounts actually funded into the Working Capital Reserve, plus (ii) an amount (calculated as a yearly return) equal to 27.5% of the Working Capital Reserve actually funded through Fundings, compounded annually through the closing date, plus (iii) the aggregate amount of all Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date (exclusive of the Management Fee), minus (iv) any payments made to the Member under the Option Agreement. To avoid any doubt, BCC shall receive a credit against the Asset Purchase price for any payments made to the Member under the Option Agreement paid as Current Yield in advance to the extent that such advance Option Payments are attributable to Current Yield accruing after the closing date. All Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date of the asset purchase shall be payable from the Asset Purchase Price to BCC or the BCC Affiliate, as appropriate. Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.03 shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement. (b) Notwithstanding any provision to the contrary contained herein or in any other 3 4 Transaction Document, BCC agrees that the Asset Purchase Option shall not be exercised unless (i) BCC or its designee is prohibited (by operation of law, or any other reason other than the acts or omissions of BCC or any BCC Affiliate) from exercising the Option to acquire the Equity Interests pursuant to the Option Agreement or (ii) the Lessee or any Member is in Default of any covenant, agreement, representation or warranty contained in this Agreement (except for a Default in the payment of interest under the Notes) or the Option Agreement, which Default was not caused by BCC or any BCC Affiliate. SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee hereunder and under the other Transaction Documents, Lessee and the Member (as applicable) have executed and delivered to Lessor or BCC (as applicable) the following: (i) the Lease and the other Lease Documents to which it is a party; (ii) Revolving Credit/Future Advances Leasehold Mortgage in the form attached hereto as Exhibit B encumbering the Property in favor of BCC (the "LEASEHOLD MORTGAGE"); (iii) the Deposit Pledge Agreement and the Pledge Agreement; and (iv) such other documents, certificates, powers, affidavits and instrument as BCC may reasonably request. In addition to the foregoing documents, the Member has executed and delivered to BCC the Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby each Member has agreed that BCC shall have an option to purchase the equity interest of each Member in Lessee, on the terms and conditions provided therein. SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount of interest due or payable pursuant to any Transaction Document exceed the maximum rate of interest allowed by Law and, in the event any such payment is inadvertently paid by the Lessee or the Member or inadvertently received by BCC or any BCC Affiliate, then such excess sum shall be credited as a payment of principal due to BCC or any BCC Affiliate. It is the express intention of the parties hereto that neither the Lessee nor the Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.06 INTENTION. It is the intention of BCC, the Member and Lessee that (i) the Management Firm operate the Facility pursuant to the Management Agreement and that Lessee act as a passive investor with respect to the Facility, (ii) Lessee include on its financial statements all revenue and losses with respect to the Facility during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other obligations of Lessee and the Member under the Transaction Documents be secured by the Leasehold Mortgage, but subject to the rights of Lessor under the Lease, regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or against Lessee. BCC, each Member and Lessee agree to take no position inconsistent with the intention of the parties as herein stated. 4 5 ARTICLE II CONDITIONS TO ADVANCES SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents and make Advances are subject to the condition precedent that BCC receives the following five days prior to the making of any Advance, in form and substance satisfactory to BCC: (a) the Note(s); (b) the Working Capital Assurance Agreement; (c) the Leasehold Mortgage; (d) the Option Agreement; (e) the Management Agreement; (f) a certificate of the Secretary of State of the State of Delaware stating that the Lessee is duly organized, validly existing and in good standing in such state; (g) a certified copy of the Operating Agreement of the Lessee and the Member, together with certified resolutions or authorizations of the Lessee and the Member granting the power to Lessee and the Member to enter into and perform the Transaction Documents; (h) all other Transaction Documents; (i) the Lease and all other Lease Documents; and (i) such other affidavits, documents, certificates, statements and instruments as BCC may reasonably request. SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The obligation of BCC to accept delivery of the Transaction Documents and consummate this transaction, and to make any Advance, shall be further subject to the condition precedent that: (a) the following statements shall be true and correct (and the delivery by the Lessee and the Member of the Transaction Documents shall be deemed to constitute a representation and warranty by the Lessee and the Member that such statements are true on such date): (i) The representations and warranties contained in Article III of this Agreement and the other Transaction Documents are true and correct in all material respects on and as of date of the execution and delivery of this 5 6 Agreement, at the time of each Advance, and as of each date until the Obligations are satisfied in full; and (ii) No event has occurred and is continuing which constitutes a Default or an Event of Default under any of the Transaction Documents; and (b) BCC shall have received such other opinions or documents as BCC may request in BCC's sole discretion. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee and each Member represents and warrants as follows: (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited liability company duly formed, validly existing and in good standing under the laws of State of Delaware, has qualified to do business in the State in which the Facility is located, and has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. (b) POWER; AUTHORITY. The execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party are within the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which Lessee is a party have been duly executed and delivered by the duly authorized Management Firm of the Lessee. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by the Lessee of this Agreement or any other Transaction Document to which it is a party and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under, any contract, agreement or other document or instrument to which the Lessee is a party or by which its properties are bound. (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee is a party are legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) LITIGATION. There is no pending or, to the best of Lessee's knowledge, threatened action, suit or proceeding against or affecting the Lessee before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this 6 7 Agreement and the other Transaction Documents to which the Lessee is a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any Law applicable to the Lessee. (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's leasehold interest in the Lease, the Lessee has good, marketable and legal title to its properties and assets. The Lessee has a good and valid leasehold interest in the Lease. (h) LIENS. None of the properties and assets of the Lessee are subject to any Lien or other charge other than Liens in favor of Lessor pursuant to the Lease, BCC as provided herein, or a BCC Affiliate ("PERMITTED LIENS"), and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party will neither result in the creation of any Lien or other charge upon any of the Lessee's properties or assets, nor cause a default under any agreements to which Lessee is a party. (i) SECURITY. Upon the consummation of this transaction, BCC will have a valid and perfected mortgage lien in the Lease. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of the Lessee required by Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid. (k) NO EMPLOYEES. The Lessee has no employees for which it is required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. No event has occurred, which has not been remedied, cured or waived, which constitutes, or with the passage of time or giving of notice or both would constitute, a Default or an Event of Default under any Transaction Document or Lease Document or which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Lessee under any agreement or judgment, decree or order, to which the Lessee is a party or by which the Lessee or any of its properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. All written information, reports and other papers and data furnished to BCC were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give BCC a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the persons involved as at the date thereof and the results of operations for such periods. No document furnished or written statement made to BCC by Lessee or any Member in connection with the execution of this Agreement or any of the other Transaction Documents (or in connection with the organization or capitalization of Lessee by the Members) contains or will contain any untrue statement of a material fact or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or 7 8 beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any Entity. (o) INVESTMENT COMPANY. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. (q) SECURITIES REPRESENTATIONS. Neither Lessee nor any agent, broker, dealer or other person or entity has offered or sold any equity interests in Lessee in violation of the 1933 Act or any state securities laws. (r) CAPITAL CONTRIBUTIONS. All Indebtedness (if any) incurred by any Member or equity owner of any Member to fund the capital contributions to Lessee or any Member (including Indebtedness used to make Fundings) constitutes full recourse Indebtedness against such Member or equity owners (as appropriate), and such Indebtedness is not limited in collection to any particular asset of the person or Entity incurring such Indebtedness. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC Affiliate shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will and the Member shall cause the Lessee to: (a) COMPLIANCE WITH LAWS; ETC. Comply, in all material respects with all applicable Laws, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. (b) MAINTENANCE OF INSURANCE. Maintain or contract to be maintained, with premiums fully paid, with responsible and reputable insurance companies or associations, such insurance in such amounts and covering such risks as is required to be carried under the Lease, and all such policies evidencing such insurance shall name BCC and Lessor as additional insureds thereunder. Lessee shall also maintain insurance of sufficient types and amounts to comply with all other Laws of any government entity exercising jurisdiction over Lessee. All insurance policies shall provide for notice of nonrenewal and notice of extension to BCC and Lessor, and shall not be terminated, canceled, amended or modified without 30 days prior written notice to BCC and Lessor. Lessee shall provide BCC with evidence of all insurance, including renewals or extensions of such insurance, promptly after receiving such insurance. Insurance policies and proceeds thereof shall at all times during the term of the Lease be subject to the Lessor's rights as provided in the Lease Documents. 8 9 (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (i) any actions, suits or proceedings instituted against the Lessee; (ii) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (iii) the occurrence of a Default or an Event of Default. (d) MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of any of the other Transaction Documents, (i) protect and preserve all of its properties, (ii) maintain in good repair, working order and condition all of its tangible properties, and (iii) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties so that the business carried on in connection therewith may be properly and advantageously conducted at all times, as reasonably may be determined by BCC. (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the Laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a limited liability company, and qualify and remain qualified and authorized to do business in such state. (f) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the business presently carried on by the Lessee. (g) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents. Provided, however, notwithstanding anything to the contrary contained in this Section 4.01, Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01 are required to be performed by the Management Firm under the Management Agreement. SECTION 4.02 NEGATIVE COVENANTS. So long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will not, and no Member will cause the Lessee to, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Make any distribution of cash or other property to the Member or declare or pay any dividend or distribution on any securities of Lessee. (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Facility. 9 10 (d) TRANSFER OF ASSETS. Except as expressly contemplated in the Transaction Documents to BCC or an Entity designated by BCC or otherwise as expressly permitted in the Lease with respect to Subleases of a portion of the Facility, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity. The restrictions of this Subsection shall include a prohibition on any assignment, pledge, hypothecation or other transfer of the Lease or sublease or license of the Facility, except to BCC or a BCC Affiliate in accordance with the terms and conditions of the Lease or otherwise as expressly permitted in the Lease with respect to Subleases of a portion of the Facility. (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the Transaction Documents or Indebtedness incurred to Lessor as expressly provided in the Lease Documents. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity. (g) LOANS. Extend credit to or make any advance, loan, contribution or payment of money or goods to any person or Entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Lessee in any way. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents. (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to transfer all or any portion of the Member's Equity Interest in Lessee to a party that does not as of the date hereof hold an equity interest in the Lessee. (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Transaction Document, (ii) waive any default or potential event of default by Lessor under any Transaction Document, (iii) declare a default or event of default under any Transaction Document, (iv) exercise any right to extend the term of the Lease, (v) exercise any right to purchase the Facility or exercise a right of refusal with respect thereto or (vi) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Facility, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity. (m) ISSUANCE OF SECURITIES. Except for the equity interests of the Lessee that have been issued to the Member and are outstanding as of the date hereof, issue any equity 10 11 interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing. ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"), whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due, or the Member shall fail to make payments in connection with Fundings (as provided in Section 1.01 hereof) when due (each a "MONETARY DEFAULT"); or (b) Any representation or warranty made by the Lessee or the Member under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) The Lessee or the Member shall fail to perform or observe any term, covenant or agreement contained in this Agreement, or in any other Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) The Lessee or any Member shall generally not pay its debts when due; or (e) The Lessee or any Member shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Lessee or any Member seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of the Lessee or any Member of any of its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for the Lessee or any Member or for any substantial part of its property; or the Lessee or any Member shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $50,000 shall be rendered against the Lessee and the same shall not be discharged within 30 days after entry; or (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $50,000 in value and such warrant or process shall continue undischarged or unstayed for ten consecutive days; or (h) Any material provision of any Transaction Document to which the Lessee or the Member is a party shall for any reason cease to be valid and binding on the Lessee or the 11 12 Member, or the Lessee or the Member shall so state in writing; or (i) The Leasehold Mortgage shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens; or (j) an Option Agreement Event of Default, a Mortgage Event of Default, a Lease Event of Default, a Deposit Pledge Event of Default or a Management Agreement Event of Default shall occur and be continuing. ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following provisions shall apply: (a) ACCELERATOR AND TERMINATION: (i) Automatic. Upon the occurrence of a Shortfall Event of Default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other Shortfall Event of Default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (b) BCC'S RIGHT TO ENTER PROPERTY. BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (c) USE OF PREMISES. BCC may, without payment of any rent or any other charge, enter the Property and, without breach of peace, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the 12 13 Lessee's equipment, for the purpose of (i) operating the Facility and (ii) collecting any accounts receivable. (d) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in Law or in equity. (e) RIGHT TO FORECLOSE. BCC may foreclose upon the Lease, take immediate possession of the Facility and Property and operate the Property, all in accordance with the terms and conditions of the Leasehold Mortgage. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following a Shortfall Event of Default shall be applied or paid over as follows: (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses for indemnification as provided herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as 13 14 to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by Law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to monetary defaults under this Agreement or any other Transaction Document. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of default under any Transaction Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand. ARTICLE VIII MISCELLANEOUS SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. SECTION 8.02 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Lessee or any Member, at: c/o Hakman & Company, Incorporated 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 (ii) If to BCC, at 14 15 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY (OR THE MEMBER OR THE MEMBER'S PROPERTY) IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations, and the obligation of the Member, under this Agreement and the other Transaction Documents shall be performed by the Lessee and the Member at their sole cost and expense. If the Lessee or the Member shall fail to do any act or thing which it or they have covenanted to do under this Agreement or any of the other Transaction Documents, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee or the Member, and the Lessee and the Member hereby irrevocably authorizes BCC so to act. SECTION 8.05 INDEMNIFICATION. The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (a) any breach by Lessee or any Member of any covenant, agreement, representation or warranty under any Transaction Document, 15 16 (b) any and all uncollected items, including all checks or other negotiable instruments returned to BCC for insufficient funds, and (c) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business or sale thereto, which claim, debt, demand, loss, damage, action, cause of action, liability, cost or expense was not caused by the acts or omissions of BCC or a BCC Affiliate. The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member recognize that, in the event the Lessee or any Member fails to perform, observe or discharge any of its or their obligations or liabilities under this Agreement or any of the other Transaction Documents, any remedy of Law may prove to be inadequate relief to BCC; therefore, the Lessee and each Member agrees that BCC shall be entitled to temporary and permanent equitable relief in any such case without the necessity of proving actual damages. SECTION 8.07 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee, the Member and BCC and their respective personal representatives, heirs, successors and assigns, except that Lessee shall have no right to assign its rights hereunder or any interest herein. SECTION 8.08 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE LESSEE, THE MEMBER AND BCC OF ANY KIND OR NATURE, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE 16 17 BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. SECTION 8.09 CONFLICT WITH LEASE DOCUMENTS This Agreement is subject to the covenants and agreements contained in the Lease and other Lease Documents. In the event of any conflict between the provisions of this Agreement and the Lease Documents, the provisions of the Lease Documents shall control. SECTION 8.10 THIRD PARTY BENEFICIARY BCC, the Member and the Lessee each acknowledge and agree that this Agreement and the rights hereunder are intend to benefit, in addition to the parties hereto, the Lessor, who shall be deemed to be a third party beneficiary hereof. Without limiting the generality of the foregoing, (i) the representations, warranties, affirmative covenants and negative covenants of Lessee and the Member contained herein shall inure to the benefit of Lessor (together with BCC) and (ii) the Lessor may enforce any or all of the provisions herein contained. BCC hereby acknowledges and agrees that any security interest BCC acquires in personal, intangible and other property of the Lessee pursuant to this Agreement shall be and is subordinate to the security interest of Lessor created under the Lease. SECTION 8.11 NO AMENDMENT BCC, Lessee and the Member hereby agree that no Transaction Document shall be amended, modified or altered in any manner without the prior written consent of the Lessor. 17 18 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Shortfall Funding Agreement to be executed by their respective officers or authorized agents as of the date first above written. ELDER CARE OPERATORS OF _____, LLC By: ELDER CARE OPERATORS, LLC, Manager By: CARE OPERATORS FUNDING, LLC, Manager By: RETIREMENT OPERATORS MANAGEMENT, INC., Manager By:______________________________ F. David Carr, President ELDER CARE OPERATORS, LLC a Delaware limited liability company By: CARE OPERATORS FUNDING, LLC, Manager By: RETIREMENT OPERATORS MANAGEMENT, INC., Manager By:______________________________ F. David Carr, President OAKHAVEN ELDER LIVING, INC., a California corporation By:_______________________________________ Title:____________________________________ Its authorized representative S - 1 [Shortfall Funding Agreement] 19 ATTEST: BALANCED CARE CORPORATION ______________________________ By:_________________________________ Title:______________________________ S - 2 [Shortfall Funding Agreement] 20 OMITTED SCHEDULE LIST OF MEMBERS EX-10.25 25 BALANCED CARE CORPORATION 1 Exhibit 10.25 SCHEDULE TO FORM OF NHP FIRST SERIES SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Collateral Location Lessee Management Firm Account Deposits - -------- ------ ---------------- ------------------ Akron, OH Elder Care Operators Balanced Care at Akron, Inc. $110,000/$700,000 of Akron, LLC Hilliard, OH Elder Care Operators Balanced Care at Hilliard, Inc. $110,000/$1,265,000 of Hilliard, LLC Lakemont Farms, PA* Elder Care Operators Balanced Care at Lakemont Farms, Inc. $110,000/$970,000 of Lakemont Farms, LLC York, PA* Elder Care Operators Balanced Care at York, Inc. $110,000/$660,000 of York, LLC Bristol, TN Elder Care Operators Balanced Care at Bristol, Inc. $110,000/$600,000 of Bristol, LLC Murfreesboro, TN Elder Care Operators Balanced Care at Murfreesboro, Inc. $110,000/$660,000 of Murfreesboro, LLC - -------------- * Lessor is MLD Delaware Trust; in all others, it is Nationwide Health Properties, Inc.
EX-10.26 26 BALANCED CARE CORPORATION 1 Exhibit 10.26 FORM OF SECOND SERIES SHORTFALL FUNDING AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of the Documentation Date by and among ____________________________________, a Delaware limited liability company (the "LESSEE"), the member(s) of Lessee listed on Schedule A attached hereto (collectively, the "MEMBER") and Balanced Care Corporation, a Delaware corporation ("BCC"). W I T N E S S E T H WHEREAS, the Member constitutes the holder of all equity interests in the Lessee; and WHEREAS, Lessee executed and delivered the Lease dated as of the Documentation Date (the "LEASE") between Lessee and Nationwide Health Properties, Inc., a Maryland corporation (the "LESSOR"), whereby Lessee leased from Lessor property, together with all improvements built or to be built thereon, located in ___________________________, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Lessee and _________________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, Lessor and BCC Development and Management Company, Inc., a Delaware corporation ("Developer") have entered into a Development Agreement dated as of the Documentation Date (the "Development Agreement") for the purpose of developing the Facility; and WHEREAS, the Developer and the Management Firm are wholly-owned subsidiaries of BCC; and WHEREAS, Lessee will deposit immediately available funds from time to time as specifically provided in this Agreement to fund the Working Capital Reserve (to be used to fund Shortfalls); and WHEREAS, such funds to be deposited in the Working Capital Reserve will come from the proceeds of the Senior Note issued by Lessee to the Senior Lender pursuant to the Senior Credit Documents; and WHEREAS, upon the advance of the entire principal amount of the Senior Note and depletion of the Working Capital Reserve, BCC intends to make Advances to the Lessee, on the terms and conditions herein stated, to fund continuing Shortfalls; and 2 WHEREAS, BCC is willing to fund Advances to Lessee covering Shortfalls after the entire amount of the Senior Note has been advanced and upon depletion of the Working Capital Reserve, only on the terms and conditions provided in this Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I FUNDING SHORTFALLS SECTION 1.01 FUNDING; CAPITALIZATION OF LESSEE; WORKING CAPITAL RESERVE. (a) Each Member (jointly and severally if more than one) hereby agrees to contribute as capital to the Lessee the following capital contributions: (i) At such time as BCC or the Management Firm requests, and upon receipt of advances from Senior Lender under and in accordance with the Senior Note, the Member and/or the Lessee shall deposit into the Collateral Account so much of such funds so advanced under the Senior Note, up to the maximum amount of no less than of $__________, representing 15% of the total capital needed to fully fund the Working Capital Reserve; and (ii) on or before August 1, 1999, but subject to the provisions of Section 1.01(c) below, the Member shall have deposited into the Collateral Account funds sufficient to make the total amounts contributed to the Working Capital Reserve equal the sum of $__________. Time is of the essence with respect to each contribution described in this Section 1.01(a). (b) The contributions described in Section 1.01(a) shall be made directly into the Collateral Account. Each contribution of funds into the Collateral Account as provided in this Section 1.01 is referred to herein as a "FUNDING", and the aggregate of all Fundings to be made into the Collateral Account as provided in Section 1.01(a)(ii) above is referred to as the "WORKING CAPITAL RESERVE"). As contemplated pursuant to the Senior Note, BCC or the Management Firm will from time to time request that Fundings be made under the Senior Note into the Collateral Account to fund the Working Capital Reserve. Under the Working Capital Assurance Agreement, the Lessor may also request Fundings. No Fundings may be made into the Collateral Account until such time as BCC or the Management Firm (or the Lessor, as appropriate) so requests; provided, however, if BCC or the Management Firm has failed to make a request for Fundings as provided under the Senior Note (and if the Lessor has failed to make a request for Fundings pursuant to the Working Capital Assurance Agreement), and a Shortfall exists, BCC shall be obligated to make Advances pursuant to the provisions of Section 1.02 below if all other conditions to making such Advances have been satisfied or waived in writing by 2 3 BCC. (c) BCC, the Member and Lessee recognize that Senior Lender has not committed to fund sums into the Working Capital Reserve in excess of the principal amount of the Senior Note. Lessee, the Member and BCC understand that Senior Lender will either approve or disapprove of funding the remainder of the Working Capital Reserve pursuant to one or more additional senior notes on or before July 18, 1998. Lessee and the Member agree to provide notice to BCC within 24 hours of receipt of notice from Senior Lender as to whether Senior Lender has approved the additional Fundings into the Working Capital Reserve. Notwithstanding any provision to the contrary contained herein or in the other Transaction Documents, in no event shall Lessee or the Member be required to fully fund the Working Capital Reserve as provide in Section 1.01(a)(ii) above, in no event shall Lessee or the Member be in Default hereunder, and in no event shall an Event of Default be declared by BCC or any BCC Affiliate, solely as a result of a failure by Senior Lender to approve the funding of the remaining amounts to be deposited into the Working Capital Reserve as provided in this Section. (i) In the event Senior Lender approves by July 18, 1998 the additional Funding pursuant to one or more additional senior notes such that the Working Capital Reserve will be fully funded by the date provided in Section 1.01(a)(ii) above, Lessee, the Member and BCC shall promptly thereafter execute such further documents and instruments as may be reasonably requested by BCC, the Member, Lessee and/or Senior Lender to effect such additional Fundings, including the issuance by Lessee of additional senior notes. (ii) In the event the Senior Lender fails to approve the additional Fundings into the Working Capital Reserve on or before July 18, 1998 such that the Working Capital Reserve will be fully funded by the date provided in Section 1.01(a)(ii) above, the Member shall have the opportunity (but not the obligation) until October 31, 1998 to arrange for additional Fundings into the Working Capital Reserve such that the Working Capital Reserve will be fully funded by the date provided in Section 1.01(a)(ii) above. Such additional Fundings, and the parties providing such additional Fundings, shall be subject in all respects to the prior written approval of BCC. Without limiting other requirements for such approval by BCC, the parties providing such additional Fundings shall execute such further instruments and documents, and agree to such additional terms, as BCC may reasonably request, including agreeing to be bound by provisions similar to those contained in Section 7.02 below. Lessee shall give prompt notice to BCC in the event that Lessee determines that Lessee will not be in a position to arrange for the additional Fundings in the Working Capital Reserve as provided in this subsection. (iii) In the event that the Senior Lender does not approval the additional Fundings on or before July 18, 1998 such that the Working Capital Reserve will be fully funded by the date provided in Section 1.01(a)(ii) above, and the Member has not obtained a source for the additional Fundings on or before October 31, 1998 on terms and conditions and with parties satisfactory to BCC, BCC shall have the right at any time thereafter, but not the obligation, to require that the Member sell all of the Equity Interests to BCC or its designee in the manner 3 4 provided for in the Option Agreement; provided, however, the purchase price for the Equity Interests shall be the sum of (A) the amount of Fundings actually advanced by Senior Lender under the Senior Note and deposited into the Collateral Account, plus (B) an amount calculated on a pro-rata basis as 27.5% per annum of the amount of funds actually advanced under the Senior Note to or for the benefit of Lessee and contributed into the Working Capital Reserve from the date of deposit through the date of Closing, plus (C) reimbursement for all organizational and qualification costs of Lessee (not to exceed with respect to such organizational and qualification costs, $3,000). In such event, all terms and conditions of the sale applicable to the Option shall be equally applicable to the sale under this Section 1.01(c)(iii), and the failure by the Member to close on such sale within 5 business days after written notice from BCC (time being of the essence) shall constitute an Event of Default. (d) The Member and the Lessee acknowledge and agree that (i) Fundings under the Senior Note and any other borrowings of Lessee to fund the Working Capital Reserve shall be recourse to the Member to the extent that such Member will be liable for no less than 15% of the total amount to be funded into the Working Capital Reserve as provided in Section 1.01(a)(ii) above, (ii) the Member has sufficient funds in personal accounts such that the guaranty of Indebtedness in connection with sums borrowed for the Working Capital Reserve is meaningful and has a likelihood of being repaid and (iii) Lessor and the Management Firm may (without notice to Lessee or Member, and whether acting alone or together) withdraw funds from the Working Capital Reserve to fund Shortfalls with respect to the Facility as provided in the Transaction Documents and the Lease Documents. SECTION 1.02 ADVANCES. Upon the advance of all sums under the Senior Note (and, if applicable, the advance of all sums under additional senior notes to fully fund the Working Capital Reserve) into the Working Capital Reserve and the complete depletion of the Working Capital Reserve, and to the extent thereafter of any Shortfall, BCC hereby agrees to advance from time to time funds to the Lessee upon no less than five (5) days prior written notice, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes issued by the Lessee in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall mature on the anniversary of the fifth year after issuance of the first Note issued under this Agreement. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Eastern Edition of the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in such Eastern Edition of the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants under the Transaction Documents applicable to Lessee and the Member (including the obligations of the Member under the Option Agreement), together with all interest payable under the Transaction Documents and all other costs and expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC Affiliate (including indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". Notwithstanding any provision to the contrary 4 5 contained in the Transaction Documents, the provisions of this Section 1.02, and any Notes issued hereunder, shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement. SECTION 1.03 ASSET PURCHASE OPTION. (a) The Lessee and the Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase all of the assets of the Lessee (including the option to take an assignment of the Lease) for the Asset Purchase Price. The Asset Purchase Option may be exercised by BCC by providing written notice to the Lessee at any time during the term of the Lease. The closing of the purchase of the assets of the Lessee shall take place within 30 days after BCC exercises the Asset Purchase Option at such location in Pennsylvania as BCC may designate. At the closing of the asset purchase, the Lessee shall transfer, assign and convey to BCC (or its designee) all assets of Lessee, free and clear of all Liens and restrictions of any kind or nature, except for Liens or restrictions in favor of the Lessor pursuant to the Lease Documents or in favor of BCC pursuant to the Transaction Documents (provided, however, Liens in favor of BCC securing Advances or other Obligations shall be paid in full by Lessee and the Member at the closing of the asset purchase). The Lessee (and the Member if requested by BCC) shall execute and deliver at the closing of the asset purchase an assignment of lease (assigning the Lease to the purchaser), a bill of sale conveying all other assets of the Lessee and such other documents and instruments as BCC may reasonably request, all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE PRICE" as used herein shall mean (i) all amounts actually funded into the Working Capital Reserve (including advances for interest due under the Senior Note), plus (ii) an amount (calculated as a yearly return) equal to 27.5% of the Working Capital Reserve actually funded through Fundings, compounded annually through the closing date, plus (iii) the aggregate amount of all Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date (exclusive of the Management Fee), minus (iv) any payments made to the Member under the Option Agreement. To avoid any doubt, BCC shall receive a credit against the Asset Purchase Price for any payments made to the Member under the Option Agreement paid as Current Yield in advance to the extent that such advance Option Payments are attributable to Current Yield accruing after the closing date. All Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date of the asset purchase shall be payable from the Asset Purchase Price to BCC or the BCC Affiliate, as appropriate. Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.03 shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement and Section 6.04 of this Agreement. (b) Notwithstanding any provision to the contrary contained herein or in any other Transaction Document, BCC agrees that the Asset Purchase Option shall not be exercised unless (i) BCC or its designee is prohibited (by operation of law, or any other reason other than the acts or omissions of BCC or any BCC Affiliate) from exercising the Option to acquire the Equity Interests pursuant to the Option Agreement or (ii) the Lessee or any Member is in Default of any covenant, agreement, representation or warranty contained in this Agreement (except for a Default in the payment of interest under the Notes) or the Option Agreement, which Default was 5 6 not caused by BCC or any BCC Affiliate. SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee hereunder and under the other Transaction Documents, Lessee and the Member (as applicable) have executed and delivered to Lessor or BCC (as applicable) the following: (i) the Lease and the other Lease Documents to which it is a party; (ii) Leasehold Mortgage in the form attached hereto as Exhibit B encumbering the Property in favor of BCC (the "LEASEHOLD MORTGAGE"); (iii) the Deposit Pledge Agreement and the Pledge Agreement; and (iv) such other documents, certificates, powers, affidavits and instrument as BCC may reasonably request. In addition to the foregoing documents, the Member has executed and delivered to BCC the Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby each Member has agreed that BCC shall have an option to purchase the equity interest of each Member in Lessee, on the terms and conditions provided therein. SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount of interest due or payable pursuant to any Transaction Document (exclusive of payment made under the Option Agreement and sums paid in connection with the Asset Purchase Option) exceed the maximum rate of interest allowed by Law and, in the event any such payment is inadvertently paid by the Lessee or the Member or inadvertently received by BCC or any BCC Affiliate, then such excess sum shall be credited as a payment of principal due to BCC or any BCC Affiliate. It is the express intention of the parties hereto that neither the Lessee nor the Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.06 INTENTION. It is the intention of BCC, the Member and Lessee that (i) the Management Firm operate the Facility pursuant to the Management Agreement and that Lessee act as a passive investor with respect to the Facility, (ii) Lessee include on its financial statements all revenue and losses with respect to the Facility during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other obligations of Lessee and the Member under the Transaction Documents be secured by and pursuant to the Leasehold Mortgage and the Pledge Agreement, but subject to the rights of Lessor under the Lease, regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or 6 7 against Lessee. BCC, each Member and Lessee agree to take no position inconsistent with the intention of the parties as herein stated. ARTICLE II CONDITIONS TO ADVANCES SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents and make Advances are subject to the condition precedent that BCC receives the following five days prior to the making of any Advance: (a) the Note(s); (b) the Working Capital Assurance Agreement; (c) the Leasehold Mortgage; (d) the Option Agreement; (e) the Management Agreement; (f) a certificate of the Secretary of State of the State of Delaware stating that the Lessee is duly organized, validly existing and in good standing in such state; (g) a certified copy of the Operating Agreement of the Lessee and the Member, together with certified resolutions or authorizations of the Lessee and the Member granting the power to Lessee and the Member to enter into and perform the Transaction Documents; (h) all other Transaction Documents; and (i) the Lease and all other Lease Documents. SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The obligation of BCC to accept delivery of the Transaction Documents and consummate this transaction, and to make any Advance, shall be further subject to the condition precedent that the following statements shall be true and correct (and the delivery by the Lessee and the Member of the Note and the other Transaction Documents shall be deemed to constitute a representation and warranty by the Lessee and the Member that such statements are true on such date): (i) The representations and warranties contained in Article III of this Agreement and the other Transaction Documents are true and correct in all 7 8 material respects on and as of date of the execution and delivery of this Agreement, at the time of each Advance, and as of each date until the Obligations are satisfied in full; and (ii) No event has occurred and is continuing which constitutes a Default or an Event of Default on the part of the Lessee or the Member under any of the Transaction Documents. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee and each Member represents and warrants as follows: (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited liability company duly formed, validly existing and in good standing under the laws of State of Delaware, has qualified to do business in the State in which the Facility is located, and has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted; provided, however, notwithstanding any provision to the contrary contained herein or in the other Transaction Documents, if the foregoing is false or misleading (and so long as such representation or warranty was not made false or misleading as a result of the acts or omissions of Lessee or the Member), in no event shall BCC fail to fund Advances if required to do so hereunder or raise as a defense to the consequences of BCC's failure to make Option Payments the failure of the foregoing from being true and correct, but neither Lessee nor the Member shall raise as a defense to the obligations of Lessee or Member hereunder or under any other Transaction Document the failure of the foregoing from being true and correct in all material respects. (b) POWER; AUTHORITY. The execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party are within the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which Lessee is a party have been duly executed and delivered by the duly authorized representative of the Lessee. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by the Lessee of this Agreement or any other Transaction Document to which it is a party and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under, any contract, agreement or other document or instrument to which the Lessee is a party or by which its properties are bound. 8 9 (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee is a party are legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights; provided, however, notwithstanding any provision to the contrary contained herein or in the other Transaction Documents, if the foregoing is false or misleading (and so long as such representation or warranty was not made false or misleading as a result of the acts or omissions of Lessee or the Member), in no event shall BCC fail to fund Advances if required to do so hereunder or raise as a defense to the consequences of BCC's failure to make Option Payments the failure of the foregoing from being true and correct, but neither Lessee nor the Member shall raise as a defense to the obligations of Lessee or Member hereunder or under any other Transaction Document the failure of the foregoing from being true and correct in all material respects. (e) LITIGATION. There is no pending or, to the best of Lessee's knowledge, threatened action, suit or proceeding against or affecting the Lessee before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Lessee is a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any Law applicable to the Lessee; provided, however, notwithstanding any provision to the contrary contained herein or in the other Transaction Documents, if the foregoing is false or misleading (and so long as such representation or warranty was not made false or misleading as a result of the acts or omissions of Lessee or the Member), in no event shall BCC fail to fund Advances if required to do so hereunder or raise as a defense to the consequences of BCC's failure to make Option Payments the failure of the foregoing from being true and correct, but neither Lessee nor the Member shall raise as a defense to the obligations of Lessee or Member hereunder or under any other Transaction Document the failure of the foregoing from being true and correct in all material respects. (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's leasehold interest in the Lease, the Lessee has good, marketable and legal title to its properties and assets. The Lessee has a good and valid leasehold interest in the Lease. (h) LIENS. None of the properties and assets of the Lessee are subject to any Lien or other charge other than Liens in favor of Lessor pursuant to the Lease or the Senior Credit Documents, BCC as provided herein, or a BCC Affiliate ("PERMITTED LIENS"), and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party will neither result in the creation of any Lien or other charge upon any of the Lessee's properties or assets, nor cause a default under any agreements to which Lessee is a party. 9 10 (i) {INTENTIONALLY OMITTED}. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of the Lessee required by Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid; provided, however, if the failure to file such tax returns was due to the acts or omissions of BCC or a BCC Affiliate, the foregoing shall not constitute an Event of Default. (k) NO EMPLOYEES. The Lessee has no employees for which it is required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. To the Lessee's and Member's knowledge, no event has occurred, which has not been remedied, cured or waived, which constitutes, or with the passage of time or giving of notice or both would constitute, a Default or an Event of Default under any Transaction Document or Lease Document or which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Lessee under any agreement or judgment, decree or order, to which the Lessee is a party or by which the Lessee or any of its properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. No document furnished or written statement made to BCC by Lessee or any Member in connection with the execution of this Agreement or any of the other Transaction Documents (or in connection with the organization or capitalization of Lessee by the Members) contains or will contain any untrue statement of a material fact or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any Entity. (o) INVESTMENT COMPANY. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. (q) SOLE MEMBER. The Member is the sole member of Lessee, and no other person or Entity holds any equity interest or other security in Lessee. 10 11 (r) CAPITAL CONTRIBUTIONS. No less than 15% of the total amount to be contributed to the Working Capital Reserve as provided in Section 1.01(a)(ii) above shall be guarantied personally by the Member, and the Member has the financial resources and ability to so repay such Indebtedness. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC Affiliate shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will and the Member shall cause the Lessee to: (a) COMPLIANCE WITH LAWS. Comply, in all material respects with all applicable Laws, such compliance to include paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its properties. (b) {INTENTIONALLY OMITTED} (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (i) any actions, suits or proceedings instituted against the Lessee; (ii) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (iii) the occurrence of a Default or an Event of Default. (d) {INTENTIONALLY OMITTED} (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the Laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a limited liability company, and qualify and remain qualified and authorized to do business in such state. (f) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the business presently carried on by the Lessee. (g) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require (i) to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents or (ii) to comply or consent to such actions as BCC may wish to comply or consent to on behalf of Lessee under the Lease Documents. 11 12 Provided, however, notwithstanding anything to the contrary contained in this Section 4.01, Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01 are required to be performed by the Management Firm under the Management Agreement. SECTION 4.02 NEGATIVE COVENANTS. Except as expressly permitted under the Transaction Documents or the Lease Documents, so long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will not, and no Member will cause the Lessee to, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Make any distribution of cash or other property to the Member (other than payments to the Member to satisfy Federal, state or local income tax consequences resulting exclusively from the operations of the Facility) or declare or pay any dividend or distribution on any securities of Lessee. (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Facility. (d) TRANSFER OF ASSETS. Except as expressly contemplated in the Transaction Documents to BCC or an Entity designated by BCC or otherwise as expressly permitted in the Lease with respect to Subleases of a portion of the Facility, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity. The restrictions of this Subsection shall include a prohibition on any assignment, pledge, hypothecation or other transfer of the Lease or sublease or license of the Facility, except to BCC or a BCC Affiliate in accordance with the terms and conditions of the Lease or otherwise as expressly permitted in the Lease with respect to Subleases of a portion of the Facility. (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the Transaction Documents or Indebtedness incurred to Lessor as expressly provided in the Lease Documents. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity. 12 13 (g) LOANS. Extend credit to or make any advance, loan or contribution to any person or Entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Formation or the Limited Liability Company Agreement of the Lessee in any way. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents. (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to transfer all or any portion of the Member's Equity Interest in Lessee. (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Transaction Document, (ii) waive any default or potential event of default by Lessor under, or consent to any action requested by Lessor pursuant to, any Lease Document, (iii) declare a default or event of default under any Lease Document, (iv) exercise any right to extend the term of the Lease, (v) exercise any right to purchase the Facility or exercise a right of refusal with respect thereto, or (vi) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Facility, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity. (m) ISSUANCE OF SECURITIES. Except for the equity interests of the Lessee that have been issued to the Member and are outstanding as of the date hereof, issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing. 13 14 ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"), whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body; provided, however, notwithstanding anything to the contrary contained in this Section 5.01, no Shortfall Event of Default may be declared hereunder in the event that the Shortfall Event of Default resulted from a default on the part of BCC or a BCC Affiliate under any of the Transaction Documents: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due (a "MONETARY DEFAULT"); or (b) Any material representation or warranty made by the Lessee or the Member under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) The Lessee or the Member shall fail to perform or observe any term, covenant or agreement contained in this Agreement, or in any other Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) The Lessee or the Member shall generally not pay its debts when due; or (e) The Lessee or any Member shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Lessee or any Member seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of the Lessee or any Member of any of its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for the Lessee or any Member or for any substantial part of its property; or the Lessee or any Member shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $50,000 shall be rendered against the Lessee and the same shall not be discharged within 30 days after entry; or (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $50,000 in value and such warrant or process shall continue undischarged or unstayed for 30 consecutive days; or 14 15 (h) Any material provision of any Transaction Document to which the Lessee or the Member is a party shall for any reason cease to be valid and binding on the Lessee or the Member, or the Lessee or the Member shall so state in writing; or (i) The Leasehold Mortgage shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens; or (j) an Option Agreement Event of Default, a Mortgage Event of Default, a Lease Event of Default, a Deposit Pledge Event of Default, an Other Transaction Default or a Management Agreement Event of Default on the part of Lessee or the Member shall occur and be continuing. ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following provisions shall apply: (a) ACCELERATION AND TERMINATION: (i) Automatic. Upon the occurrence of a Shortfall Event of Default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other Shortfall Event of Default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. 15 16 (b) BCC'S RIGHT TO ENTER PROPERTY. Subject to the terms of the Lease Documents and the Transaction Documents, BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (c) USE OF PREMISES. BCC may, without payment of any rent or any other charge, enter the Property and, without breach of peace, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Lessee's equipment, for the purpose of (i) operating the Facility and (ii) collecting any accounts receivable. (d) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in Law or in equity. (e) RIGHT TO FORECLOSE. Subject to the rights of the Lessor under the Lease Documents and the Senior Credit Documents, BCC may foreclose upon the Lease, take immediate possession of the Facility and Property and operate the Property, all in accordance with the terms and conditions of the Leasehold Mortgage. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following a Shortfall Event of Default shall be applied or paid over as follows: (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses for indemnification as provided herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable 16 17 hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by Law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to defaults by the Lessee or the Member under this Agreement or any other Transaction Document. SECTION 6.04 REMEDIES OF LESSEE AND MEMBER. So long as no Event of Default has occurred under any Transaction Document or Lease Document which was caused by either the Member or the Lessee, in the event that BCC fails to make Advances once required as provided herein, after ten (10) days prior written notice of such failure sent by Lessee to BCC, Lessee and the Member shall have the following remedies and rights: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Lessee pursuant to this Agreement shall automatically be amended to provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Lessee pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Advances and an opportunity to 17 18 cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as the Member may reasonably request to effect the provisions of Subsections (i), (ii) and (iii) above. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of default under any Transaction Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand. SECTION 7.02 CONFIDENTIALITY. (a) Lessee and the Member hereby covenant and agree, on behalf of Lessee, the Member and all Lessee Affiliates, that all Confidential Information (as hereinafter defined) will be held and treated by Lessee, the Member, Lessee Affiliates and the agents and employees of Lessee, the Member and Lessee Affiliates in confidence and will not, except as explicitly consented to by BCC in its sole discretion, be disclosed by Lessee, the Member, Lessee Affiliates or the agents and employees of Lessee, the Member or Lessee Affiliates, in any manner whatsoever, in whole or in part, and will not be used by the Member, Lessee, Lessee Affiliates or the agents and employees of Lessee, the Member or Lessee Affiliates for any purpose whatsoever. Lessee and the Member further agree on behalf of Lessee, the Member and Lessee Affiliates (i) to disclose Confidential Information only to Lessee's employees who need to know the Confidential Information for purposes related to the Facility, (ii) to employ all reasonable procedures to ensure that neither the Lessee, the Member, or Lessee Affiliates, nor any of their respective agents or employees use the Confidential Information in connection with trading in the securities of BCC or communicate such information to others who so trade in such securities and (iii) that any Confidential Information not returned to BCC or the Management Firm, as applicable, will be held by Lessee and kept subject to the terms of this Section or destroyed. (b) As used in this Section, "Confidential Information" means all information and data containing or otherwise reflecting information concerning BCC or any BCC Affiliate, or any Other Facility, which is not available to the general public but is material to the business, financial condition, or prospects of BCC and BCC Affiliates or otherwise would be material to making an investment decision with respect to the publicly traded securities of BCC, together with analyses, compilations, studies or other documents, whether prepared by BCC or any other Entity, which contain or otherwise reflect such information; provided, however, Confidential Information shall in no event include information that has become public through no wrongful action of Lessee or the Member or matters for which the Lessee or the Member are required to disclose pursuant to 18 19 Laws. SECTION 7.03 CURE PERIOD FOR BCC. With respect to all obligations of BCC or a BCC Affiliate under the Transaction Documents, in no event shall be BCC or such BCC Affiliate be in default regarding any such obligations unless and until Lessee and/or the Member provides notice to BCC of such default and a period of no less than ten (10) days (or such longer period as may be provided in the Transaction Documents) to cure such default. ARTICLE VIII MISCELLANEOUS SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. All exhibits, schedules, appendixes and other attachments to this Agreement are incorporated by reference herein SECTION 8.02 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Lessee or any Member, at: Sherry, Coleman & Holthouse LLP 610 Newport Center Drive Suite 1200 Newport Beach, CA 92660 (ii) If to BCC, at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY 19 20 ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A NONAPPEALABLE JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations, and the obligation of the Member, under this Agreement and the other Transaction Documents shall be performed by the Lessee and the Member at their sole cost and expense. If the Lessee or the Member shall fail to do any act or thing which it or they have covenanted to do under this Agreement or any of the other Transaction Documents, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee or the Member, and the Lessee and the Member hereby irrevocably authorizes BCC so to act. SECTION 8.05 INDEMNIFICATION. (a) The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (i) any breach by Lessee or any Member of any covenant, agreement, representation or warranty under any Transaction Document and (ii) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business, which claim, debt, demand, loss, damage, action , cause of action, liability, cost or expense was not caused by the acts or omissions of BCC or a BCC Affiliate. The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. (b) BCC agrees to reimburse the Lessee for all costs and expenses, including 20 21 reasonable counsel fees and disbursements, incurred, and to indemnify and hold Lessee harmless from and against all losses suffered by Lessee or the Member, as the case may be, in connection with any breach by BCC or any BCC Affiliate of any covenant, agreement, representation or warranty under any Transaction Document and (b) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by Lessee, in any manner arising out of or, directly or indirectly, related to or connected with the operation of BCC's or a BCC Affiliates' business, which claim, debt, demand, loss, damage, action , cause of action, liability, cost or expense was not caused by the acts or omissions of Lessee or the Member. BCC shall indemnify the Lessee and/or the Member (as the case may be) as provided herein upon demand and in immediately available funds. SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member recognize that, in the event the Lessee or any Member fails to perform, observe or discharge any of its or their obligations or liabilities under this Agreement or any of the other Transaction Documents, any remedy of Law may prove to be inadequate relief to BCC; therefore, the Lessee and each Member agrees that BCC shall be entitled to temporary and permanent equitable relief in any such case without the necessity of proving actual damages. SECTION 8.07 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee, the Member and BCC and their respective personal representatives, heirs, successors and assigns, except that Lessee shall have no right to assign its rights hereunder or any interest herein. In the event of an assignment of BCC's obligations and rights hereunder, BCC shall nonetheless remain primarily liable to Lessee and the Member for BCC's obligations hereunder. SECTION 8.08 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. 21 22 (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. SECTION 8.09 CONFLICT WITH LEASE DOCUMENTS This Agreement is subject to the covenants and agreements contained in the Lease and other Lease Documents. In the event of any conflict between the provisions of this Agreement and the Lease Documents, the provisions of the Lease Documents shall control. SECTION 8.10 THIRD PARTY BENEFICIARY BCC, the Member and the Lessee each acknowledge and agree that this Agreement and the rights hereunder are intend to benefit, in addition to the parties hereto, the Lessor, who shall be deemed to be a third party beneficiary hereof. Without limiting the generality of the foregoing, (i) the representations, warranties, affirmative covenants and negative covenants of Lessee and the Member contained herein shall inure to the benefit of Lessor (together with BCC) and (ii) the Lessor may enforce any or all of the provisions herein contained. BCC hereby acknowledges and agrees that any security interest BCC acquires in personal, intangible and other property of the Lessee pursuant to this Agreement shall be and is subordinate to the security interest of Lessor created under the Lease and the Senior Lender under the Senior Credit Documents. SECTION 8.11 NO AMENDMENT BCC, Lessee and the Member hereby agree that no Transaction Document shall be amended, modified or altered in any manner without the prior written consent of the Lessor. 22 23 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Shortfall Funding Agreement to be executed by their respective officers or authorized agents as of the date first above written. C&G HEALTHCARE OF __________, LLC By: --------------------------- Manager MEMBERS: ------------------------------ ------------------------------ ATTEST: BALANCED CARE CORPORATION By: - --------------------------- --------------------------------- Title: ------------------------------ S-2 [Shortfall Funding Agreement] 24 OMITTED SCHEDULES/EXHIBITS SCHEDULE 1 MEMBERS OF LESSEE EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF LEASEHOLD MORTGAGE EXHIBIT C FORM OF OPTION AGREEMENT EX-10.27 27 BALANCED CARE CORPORATION 1 Exhibit 10.27 SCHEDULE TO FORM OF NHP SECOND SERIES SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Collateral Account Location Lessee Management Firm Deposits - -------- ------ ---------------- ------------------ Pensacola, FL C&G Healthcare Balanced Care at Pensacola, Inc. $179,700/$1,198,000 of Pensacola, LLC Tallahassee, FL C&G Healthcare Balanced Care at Tallahassee, Inc. $223,350/$1,489,000 of Tallahassee, LLC Hagerstown, MD C&G Healthcare Balanced Care at Hagerstown, Inc. $124,350/$829,000 of Hagerstown, LLC Johnson City, TN C&G Healthcare Balanced Care at Johnson City, Inc. $138,900/$926,000 of Johnson City, LLC Teay's Valley, WV C&G Healthcare Balanced Care at Teay's Valley, Inc. $122,100/$814,000 of Teay's Valley, LLC
EX-10.28 28 BALANCED CARE CORPORATION 1 Exhibit 10.28 FORM OF WORKING CAPITAL ASSURANCE AGREEMENT (_______) THIS AGREEMENT is made as of the 27th day of March, 1998, by and among BALANCED CARE CORPORATION, a Delaware corporation, with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC") and __________________________________, a Maryland corporation, with a principal place of business at 610 Newport Center Drive, Suite 1150, Newport Beach, CA 92660 (the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor and __________________________________, a Delaware limited liability company (the "LESSEE") have agreed to enter into that certain Lease and Security Agreement, of even date herewith (the "Lease"), relating to certain premises located in _________, ____ on property more fully described in the Lease (the "Property"); all capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, pursuant to a Shortfall Funding Agreement dated of even date herewith (the "Shortfall Agreement"), and a Deposit Pledge Agreement dated of even date herewith (the "Deposit Pledge"), each among the Members (as defined in Appendix 1 to the Shortfall Agreement) Lessee and BCC, Lessee has or will deposit funds into the Working Capital Reserve (as defined in the Shortfall Agreement) as provided in the Shortfall Agreement to fund certain operational losses anticipated in connection with the Project; and WHEREAS, Lessor and BCC Development and Management Co., a Delaware corporation ("Developer") have entered into a Development Agreement of even date herewith (the "Development Agreement") for the purpose of developing an assisted care living facility on the Property (the "Facility"); and WHEREAS, Lessee and ____________________________, a Delaware corporation (the "Manager") have entered into a Management Agreement of even date herewith (the "Management Agreement") for the operation and management of the Facility; and WHEREAS, the Developer and the Manager are wholly-owned subsidiaries of BCC; and WHEREAS, as additional security for all of the obligations of Lessee under the Lease, including without limitation all Minimum Rent and Additional Rent, as defined in the Lease (the "Lease Obligations"), the Lessor has requested the execution and delivery of this Agreement; and 2 WHEREAS, because of the significant interest of BCC in the success and economic viability of the Facility, BCC is willing to enter into this Agreement to, among other matters, provide to the Lessor adequate assurances regarding the funding of Shortfalls (as hereinafter defined) upon depletion of the Working Capital Reserve (as hereinafter defined). NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in consideration of the covenants and agreements set forth herein, the parties hereto intending to be legally bound hereby agree as follows: 1. (a) Subject to the terms of Section 4 hereof, from the date hereof until the complete payment and performance of the Lease Obligations, BCC unconditionally agrees to loan to the Lessee, sufficient funds, by means of working capital loans (collectively, the "Working Capital Loans"), to pay and satisfy the amount by which the Lessee's cash requirements to meet all of its obligations (including, without limitation, operating expenses, debt service and the Lease Obligations) due and payable during any month exceed the gross revenues received by the Lessee during such month (the "Shortfall"). Without limiting the generality of the definition of Shortfall, Shortfalls shall also include, without limitation (i) costs, expenses and damages related to Lessee's failure to pay Taxes (as defined in the Lease), to maintain adequate insurance, to maintain any license necessary or desirable to operate the Facility and indemnification and defense costs and expenses in connection with litigation arising from or related to the Facility, (ii) all costs of collection and enforcement incurred by Lessor in exercising any remedies provided in the Lease, and (iii) payment in full of all rent, additional rent and other amounts due to Lessor or third parties under the Lease in the manner and at the time prescribed in the Lease. (b) Working Capital Loans shall be made pursuant to the Shortfall Agreement. BCC hereby agrees that Lessor may make distributions of proceeds of Working Capital Loans directly to Lessor or third party creditors of Lessee. 2. (a) Subject to the terms of Section 4 hereof, whether or not there has occurred or is continuing any default, breach of condition or failure to satisfy any condition under the Shortfall Agreement, BCC shall, without further direction, advance to the Lessee the amount equal to the Shortfall in a timely fashion so that the Lessee is able to meet all of its working capital obligations (including, without limitation, all Lease Obligations) when due. Without limiting the generality of foregoing, BCC shall make Working Capital Loans to Lessee to fund Shortfalls even if Lessee fails to make contributions on a timely basis to the Working Capital Reserve as provided in Section 1.01 of the Shortfall Agreement or otherwise. (b) Without limiting BCC's obligation to fund Shortfalls as herein provided, BCC shall promptly notify Lessor should any proceedings under Title 11 of the United States Code (each a "Bankruptcy Proceeding", and the laws applied during such Bankruptcy Proceedings being referred to herein as "Bankruptcy Laws") be instituted by or against BCC, Lessee or any member owing equity interests in Lessee (collectively a "Member"), and, upon request from Lessor, shall immediately fund or otherwise cause to be paid to all creditors (exclusive of Lessor) of the party subject to the Bankruptcy Proceeding all amounts due such 3 creditors. Further, BCC shall use all reasonable efforts (within the bounds of applicable law) to cause such Bankruptcy Proceedings to be dismissed as soon as possible. 3. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to induce the Lessor to enter into and accept the Lease and enable the Lessee, upon the complete disbursement of the Working Capital Reserve, to fulfill its obligations, including, without limitation, the Lease Obligations. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor. 4. Notwithstanding anything to the contrary set forth herein, BCC's obligation to provide the Working Capital Loans, and advance Shortfalls, to the Lessee shall not commence until such time as the full amount actually deposited by Lessee in the Working Capital Reserve has been depleted. BCC shall make or permit disbursements to Lessor from the Working Capital Reserve to meet any and all Lease Obligations when and as such Lease Obligations become due and payable, pursuant to the terms and provisions of the Deposit Pledge Agreement. 5. The obligations of BCC hereunder shall not be affected by the termination, discontinuance, release or modification of any agreement from any endorser, surety or guarantor of the Lease Obligations. Notwithstanding anything to the contrary contained herein or in the Lease, the Lessor hereby covenants and agrees with BCC that the Lessor shall not amend, modify or otherwise alter the Lease or any other document executed in connection therewith (collectively, the "Lease Documents") without BCC's prior written consent, in each instance, which consent, shall not be unreasonably withheld, conditioned or delayed. In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise of any of its rights and/or remedies under the Lease Documents, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 6. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee or by reason of any disability of the Lessee. This Agreement shall not be construed as a guaranty or surety agreement, but shall constitute the separate and independent primary obligation of BCC to Lessor. This Agreement shall be in addition to any guaranty or other security for the Lease Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Lease Obligations is rescinded or must otherwise be returned by the Lessor upon the insolvency, bankruptcy or reorganization of the Lessee or otherwise, all as though such payment had not been made. 7. (a) Without limiting BCC's obligation to provide the Working Capital Loans, upon the occurrence of any default under any of the Lease Documents, BCC shall have the right, but not the obligation, to cure such default within any applicable notice and grace periods (or in the event of no grace period, within 3 days after receipt by BCC of notice of such default) and, to the 3 4 extent permitted by law, enter upon the Property, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such default. The Lessor agrees to give written notice to BCC of any notices of default by Lessee under the Lease or any other Lease Document which Lessor sends to Lessee. The Lessor agrees to accept any remedy performed by BCC as if the same had been performed by the Lessee. (b) Lessor acknowledges that BCC has the right to acquire all of the Equity Interests (as defined in Appendix 1 to the Shortfall Agreement) should Lessee fail to timely make all required deposits into the Working Capital Reserve pursuant to Section 1.01 of the Shortfall Agreement. In the event that Lessee fails to make such deposits into the Working Capital Reserve and BCC exercises its rights under Section 1.01 of the Shortfall Agreement by having BCC, an Affiliate of BCC or a designee of BCC purchase all of the Equity Interests, Lessor shall recognize as Lessee under the Lease and other Lease Documents such designee as BCC may designate so long as such designee fully funds the Working Capital Reserve as provided in the Shortfall Agreement and otherwise executes and delivers to Lessor such documents, instruments, affidavits and opinions as Lessor may reasonably request. In such event (but subject to Section 10 of this Agreement), this Agreement and the obligations of the parties hereunder (including without limitation BCC's obligation to fund Shortfalls) shall remain in full force and effect. 8. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO BCC: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President WITH COPIES TO: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven J. Adelkoff, Esq. IF TO THE LESSOR: ____________________________________ 610 Newport Center Drive, Suite 1150 Newport Beach, CA 92660 4 5 Att: President and General Counsel Cordray & Goodrich 3306 Sul Ross Houston, TX 77098 Att: Howard F. Cordray, Jr. or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 9. This Agreement shall be construed, and the rights and obligations of the Lessor and BCC shall be determined, in accordance with the laws of the State in which the Facility is located, exclusive of such State's conflicts of laws rules. 10. This Agreement and BCC's obligations hereunder shall automatically terminate upon the purchase by BCC or a wholly-owned subsidiary of BCC (a "BCC Affiliate") of all of the issued and outstanding equity of the Lessee or substantially all of the assets of Lessee (and Lessor hereby consents to such purchase of equity or assets); provided, however, if a BCC Affiliate purchases all of the assets or the outstanding equity of Lessee, BCC shall provide to Lessor an unconditional guaranty of all Lease Obligations, in form and substance reasonably satisfactory to Lessor. Lessor shall have the right, but not the obligation, to terminate this Agreement if (i) an Event of Default under the Lease remains uncured beyond any applicable cure period or (ii) BCC fails to perform any of BCC's obligations or duties under this Agreement. 11. (a) The Lessor covenants and agrees with BCC that (subject to Bankruptcy Laws) the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except to BCC or a BCC Affiliate) or any transfer of substantially all of the Lessee's assets or any transfer of the issued and outstanding equity of the Lessee without the prior written consent of BCC, which consent BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of this Agreement or the Lease, (A) the Lessee or any Guarantor (as defined in the Lease) attempts to assign its interest in the Lease (or transfer substantially all of its assets), (B) the current holders of the issued and outstanding equity of the Lessee attempt to transfer any such equity or (C) if any of the events described in Section 10.1.8 and Section 10.1.10 of the Lease occurs with respect to Lessee or a Guarantor, each of the Lessor and BCC covenant and agree that, subject to applicable law, the Lessor shall terminate the Lease (in accordance with the terms thereof) and Lessor shall enter into a new lease of the Property with BCC (or any of its wholly-owned subsidiaries, provided, that, BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to the Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (Y) BCC and its subsidiary shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents and (Z) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed 5 6 and delivered and are enforceable. BCC agrees to pay all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 11. (b) BCC agrees to indemnify, defend and hold Lessor, its Affiliates, and their respective trustees, officers, directors, shareholders and other representatives (the "Indemnified Parties") harmless from and against any and all claims, demands, actions, causes of action, damages, losses, liabilities, fees (including without limitation attorneys fees), costs (including without limitation court costs) and expenses (collectively "Claims") in any way or manner whatsoever related or attributed to or arising out of suits, litigation or threatened suits or litigation by the Lessee or its members in connection with (i) the rights, interests, obligations and duties of Lessor or BCC under this Agreement, the Shortfall Agreement, the Deposit Pledge Agreement and any related leasehold mortgages, option agreements, equity pledge agreements, financing statements or other security interests (the "Applicable Documents") and/or (ii) any acts or failures to act, or the performance or assertion of any rights, duties or obligations, by BCC or the Indemnified Parties with respect to the Applicable Documents; provided, however, no Indemnified Party shall be held harmless or entitled to indemnifications or defenses to the extent that the Claim was caused in whole or in part by a breach of any obligation, covenant or agreement of the Indemnified Party under Sections 5, 7 or 11 of this Agreement. 12. (a) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (b) Amendments. This Agreement may be modified or amended only by a written instrument executed by the Lessor, the Lessee and BCC. (c) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (e) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. 6 7 (f) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (g) Representations and Warranties of BCC. BCC represents and warrants that (i) this Agreement constitutes a legal, valid and binding obligation of BCC, was duly authorized, executed and delivered by BCC, and is fully enforceable against BCC in accordance with its terms (except as may be limited by bankruptcy and creditor's rights laws and general principles of equity), (ii) BCC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly authorized and qualified to do all things required of it under this Agreement; (iii) neither this Agreement nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which BCC is a party and (iv) the recitals set forth above are hereby incorporated by this reference and made a part of this Agreement, and BCC represents and warrants that such recitals are true and correct. Any material breach by BCC of the representations and warranties set forth herein shall be a default under this Agreement. (h) Subordination. If for any reason whatsoever Lessee, any Affiliates of Lessee, Developer or Manager now or hereafter becomes indebted to BCC or any Affiliate of BCC, such indebtedness and all interest therein shall at all times be subordinated in all respects to the obligations of BCC under this Agreement, the obligations of Lessee under the Lease, and the obligations of Developer under the Development Agreement. For purposes of this Agreement, the terms "Affiliate" and "Affiliates" shall have the meanings set forth in that certain First Series Master Investment Agreement (the "Master Agreement") of even date herewith, by and between the Lessor, Developer, Lessee's members and BCC. (i) Counsel Fees. If Lessor or BCC brings any action to interpret or enforce this Agreement, or for damages for any alleged breach thereof, the prevailing party in any such action shall be entitled to reasonable attorney's fees and costs as awarded by the court in addition to all other recovery, damages and costs. (j) Reliance by Lessor. BCC acknowledges that (i) BCC will benefit from the execution and continued existence of the Lease, (ii) Lessor will be relying upon BCC's assurances, representations, warranties, and covenants contained herein and (iii) Lessor may take, or delay in taking or refuse to take any and all action with reference to the Lease (regardless of whether the same might vary the risk or alter the rights, remedies or recourses of BCC), including without limitation the settlement or compromise of any amount allegedly due thereunder, the granting of indulgences or extensions, and/or the release of or refusal to execute on any and all collateral; provided, however, nothing contained in this Section shall limit or modify the obligations of Lessor under this Agreement, including without limitation Section 5 above. (k) Waiver Provisions. BCC hereby knowingly, voluntarily and unequivocally waives: (i) all notice of acceptance, protest, demand and dishonor, presentment and demands of any kind now or hereafter provided for by any statute or rule of law; (ii) any and all requirements that Lessor institute any action or proceeding, or exhaust any or all of Lessor's rights, remedies or recourses, against Lessee or anyone else as a condition precedent to bringing an action against BCC under this Agreement; (iii) any defense arising by reason of any disability, insolvency, 7 8 bankruptcy, lack of authority or power, dissolution or any other defense of Lessee, BCC, any guarantor of the Lease, or their respective successors and assigns (even though rendering same void, unenforceable or otherwise uncollectible); (iv) the benefits of any and all express or implied waivers which may otherwise be available to or claimed by BCC under the laws of the State in which the Property is located; (v) any claim BCC might otherwise have against Lessor by virtue of Lessor's invocation of any right, remedy or recourse permitted it hereunder or under the Lease, any letter of credit agreement, any guaranty, or otherwise available at law or equity; (vi) any failure, omission, delay or lack on the part of Lessor or Lessee to enforce, assert or exercise any right, power or remedy conferred on Lessor or Lessee in the Lease, or any action on the part of Lessor granting a waiver, indulgence or extension to Lessee or any other party; (vii) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets of Lessee or BCC, marshaling of assets or liabilities, receiverships, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting Lessee, BCC, or their respective assets, or the disaffirmance of the Lease in any such proceeding; (viii) any release or other reduction of the Lease Obligations arising as a result of the expansion, release, substitution or replacement (whether or not in accordance with terms of the Lease) of the Premises or any portion thereof; and (ix) any defense or claim available to BCC as a result of BCC's exercise of its right to purchase the Premises (or any portion thereof) pursuant to the Master Agreement or that certain Right of First Refusal Agreement of even date herewith by and between Lessor and BCC; provided, however, nothing contained in this Section shall limit or modify the obligations of Lessor under this Agreement, including without limitation Section 5 and Section 11(a) above. (l) Application of Agreement. This Agreement shall apply notwithstanding any extension or renewal of the Lease, or any holdover following the expiration or termination of the Term or any renewal or extension of the Term (as defined in the Lease). (m) Financial Reporting. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of BCC, BCC shall deliver the quarterly consolidated or combined, as applicable, financial statement of BCC to Lessor. Within one hundred (100) days of the fiscal year end of BCC, BCC shall deliver to Lessor the annual consolidated or combined, as applicable, financial statement of BCC audited by a reputable certified public accounting firm. If BCC is or becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, BCC shall, in lieu of providing the financial statements described in the first two sentences of this Subsection, concurrently deliver to Lessor such reports as are delivered to the SEC pursuant to applicable securities laws. All of the reports and statements required hereby shall be prepared in accordance with GAAP and BCC's accounting principles consistently applied and shall be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President, Development, or other officer of BCC as approved by Lessor in writing, certifying that said reports are true, correct, and complete in all material respects after due inquiry. (n) Leasehold Mortgage. To secure the obligations of the Lessee under the Shortfall Agreement, Lessee has granted to BCC a leasehold mortgage (the "Leasehold Mortgage") encumbering Lessee's interest in the Lease. BCC shall, concurrently with the execution and delivery of 8 9 this Agreement, execute and deliver to Lessor an escrow letter and satisfaction instrument in the form attached hereto as Exhibit A removing the Leasehold Mortgage of record, which satisfaction instrument may only be recorded as provided in such escrow letter. BCC shall provide notice to Lessor if BCC shall desire to institute any foreclosure proceedings by BCC under the Leasehold Mortgage, and BCC shall not institute such proceedings without the prior written consent of the Lessor, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, BCC agrees that Lessor may condition consent to such foreclosure on the agreement by BCC that all personal property leased to Lessee under the Lease will remain in the Facility and that such foreclosure will not materially or unreasonably disrupt or interrupt the operation of the Facility. (o) Management Agreement. BCC acknowledges that BCC is the sole shareholder of the Manager. As sole shareholder of the Manager, BCC agrees and shall cause the Manager to agree, that in the case of an Event of Default under the Lease (after applicable cure periods): (i) Lessor shall have the right to terminate the Management Agreement and Manager's rights to manage the Facility, (ii) Lessor shall have the right to require the Manager to cooperate and assist in all reasonable ways during any transition of management of the Facility after such termination, (iii) during any such interim management, Lessor shall have the right to approve or veto all operation budgets and (iv) Manager shall otherwise take such actions or refrain from taken such actions as Lessor may reasonably request. 9 10 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: BALANCED CARE CORPORATION, a Delaware corporation _____________________________________ By:________________________________ Name: Name: Title: WITNESS: LESSOR: ___________________________ _____________________________________ By:________________________________ Name: Name: Title: S - 1 EX-10.29 29 BALANCED CARE CORPORATION 1 Exhibit 10.29 SCHEDULE TO FORM OF NHP FIRST SERIES WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Lessor Lessee State of Property Manager - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Akron, OH Nationwide Health Elder Care Ohio Balanced Care at Akron, Properties, Inc. Operators of Akron, Inc. LLC - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Hilliard, OH Nationwide Health Elder Care Ohio Balanced Care at Properties, Inc. Operators of Hilliard, Inc. Hilliard, LLC - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Lakemont Farms, PA MLD Delaware Trust Elder Care Pennsylvania Balanced Care at Lakemont Operators of Farms, Inc. Lakemont Farms, LLC - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- York, PA MLD Delaware Trust Elder Care Pennsylvania Balanced Care at York, Operators of York, Inc. LLC - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Bristol, TN Nationwide Health Elder Care Tennessee Balanced Care at Bristol, Properties, Inc. Operators of Inc. Bristol, LLC - ------------------------------ ---------------------- --------------------- --------------------------- --------------------------- Murfreesboro, TN Nationwide Health Elder Care Tennessee Balanced Care at Properties, Inc. Operators of Murfreesboro, Inc. Murfreesboro, LLC - ------------------------------ ---------------------- --------------------- --------------------------- ---------------------------
EX-10.30 30 BALANCED CARE CORPORATION 1 Exhibit 10.30 FORM OF WORKING CAPITAL ASSURANCE AGREEMENT (_______________________) THIS AGREEMENT is made as of the 26th day of June, 1998, by and among BALANCED CARE CORPORATION, a Delaware corporation, with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC") and Nationwide Health Properties, Inc., a Maryland corporation, with a principal place of business at 610 Newport Center Drive, Suite 1150, Newport Beach, CA 92660 (the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor and ______________________________________, a Delaware limited liability company (the "LESSEE") have agreed to enter into that certain Lease and Security Agreement, of even date herewith (the "Lease"), relating to certain premises located in ____________________________ on property more fully described in the Lease (the "Property"); all capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, pursuant to a Shortfall Funding Agreement dated of even date herewith (the "Shortfall Agreement"), and a Deposit Pledge Agreement dated of even date herewith (the "Deposit Pledge"), each among the Members (as defined in Appendix 1 to the Shortfall Agreement) Lessee and BCC, Lessee has or will deposit funds into the Working Capital Reserve (as defined in the Shortfall Agreement) as provided in the Shortfall Agreement to fund certain operational losses anticipated in connection with the Project; and WHEREAS, the Lessee has entered into the Senior Credit Documents (as defined in Appendix 1 to the Shortfall Agreement), whereby Lessee will receive the proceeds of a loan in the amount of $_______ from Senior Lender (as defined in Appendix 1 to the Shortfall Agreement), and which proceeds shall be deposited in the Collateral Account (as defined in the Deposit Pledge Agreement) for the benefit of Lessor, BCC and the Manager (as hereinafter defined) pursuant to the terms of the Deposit Pledge Agreement and Shortfall Agreement; and WHEREAS, Lessor and BCC Development and Management Co., a Delaware corporation ("Developer") have entered into a Development Agreement of even date herewith (the "Development Agreement") for the purpose of developing an assisted care living facility on the Property (the "Facility"); and WHEREAS, Lessee and ___________________________________, a Delaware corporation (the "Manager") have entered into a Management Agreement of even date herewith (the "Management Agreement") for the operation and management of the Facility; and 2 WHEREAS, the Developer and the Manager are wholly-owned subsidiaries of BCC; and WHEREAS, as additional security for all of the obligations of Lessee under the Lease, including without limitation all Minimum Rent and Additional Rent, as defined in the Lease (the "Lease Obligations"), the Lessor has requested the execution and delivery of this Agreement; and WHEREAS, because of the significant interest of BCC in the success and economic viability of the Facility, BCC is willing to enter into this Agreement to, among other matters, provide to the Lessor adequate assurances regarding the funding of Shortfalls (as hereinafter defined) upon depletion of the Working Capital Reserve. NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in consideration of the covenants and agreements set forth herein, the parties hereto intending to be legally bound hereby agree as follows: 1. (a) Subject to the terms of Section 4 hereof, from the date hereof until the complete payment and performance of the Lease Obligations and obligations under the Senior Note, BCC unconditionally agrees to loan to the Lessee, sufficient funds, by means of working capital loans (collectively, the "Working Capital Loans"), to pay and satisfy the amount by which the Lessee's cash requirements to meet all of its obligations (including, without limitation, operating expenses, debt service and the Lease Obligations) due and payable during any month exceed the gross revenues received by the Lessee during such month (the "Shortfall"). Without limiting the generality of the definition of Shortfall, Shortfalls shall also include, without limitation (i) costs, expenses and damages related to Lessee's failure to pay Taxes (as defined in the Lease), to maintain adequate insurance, to maintain any license necessary or desirable to operate the Facility and indemnification and defense costs and expenses in connection with litigation arising from or related to the Facility, (ii) all costs of collection and enforcement incurred by Lessor in exercising any remedies provided in the Lease, and (iii) payment in full of all rent, additional rent and other amounts due to Lessor or third parties under the Lease and the Senior Note (as defined in Appendix 1 to the Shortfall Agreement) in the manner and at the time prescribed in the Lease and such Senior Note. (b) Working Capital Loans shall be made pursuant to the Shortfall Agreement. BCC hereby agrees that Lessor may make distributions of proceeds of Working Capital Loans directly to Lessor or third party creditors of Lessee. 2. (a) Subject to the terms of Section 4 hereof, whether or not there has occurred or is continuing any default, breach of condition or failure to satisfy any condition under the Shortfall Agreement, BCC shall, without further direction, advance to the Lessee the amount equal to the Shortfall in a timely fashion so that the Lessee is able to meet all of its working capital obligations (including, without limitation, all Lease Obligations and obligations under the Senior Note) when due. Without limiting the generality of foregoing, BCC shall make Working Capital Loans to 7 - - 3 Lessee to fund Shortfalls even if Lessee fails to make contributions on a timely basis to the Working Capital Reserve as provided in Section 1.01 of the Shortfall Agreement or otherwise. (b) Without limiting BCC's obligation to fund Shortfalls as herein provided, BCC shall promptly notify Lessor should any proceedings under Title 11 of the United States Code (each a "Bankruptcy Proceeding", and the laws applied during such Bankruptcy Proceedings being referred to herein as "Bankruptcy Laws") be instituted by or against BCC, Lessee or any member owing equity interests in Lessee (collectively a "Member"), and, upon request from Lessor, shall immediately fund or otherwise cause to be paid to all creditors (exclusive of Lessor) of the party subject to the Bankruptcy Proceeding all amounts due such creditors. Further, BCC shall use all reasonable efforts (within the bounds of applicable law) to cause such Bankruptcy Proceedings to be dismissed as soon as possible. 3. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to induce the Lessor to enter into and accept the Lease and the Senior Credit Documents and enable the Lessee, upon the complete disbursement of the Working Capital Reserve, to fulfill its obligations, including, without limitation, the Lease Obligations and the obligations under the Senior Note. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor. 4. Notwithstanding anything to the contrary set forth herein, BCC's obligation to provide the Working Capital Loans, and advance Shortfalls, to the Lessee shall not commence until such time as (i) the Senior Lender has advanced the full principal amount of the Senior Note to or for the benefit of the Lessee into the Working Capital Reserve and (ii) the full amount actually deposited by Lessee in the Working Capital Reserve has been depleted. BCC shall make or permit disbursements to Lessor from the Working Capital Reserve to meet any and all Lease Obligations and obligations under the Senior Note when and as such obligations become due and payable, pursuant to the terms and provisions of the Deposit Pledge Agreement. 5. The obligations of BCC hereunder shall not be affected by the termination, discontinuance, release or modification of any agreement from any endorser, surety or guarantor of the Lease Obligations and the obligations under the Senior Note. Notwithstanding anything to the contrary contained herein or in the Lease, the Lessor hereby covenants and agrees with BCC that the Lessor shall not amend, modify or otherwise alter the Lease or any other document executed in connection therewith (collectively, the "Lease Documents") without BCC's prior written consent, in each instance, which consent, shall not be unreasonably withheld, conditioned or delayed. In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise of any of its rights and/or remedies under the Lease Documents, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 6. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee or by reason of any disability of the Lessee. This Agreement 8 - - 4 shall not be construed as a guaranty or surety agreement, but shall constitute the separate and independent primary obligation of BCC to Lessor. This Agreement shall be in addition to any guaranty or other security for the Lease Obligations and obligations under the Senior Note, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Lease Obligations or obligations under the Senior Note is rescinded or must otherwise be returned by the Lessor upon the insolvency, bankruptcy or reorganization of the Lessee or otherwise, all as though such payment had not been made. 7. (a) Without limiting BCC's obligation to provide the Working Capital Loans, upon the occurrence of any default under any of the Lease Documents or any Senior Credit Document, BCC shall have the right, but not the obligation, to cure such default within any applicable notice and grace periods (or in the event of no grace period, within 3 days after receipt by BCC of notice of such default) and, to the extent permitted by law, enter upon the Property, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such default. The Lessor agrees to give written notice to BCC of any notices of default by Lessee under the Lease or any other Lease Document which Lessor sends to Lessee. The Lessor agrees to accept any remedy performed by BCC as if the same had been performed by the Lessee. (b) Lessor acknowledges that BCC has the right to acquire all of the Equity Interests (as defined in Appendix 1 to the Shortfall Agreement) should Lessee fail to timely make all required deposits into the Working Capital Reserve pursuant to Section 1.01 of the Shortfall Agreement. In the event that Lessee fails to make such deposits into the Working Capital Reserve and BCC exercises its rights under Section 1.01 of the Shortfall Agreement by having BCC, an Affiliate of BCC or a designee of BCC purchase all of the Equity Interests, Lessor shall recognize as Lessee under the Lease and other Lease Documents such designee as BCC may designate so long as such designee fully funds the Working Capital Reserve as provided in the Shortfall Agreement and otherwise executes and delivers to Lessor such documents, instruments, affidavits and opinions as Lessor may reasonably request. In such event (but subject to Section 10 of this Agreement), this Agreement and the obligations of the parties hereunder (including without limitation BCC's obligation to fund Shortfalls) shall remain in full force and effect. 8. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO BCC: C/O BCC DEVELOPMENT AND MANAGEMENT CO. 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President WITH COPIES TO: C/O BCC DEVELOPMENT AND MANAGEMENT CO. 5021 Louise Drive, Suite 200 9 - - 5 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven J. Adelkoff, Esq. IF TO THE LESSOR: Nationwide Health Properties, Inc. 610 Newport Center Drive, Suite 1150 Newport Beach, CA 92660 Att: President and General Counsel Cordray & Goodrich 3306 Sul Ross Houston, TX 77098 Att: Howard F. Cordray, Jr. or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 9. This Agreement shall be construed, and the rights and obligations of the Lessor and BCC shall be determined, in accordance with the laws of the State in which the Facility is located, exclusive of such State's conflicts of laws rules. 10. This Agreement and BCC's obligations hereunder shall automatically terminate upon the purchase by BCC or a wholly-owned subsidiary of BCC (a "BCC Affiliate") of all of the outstanding legal and beneficial interest in the Lessee or substantially all of the assets of Lessee (and Lessor hereby consents to such purchase of equity or assets); provided, however, if a BCC Affiliate purchases all of the assets or the outstanding legal and beneficial interest in Lessee, BCC shall provide to Lessor an unconditional guaranty of all Lease Obligations, in form and substance reasonably satisfactory to Lessor. Lessor shall have the right, but not the obligation, to terminate this Agreement if (i) an Event of Default under the Lease remains uncured beyond any applicable cure period or (ii) BCC fails to perform any of BCC's obligations or duties under this Agreement. 11. (a) The Lessor covenants and agrees with BCC that (subject to Bankruptcy Laws) the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except to BCC or a BCC Affiliate) or any transfer of substantially all of the Lessee's assets or any transfer of the outstanding legal and beneficial interest in the Lessee without the prior written consent of BCC, which consent BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of this Agreement or the Lease, (a) the Lessee or any Guarantor (as defined in the Lease) attempts to assign its interest in the Lease (or transfer 10 - - 6 substantially all of its assets), (b) the current holders of the issued and outstanding equity of the Lessee attempt to transfer any such equity or (c) if any of the events described in Section 10.1.8 and Section 10.1.10 of the Lease occurs with respect to Lessee or a Guarantor, each of the Lessor and BCC covenant and agree that, subject to applicable law, the Lessor shall terminate the Lease (in accordance with the terms thereof) and Lessor shall enter into a new lease of the Property with BCC (or any of its wholly-owned subsidiaries, provided, that, BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to the Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (y) BCC and its subsidiary shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents and (z) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed and delivered and are enforceable. BCC agrees to pay all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 11. (b) BCC agrees to indemnify, defend and hold Lessor, its Affiliates, and their respective trustees, officers, directors, shareholders and other representatives (the "Indemnified Parties") harmless from and against any and all claims, demands, actions, causes of action, damages, losses, liabilities, fees (including without limitation attorneys fees), costs (including without limitation court costs) and expenses (collectively "Claims") in any way or manner whatsoever related or attributed to or arising out of suits, litigation or threatened suits or litigation by the Lessee or its members in connection with (i) the rightful exercise of the rights, interests, obligations and duties of Lessor or BCC under this Agreement, the Shortfall Agreement, the Deposit Pledge Agreement and any related leasehold mortgages, option agreements, equity pledge agreements, financing statements or other security interests (the "Applicable Documents") and/or (ii) any acts or failures to act, or the performance or assertion of any rights, duties or obligations, by BCC or the Indemnified Parties with respect to the Applicable Documents; provided, however, no Indemnified Party shall be held harmless or entitled to indemnifications or defenses to the extent that the Claim was caused in whole or in part by a breach of any obligation, covenant or agreement of the Indemnified Party under Sections 5, 7 or 11 of this Agreement. 12. (a) Entire Agreement . This Agreement contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (b) Amendments. This Agreement may be modified or amended only by a written instrument executed by the Lessor, the Lessee and BCC. (c) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being 11 - - 7 enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (e) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. (f) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (g) Representations and Warranties of BCC. BCC represents and warrants that (i) this Agreement constitutes a legal, valid and binding obligation of BCC, was duly authorized, executed and delivered by BCC, and is fully enforceable against BCC in accordance with its terms (except as may be limited by bankruptcy and creditor's rights laws and general principles of equity), (ii) BCC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly authorized and qualified to do all things required of it under this Agreement; (iii) neither this Agreement nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which BCC is a party and (iv) the recitals set forth above are hereby incorporated by this reference and made a part of this Agreement, and BCC represents and warrants that such recitals are true and correct. Any material breach by BCC of the representations and warranties set forth herein shall be a default under this Agreement. (h) Subordination. If for any reason whatsoever Lessee, any Affiliates of Lessee, Developer or Manager now or hereafter becomes indebted to BCC or any Affiliate of BCC, such indebtedness and all interest therein shall at all times be subordinated in all respects to the obligations of BCC under this Agreement, the obligations of Lessee under the Lease, the obligations of Lessee and the Members to the Senior Lender under the Senior Credit Documents and the obligations of Developer under the Development Agreement. For purposes of this Agreement, the terms "Affiliate" and "Affiliates" shall have the meanings set forth in that certain Second Series Master Investment Agreement (the "Master Agreement") of even date herewith, by and between the Lessor, Developer, Lessee's members and BCC. (i) Counsel Fees. If Lessor or BCC brings any action to interpret or enforce this Agreement, or for damages for any alleged breach thereof, the prevailing party in any such action shall be entitled to reasonable attorney's fees and costs as awarded by the court in addition to all other recovery, damages and costs. (j) Reliance by Lessor. BCC acknowledges that (i) BCC will benefit from the execution and continued existence of the Lease, (ii) Lessor will be relying upon BCC's assurances, representations, warranties, and covenants contained herein and (iii) Lessor may take, or delay in 12 - - 8 taking or refuse to take any and all action with reference to the Lease (regardless of whether the same might vary the risk or alter the rights, remedies or recourses of BCC), including without limitation the settlement or compromise of any amount allegedly due thereunder, the granting of indulgences or extensions, and/or the release of or refusal to execute on any and all collateral; provided, however, nothing contained in this Section shall limit or modify the obligations of Lessor under this Agreement, including without limitation Section 5 above. (k) Waiver Provisions. BCC hereby knowingly, voluntarily and unequivocally waives: (i) all notice of acceptance, protest, demand and dishonor, presentment and demands of any kind now or hereafter provided for by any statute or rule of law; (ii) any and all requirements that Lessor institute any action or proceeding, or exhaust any or all of Lessor's rights, remedies or recourses, against Lessee or anyone else as a condition precedent to bringing an action against BCC under this Agreement; (iii) any defense arising by reason of any disability, insolvency, bankruptcy, lack of authority or power, dissolution or any other defense of Lessee, BCC, any guarantor of the Lease, or their respective successors and assigns (even though rendering same void, unenforceable or otherwise uncollectible); (iv) the benefits of any and all express or implied waivers which may otherwise be available to or claimed by BCC under the laws of the State in which the Property is located; (v) any claim BCC might otherwise have against Lessor by virtue of Lessor's invocation of any right, remedy or recourse permitted it hereunder or under the Lease, any letter of credit agreement, any guaranty, or otherwise available at law or equity; (vi) any failure, omission, delay or lack on the part of Lessor or Lessee to enforce, assert or exercise any right, power or remedy conferred on Lessor or Lessee in the Lease, or any action on the part of Lessor granting a waiver, indulgence or extension to Lessee or any other party; (vii) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets of Lessee or BCC, marshaling of assets or liabilities, receiverships, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting Lessee, BCC, or their respective assets, or the disaffirmance of the Lease in any such proceeding; (viii) any release or other reduction of the Lease Obligations arising as a result of the expansion, release, substitution or replacement (whether or not in accordance with terms of the Lease) of the Premises or any portion thereof; and (ix) any defense or claim available to BCC as a result of BCC's exercise of its right to purchase the Premises (or any portion thereof) pursuant to the Master Agreement or that certain Right of First Refusal Agreement of even date herewith by and between Lessor and BCC; provided, however, nothing contained in this Section shall limit or modify the obligations of Lessor under this Agreement, including without limitation Section 5 and Section 11(a) above. (l) Application of Agreement. This Agreement shall apply notwithstanding any extension or renewal of the Lease, or any holdover following the expiration or termination of the Term or any renewal or extension of the Term (as defined in the Lease). (m) Financial Reporting. Within forty-five (45) days of the end of each of the first three quarters of the fiscal year of BCC, BCC shall deliver the quarterly consolidated or combined, as applicable, financial statement of BCC to Lessor. Within one hundred (100) days of the fiscal year end of BCC, BCC shall deliver to Lessor the annual consolidated or combined, as applicable, financial statement of BCC audited by a reputable certified public accounting firm. If BCC 13 - - 9 is or becomes subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, BCC shall, in lieu of providing the financial statements described in the first two sentences of this Subsection, concurrently deliver to Lessor such reports as are delivered to the SEC pursuant to applicable securities laws. All of the reports and statements required hereby shall be prepared in accordance with GAAP and BCC's accounting principles consistently applied and shall be accompanied by a statement signed by the President, Chief Financial Officer, Principal Accounting Officer, Controller, Executive Vice President, Development, or other officer of BCC as approved by Lessor in writing, certifying that said reports are true, correct and complete in all material respects after due inquiry. (n) Leasehold Mortgage. To secure the obligations of the Lessee under the Shortfall Agreement, Lessee has granted to BCC a leasehold mortgage (the "Leasehold Mortgage") encumbering Lessee's interest in the Lease. BCC shall, concurrently with the execution and delivery of this Agreement, execute and deliver to Lessor an escrow letter and satisfaction instrument in the form attached hereto as Exhibit A removing the Leasehold Mortgage of record, which satisfaction instrument may only be recorded as provided in such escrow letter. BCC shall provide notice to Lessor if BCC shall desire to institute any foreclosure proceedings by BCC under the Leasehold Mortgage, and BCC shall not institute such proceedings without the prior written consent of the Lessor, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, BCC agrees that Lessor may condition consent to such foreclosure on the agreement by BCC that all personal property leased to Lessee under the Lease will remain in the Facility and that such foreclosure will not materially or unreasonably disrupt or interrupt the operation of the Facility. (o) Management Agreement. BCC acknowledges that BCC is the sole shareholder of the Manager. As sole shareholder of the Manager, BCC agrees and shall cause the Manager to agree, that in the case of an Event of Default under the Lease (after applicable cure periods): (i) Lessor shall have the right to terminate the Management Agreement and Manager's rights to manage the Facility, (ii) Lessor shall have the right to require the Manager to cooperate and assist in all reasonable ways during any transition of management of the Facility after such termination, (iii) during any such interim management, Lessor shall have the right to approve or veto all operation budgets and (iv) Manager shall otherwise take such actions or refrain from taken such actions as Lessor may reasonably request. (p) Confidentiality. Lessor hereby covenants and agrees, on behalf of Lessor and all Affiliates of Lessor, that all Confidential Information (as hereinafter defined) will be held and treated by Lessor, Lessor's Affiliates and the agents and employees of Lessor and its Affiliates in confidence and will not, except as explicitly consented to by BCC in its sole discretion, be disclosed by Lessor, its Affiliates or the agents and employees of Lessor or its Affiliates, in any manner whatsoever, in whole or in part, and will not be used by Lessor, its Affiliates or the agents and employees of Lessor or its Affiliates other than in connection with the Other Facilities (as defined in Appendix 1 to the Shortfall Agreement). Lessor further agrees on behalf of itself and its Affiliates (i) to disclose Confidential Information only to (A) Lessor's employees who need to know the Confidential Information in connection with the Facility and (B) potential or actual participants or assignees of Lessor's interest in the Lease, the other Lease Documents, any other documents related thereto and the Facility, but only after receiving from 14 - - 10 such potential or actual participants or assignees an agreement whereby the recipient of such Confidential Information agrees to be bound by the provisions hereof relating to confidentiality and non-disclosure, (ii) to employ all reasonable procedures to ensure that neither the Lessor, nor its Affiliates, agents, employees or potential or actual participants or assignees of Lessor or its Affiliates use the Confidential Information in connection with trading in the securities of BCC or communicate such information to others who so trade in such securities and (iii) that any Confidential Information not returned to BCC, the Management Firm or Lessee, as applicable, will be held by Lessor and kept subject to the terms of this Section or destroyed. As used in this Section, (i) "Confidential Information" means all information and data containing or otherwise reflecting information concerning BCC or any Affiliate of BCC, or any Other Facility, which is not available to the general public but is material to the business, financial condition, or prospects of BCC and its Affiliates or otherwise would be material to making an investment decision with respect to the publicly traded securities of BCC, together with analyses, compilations, studies or other documents, whether prepared by BCC, Lessor or any other Entity (as defined in Appendix 1 to the Shortfall Agreement), which contain or otherwise reflect such information and (ii) "Affiliate" of any Entity (the "Subject") shall mean (x) any Entity which, directly or indirectly, controls or is controlled by or is under common control with the Subject, (b) any Entity or person owning, beneficially, directly or indirectly, five percent or more of the outstanding capital stock, shares or equity interests of the Subject or (c) any officer, director, employee, general partner, member, manager or trustee of either the Subject or any Entity controlling, controlled by or under common control with the Subject (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of the Subject); provided, however, Confidential Information shall in no event include information that has become public through no wrongful action of Lessor or the Member or matters for which the Lessor is required to disclose pursuant to Laws. 15 - - 11 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: - -------- ----- BALANCED CARE CORPORATION, a Delaware corporation _____________________________________ By: _______________________________ Name: Name: Title: WITNESS: LESSOR: - -------- -------- NATIONWIDE HEALTH PROPERTIES, INC. _____________________________________ By: _______________________________ Name: Name: Title: S - 1 EX-10.31 31 BALANCED CARE CORPORATION 1 Exhibit 10.31 SCHEDULE TO FORM OF NHP SECOND SERIES WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
- ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Facility Location Lessee County State Loan Amount Manager - ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Pensacola, FL C&G Healthcare of Escambia Florida $179,700 Balanced Care at Pensacola, LLC Pensacola, Inc. - ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Tallahassee, FL C&G Healthcare of Leon Florida $223,350 Balanced Care at Tallahassee, LLC Tallahassee, Inc. - ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Hagerstown, MD C&G Healthcare at Washington Maryland $124,350.00 Balanced Care at Hagerstown, LLC Hagerstown, Inc. - ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Johnson City, C&G Healthcare at Washington Tennessee $138,900.00 Balanced Care at TN Johnson City, LLC Johnson City, Inc. - ------------------------------ ---------------------- ---------------- --------------- --------------------- ---------------------- Teay's Valley, C&G Healthcare at Putnam West Virginia $122,100.00 Balanced Care at WV Teay's Valley, LLC Teay's Valley, Inc. - ------------------------------ ---------------------- ---------------- --------------- --------------------- ----------------------
EX-10.32 32 BALANCED CARE CORPORATION 1 Exhibit 10.32 ================================================================================ FORM OF LEASE AND SECURITY AGREEMENT By and Between _____________________ AND ________________________________________ a Delaware limited liability company ------ JANUARY 30, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS........................................................................ 1 2. LEASE OF PROPERTY..................................................................11 3. TERM OF LEASE......................................................................12 4. RENT...............................................................................13 5. IMPOSITIONS........................................................................17 6. TERMINATION OR ABATEMENT OF LEASE..................................................19 7. OWNERSHIP OF PROPERTY; TENANT'S PERSONAL PROPERTY SECURITY INTEREST................19 8. CONDITION AND USE OF PROPERTY......................................................20 9. LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS......................................22 10. CONDITION OF THE PROPERTY.........................................................23 11. CAPITAL ADDITIONS.................................................................24 12. LIENS.............................................................................27 13. CONTESTS..........................................................................27 14. INSURANCE.........................................................................28 15. INSURANCE PROCEEDS................................................................31 16. CONDEMNATION......................................................................34 17. DEFAULTS AND REMEDIES.............................................................36 18. CURE BY TENANT OF LANDLORD DEFAULTS...............................................39 19. PURCHASE OF PROPERTY BY TENANT....................................................40
i 3 20. HOLDING OVER......................................................................40 21. RISK OF LOSS......................................................................41 22. LIABILITY OF PARTIES..............................................................41 23. ASSIGNMENT AND SUBLETTING.........................................................42 24. INFORMATION FROM TENANT...........................................................43 25. APPRAISALS OF THE PROPERTY AND LANDLORD OPTIONS...................................45 26. FACILITY MORTGAGES................................................................46 27. LIMITATION OF LIABILITY...........................................................47 28. ADDITIONAL TENANT COVENANTS.......................................................47 29. MISCELLANEOUS.....................................................................49
EXHIBITS - -------- Exhibit A Legal Description of Property Exhibit B Permitted Exceptions Exhibit C Collateral Assignment Exhibit D Plans and Specifications Exhibit E Guaranty Exhibit F Subordination and Standstill Agreement Exhibit G Security Agreement Exhibit H Lease Assignment Exhibit I Deposit Pledge Agreement ii 4 LEASE AND SECURITY AGREEMENT _________________-ASSISTED LIVING FACILITY THIS LEASE AND SECURITY AGREEMENT is executed as of January 30, 1998, by and between ________________________________________________________________, as Landlord, and ____________________________________________ Delaware limited liability company, having its principal office at c/o Hakman & Co., 1350 Old Bayshore Highway, Suite 300, Burlingame, California 94010, Attention F. David Carr, as Tenant, with respect to the following Recitals: R E C I T A L S A. Landlord has, concurrently herewith, entered into that certain Assignment of Property Acquisition Rights (the "Acquisition Agreement") with Balanced Care Corporation, a Delaware corporation ("Balanced Care"), pursuant to which Landlord has obtained Balanced Care's right to acquire from Edwin T. Friddle and Doris A. Friddle, husband and wife ("Seller") more particularly described on Exhibit A attached hereto. B. Landlord has agreed to lease to Tenant, and Tenant has agreed to hire from Landlord, the "Land", the "Buildings" located thereon and the other items which collectively constitute the "Property" (all as defined in Article 1), all upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant, intending to be fully legally and equitably bound agree as follows: 1. DEFINITIONS ----------- For all purposes of this Lease, unless otherwise expressly provided in this Agreement or the context in which such term is used indicates a contrary intent, (a) the terms defined in this Article shall have the meanings ascribed to them in this Article, (b) all accounting terms not otherwise defined in this Article shall have the meanings ascribed to them in accordance with generally accepted accounting principles at the time applicable to the accrual method of accounting applied on a consistent basis from period to period, (c) all references in this Lease to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease, (d) the word "including" and words of similar import shall, except as expressly provided to the contrary, be construed as words of illustration and not as words of limitation and shall be interpreted as if the words "but not limited to" immediately followed, and (e) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision. "ADDITIONAL CHARGES" shall have the meaning ascribed to such term in Section 4.4. "ADDITIONAL RENT" shall have the meaning ascribed to such term in Section 4.3. "ADJUSTMENT FACTOR" shall mean two percent (2.00%) in any Lease Year in which the nationwide Consumer Price Index for all urban consumers increases by a percentage of less than 20% and shall mean five percent (5.00%) in all other Lease Years. 5 "AFFILIATE" of any Person (the "Subject") shall mean (a) any Person which, directly or indirectly, Controls or is Controlled by or is under common Control with the Subject, (b) any Person owning, beneficially, directly or indirectly, five percent or more of the outstanding capital stock, shares or equity interests of the Subject or (c) any officer, director, employee, general partner or trustee of either the Subject or any Person Controlling, Controlled by or under common Control with the Subject (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of the Subject). "ARCHITECT" shall mean, collectively, the architects and engineers engaged to design and engineer the Project. Developer has engaged KWM Group, Inc. and Charles D. Foster Architect, P.A., jointly, as the primary Architect (the "PRIME ARCHITECT") for the Project. "AWARD" shall have the meaning ascribed to such term in Section 16.1((c)). "BALANCED CARE" shall mean Balanced Care Corporation, a Delaware corporation. "BASE RATE" shall mean the rate of interest announced publicly by Wells Fargo Bank, a national banking association, in San Francisco, California, from time to time, as said bank's "base" or "prime" rate on corporate loans. "BASE RENT" shall mean an annual amount equal to the product of the (i) Total Project Cost multiplied by (ii) the sum of the Ten Year Treasury Rate plus three hundred thirty-five (335) basis points. "BUILDING" shall mean any building constructed from time to time as part of the Improvements. "BUSINESS DAY" shall mean any day on which banking institutions in San Francisco, California are open for the conduct of normal banking business. "CAPITAL ADDITIONS" shall mean (a) any expansion of the Facility, (b) the construction of a new wing or new story on a Building, (c) the renovation of any portion of the Property or the Building in order to provide services not previously offered by Tenant in the Facility or (d) any expansion, construction, renovation or conversion of the Property, the Building or the installation of new Fixtures in the Property to (i) increase the service and revenue generating capacity of a Building or (ii) change the purpose for which a Building is utilized so as to enhance the revenue generating capacity of the Building. Notwithstanding anything to the contrary contained in Article 11, and for the avoidance of doubt, in the event it is necessary to abate or otherwise take corrective action with respect to the existence of a Hazardous Substance (as hereinafter defined) located in, on or under the Property or in the Building, such abatement or corrective action shall not be deemed to be a Capital Addition and shall be the sole responsibility of Tenant at its sole cost and expense. "CAPITAL ADDITIONS COST" shall mean the cost of any Capital Additions made by Tenant, whether paid for by Tenant or Landlord. Such cost shall include (a) the costs of constructing the Capital Additions, including site preparation and improvement, materials, labor, supervision, developer and administrative fees, the costs of design, engineering and architectural services, the costs of fixtures, the costs of construction financing (including but not limited to capitalized interest) and other similar costs as and to the extent each of the foregoing are approved in advance and in writing by Landlord, (b) at Landlord's option, the purchase price and other 2 6 acquisition costs, or applicable ground lease rental payable for any period such ground lease is in effect to and including the date upon which such Capital Addition is completed and occupied or in operation, as the case may be, of any land which is acquired or leased for the purpose of placing thereon all or any portion of the Capital Additions or for providing means of access thereto, or parking facilities therefor (including the costs of surveying the same and recording, title insurance and escrow fees and charges), (c) insurance premiums, real estate taxes, water and sewage charges and other carrying charges for such Capital Additions during their construction, (d) reasonable fees and expenses of legal counsel, (e) any documentary transfer or similar taxes applicable to the acquisition of land for the Capital Addition, (f) any applicable regulatory or administrative fees and charges, and any costs, charges, fees or expenses paid or incurred in connection with obtaining any applicable permits, licenses, franchises, authorizations, certificates of need, certificates of occupancy and similar authorizations and entitlements and (g) all other reasonable costs and expenses of Landlord or Tenant, as applicable, and any lending institution which has committed to finance the Capital Additions, including, but not limited to, (i) the fees and expenses of their respective legal counsel, (ii) any printing, duplicating and messenger expenses, (iii) any filing, registration and recording taxes and fees, (iv) any documentary transfer or similar taxes, (v) any title insurance charges and appraisal fees, (vi) any rating agency fees and (vii) any commitment or similar fees charged by any lending institution financing or offering to finance any portion of such Capital Additions. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL ASSIGNMENT" shall mean the collateral assignment of the Management Agreement and Shortfall Funding Agreement made by Tenant in favor of Landlord, which Collateral Assignment shall be substantially in the form attached hereto as Exhibit C. "COMMENCEMENT DATE" shall have the meaning ascribed to such term in Section 3.1. "COMMITMENT FEE" shall mean an amount equal to one percent (1.00%) of the Total Project Costs determined without regard to clause (xi) of the definition of that term. "COMPLETION DATE" shall have the meaning ascribed to such term in the Development Agreement. "COMPLETION GUARANTEE" shall mean the Completion Guaranty and Agreement of even date herewith entered into by Balanced Care in favor of Landlord pursuant to the Development Agreement. "CONDEMNATION" shall have the meaning ascribed to such term in Section 16.1((a)) "CONDEMNOR" shall have the meaning ascribed to such term in Section 16.1((d)). "CONTROL" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, through the ownership of voting securities, partnership interests or other equity interests, or through any other means. "DEPOSIT PLEDGE AGREEMENT" shall mean the Deposit Pledge Agreement made by Tenant in favor of Landlord and Balanced Care in the form attached hereto as Exhibit I. 3 7 "DEVELOPER" shall mean BCC Development and Management Co., a Delaware corporation and a wholly-owned subsidiary of Balanced Care. "DEVELOPMENT AGREEMENT" shall mean the Development Agreement of even date herewith entered into by Developer and Landlord with respect to the construction and opening of the Facility. "DATE OF TAKING" shall have the meaning ascribed to such term in Section 16.1((b)). "EMPLOYEE BENEFIT PLAN" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA maintained or contributed to by the Company or any of its ERISA Affiliates, other than a Multiemployer Plan. "ENCUMBRANCE" shall have the meaning ascribed to such term in Article 26. "ENVIRONMENTAL INDEMNITY" shall mean the Environmental Indemnification Agreement delivered to Landlord pursuant to the Facility Agreement. "EQUIPMENT" shall mean all unaffixed personal property which is included in the Approved Budget under the Development Agreement or is otherwise paid for by Landlord whether through Construction Advances under that agreement or otherwise. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute. "ERISA AFFILIATE" of any Person shall mean any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as such Person or which is under common control (within the meaning of Section 414(c) of the Code) with such Person. "ERISA EVENT" with respect to any Person shall mean (a) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan of such Person or any of its ERISA Affiliates, unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the provision by the administrator of any Plan of such Person or any of its ERISA Affiliates of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(a)(2) of ERISA); (c) the cessation of operations at a facility of such Person or any of its ERISA Affiliates in the circumstances described in Section 4062(e) of ERISA with respect to a Plan; (d) the withdrawal by such Person or any of its ERISA Affiliates from a Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (e) the failure by such Person or any of its ERISA Affiliates to make a payment to a Plan required under Section 302(f)(1) of ERISA; (f) the adoption of an amendment to a Plan of such Person or any of its ERISA Affiliates requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to terminate a Plan of such Person or any of its ERISA Affiliates pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that could constitute grounds for the termination of, or the appointment of a trustee to administer, such Plan. "ESTOPPEL CERTIFICATE" shall mean a certificate of Tenant signed by the chief financial officer or another officer authorized so to sign by resolutions adopted by the board of directors or the articles of incorporation or by-laws of Tenant or by any other person whose power 4 8 and authority to act has been authorized by delegation in writing by the chief financial officer of Tenant. "EVENT OF DEFAULT" shall have the meaning ascribed to such term in Section 17.1 and elsewhere throughout this Lease. "EXTENDED TERM" shall have the meaning ascribed to such term in Section 3.2 "FACILITY" shall mean, jointly and severally, the assisted living residential facility and related support operations operated from within each Building, or, with Landlord's express prior written consent, such other similar facilities offering other related health care products and services which is operated or proposed to be operated from a Building from time to time with Landlord's consent in accordance with the provisions of this Lease. "FACILITY MORTGAGE" shall have the meaning ascribed to such term in Section 14.1. "FACILITY MORTGAGEE" shall have the meaning ascribed to such term in Section 14.1. "FAIR MARKET RENTAL" shall mean, with respect to the Property (including any Capital Additions or portions thereof paid for by Landlord) the rental paid on a net basis as provided in Section 4.5 hereof which a willing tenant not compelled to rent would pay on the basis set forth in this Lease to a willing landlord not compelled to lease for the highest and best medical use of such property (which shall in all events include the Primary Intended Use) pursuant to this Lease for the term in question, assuming that Tenant is not in default under this Lease. For purposes of this Lease, Fair Market Rental shall be determined in accordance with the appraisal procedures set forth in Article 25 or in such other manner as shall be mutually agreed upon by Landlord and Tenant; provided that, notwithstanding any provision of this Lease to the contrary, the Fair Market Rental applicable to the Extended Term shall be no less than 103% nor more than 120% of the sum of Base Rent plus Additional Rent payable for the final 12 months of the Fixed Term (with respect to the first Extended Term) or the final 12 months of the last Extended Term to expire (with respect to each subsequent Extended Term). Fair Market Rental shall not be adjusted to take into account loss or wear and tear of Equipment. "FAIR MARKET VALUE" shall mean, with respect to the Property, including all Capital Additions, the price that a willing buyer not compelled to buy would pay to a willing seller not compelled to sell for such property (a) assuming this Lease is not in effect with respect to the Property (except as otherwise provided below) (b) assuming that such seller must pay any closing costs and title insurance premiums with respect to such sale and (c) assuming that the Property is fully licensed by all governmental agencies having jurisdiction thereof, and is and will continue to be operated for the Primary Intended Use and is otherwise a going concern. Notwithstanding the foregoing, the computation of Fair Market Value shall assume that a lease of the Property providing for payment of a Fair Market Rental for the remaining Term of this Lease is in effect if Tenant is to acquire the Property pursuant to Article 15 or Article 16. For purposes of this Lease, Fair Market Value shall be determined in accordance with the appraisal procedures set forth in Article 25 or in such other manner as shall be mutually agreed upon by Landlord and Tenant. Fair Market Value shall not be adjusted to take into account loss or wear and tear of Equipment. "FAIR MARKET VALUE PURCHASE PRICE" shall mean a purchase price equal to the Fair Market Value of the Property. 5 9 "FISCAL YEAR" shall mean the 12 month period commencing July 1 and terminating June 30 of each year. "FIXED TERM" shall have the meaning ascribed to such term in Section 3.1. "FIXTURES" shall mean all equipment (including non-movable medical or other equipment), machinery, fixtures and other items of property, including all components thereof, now and hereafter located in, on or used and incorporated into or otherwise attached to the Property, including without limitation any and all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems, equipment and apparatus, sprinkler systems and fire, life-safety and theft protection equipment, built-in oxygen and vacuum systems, wiring, tubing, central clock systems, doctor register or call systems, elevators, dumb waiters, intercom systems, nurse call systems, affixed cabinetry and counters, pneumatic tube systems, vacuum cleaning systems, conveyor systems, paging systems, mill work, x-ray protection, pass-through boxes, exhaust systems, laboratory plumbing and piping, medical gas systems, counters, cabinets, emergency generators and similar items incorporated into and made a part of or otherwise attached to the Property, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto. "GOVERNMENTAL APPROVALS" shall mean all certificates, permits and licenses required to be obtained from any governmental authority or instrumentality, necessary or desirable in connection with the Primary Intended Use of the Property, including without limitation, a certificate of occupancy for the Facility (or other similar evidence of the continuing right to occupy and use the Facility), a license as a 60-unit assisted living facility from the applicable State authority and each other jurisdiction or governmental agency or instrumentality having the right and power to issue such license or similar authority to so use the Property, if required for the Primary Intended Use a Medicare provider number from the Health Care Financing Administration of the United States Department of Health and Human services and all other appropriate approvals required by any applicable Legal Requirements for the operation of the Facility for its Primary Intended Use, including without limitation approvals by State and federal environmental protection agencies and Federal Flood Plains Protection Act of 1973, as amended. "GUARANTOR" shall mean, jointly, severally and collectively Assisted Care Operators, L.L.C., a Delaware limited partnership ("PRIMARY PARENT") and Oakhaven Senior Living, Inc., a California corporation ("SECONDARY PARENT"). "HAZARDOUS SUBSTANCES" shall mean any substance (including without limitation any asbestos, formaldehyde, radioactive substance, hydrocarbons, industrial solvents, flammables, explosives, and any hazardous substance or toxic material) which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of the Land (which shall include all soils, soil vapor, surface water and ground water), Property, Facilities or the Building or constitute or cause a health, safety or environmental hazard on, under, or about the Land, Facilities, the Building or the Property or to any person who may enter on, under, or about the Land, Facilities, Building or the Property or require remediation at the behest of any governmental agency. "IMPOSITIONS" shall mean all (A) taxes (including without limitation (i) all real property taxes imposed upon the Land, Building and Fixtures (ii) all personal property taxes imposed upon any portion of the Property, and (iii) all ad valorem, sales, use, single business, gross 6 10 receipts, transaction privilege, rent or similar taxes relating to or imposed upon Landlord, Tenant, Rent or Tenant's business conducted upon any portion of the Land, the Property or from within a Building), (B) assessments (including without limitation all supplemental real property tax assessments or assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), (C) any other covenants, conditions or restrictions of record with respect to the Property, water, sewer or other rents and charges, excises, tax levies, fees (including without limitation license, permit, franchise, inspection, authorization and similar fees) and (D) all other governmental, quasi-governmental or private charges, in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character or nature whatsoever with respect to or connected with the Property, the Facility, the Building, Landlord's investment in any of the foregoing or the business conducted thereon or therein by Tenant (including all interest and penalties thereon due to any failure or delay in payment thereof) which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to, or may be a lien upon (a) Landlord's interest in the Property, (b) the Property or any part thereof or any Rent therefrom or any estate, right, title or interest therein or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Property or the leasing or use of the Property or any part thereof by Tenant. For the purposes of this definition, the term "real property tax" shall mean all taxes which are imposed, levied or assessed upon or with respect to the Property, the Building, the Land, the Rent or any portion thereof (including increases in real property taxes which are imposed as a result of a transfer, either partial or total, of Landlord's interest in the Property or which are added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer or which are imposed by reason of this transaction, any modifications hereto, or any transfers hereof or which are caused by reason of any new construction in or to the Property). Notwithstanding the foregoing provisions of this definition to the contrary, "Impositions" shall not include (1) any tax based on the net income of Landlord, unless such tax is levied, assessed or imposed expressly in lieu of a charge, tax or assessment which otherwise would constitute an Imposition, in which case the substitute tax, assessment, tax levy or charge shall constitute an Imposition even if it is measured by the net income of Landlord or (2) a real property stamp, documentary transfer or similar tax payable with respect to the conveyance to a Person other than Tenant, Balanced Care or the wholly-owned subsidiary or 100% shareholder of either. "IMPROVEMENTS" shall have the meaning ascribed to such term in Section 2.1((b)). "IMPUTED INTEREST" shall have the meaning ascribed to such term in the Development Agreement. "INSUFFICIENCY" shall mean, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA. "INSURANCE REQUIREMENTS" shall mean all (i) terms and conditions of any insurance policy required by this Lease and all requirements of the issuer of any such insurance policy and (ii) all requirements pertaining to the Property or the Primary Intended Use of any insurance board, association, organization or company. "LAND" shall mean the approximately acre parcel of real property situated in the City of Anderson, County of Madison, State of Indiana, more particularly described in Exhibit A attached hereto and any other land acquired or leased and made subject to this Lease in connection with a Capital Addition. 7 11 "LEASE" shall mean this document, as the same may be amended from time to time in accordance herewith. "LEASEHOLD MORTGAGE" shall have the meaning ascribed to that term in the Facility Agreement. "LEASE YEAR" shall mean each 12 consecutive month period commencing on the first day of the first full calendar month to commence on or after the Commencement Date; provided that the first Lease Year shall also include the period between the Commencement Date and the first day of the first full calendar month to commence on or after the Commencement Date. "LEGAL REQUIREMENTS" shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, common law, decrees and injunctions affecting the Property or the maintenance, construction, use, alteration, occupancy or operation thereof, whether now or hereafter enacted and in force (including any of the foregoing which may require repairs, modifications or alterations in or to the Property), all permits, licenses, franchises, authorizations, land use entitlements, zoning and regulations relating thereto, and all covenants, conditions, agreements, restrictions, obligations and encumbrances contained in any instruments, either of record or known to Tenant. "MANAGEMENT AGREEMENT" shall mean the Management Agreement of even date herewith entered into by Manager and Tenant with respect to the management by Developer of the Facility. "MANAGEMENT GUARANTEE" shall mean the guaranty of the Management Agreement and Shortfall Funding Agreement entered into by Balanced Care in favor of Landlord. "MANAGER" shall mean ____________________________., a Delaware corporation and the wholly-owned subsidiary of Balanced Care. "MINIMUM REPURCHASE PRICE" shall mean the Total Project Costs, plus any portion of a Capital Additions Cost which Landlord has actually paid, less the net amount (after deduction of all reasonable legal fees and other costs and expenses, including without limitation expert witness fees, incurred by Landlord in connection with obtaining any such proceeds or awards) of any proceeds of insurance paid to and retained by Landlord in accordance with Article 15 of this Lease (other than insurance proceeds, if any, paid to compensate Landlord for lost Rent) and of any Awards received by Landlord and not applied to restoration of the Property in accordance with Article 16 of this Lease. "NET WORTH" shall mean for any period the sum of the following for Tenant and its consolidated subsidiaries, if any, on a consolidated basis, determined in accordance with generally accepted accounting principles: (a) the amount of capital or stated capital (after deducting the cost of any shares held in the applicable entity's treasury); plus (b) the amount of capital surplus and retained earnings; or (c) in the case of a capital or retained earnings deficit, minus the amount of such deficit. "NOTICE" shall mean a notice given pursuant to Section 29.8. "OFFICER'S CERTIFICATE" shall mean a certificate of Tenant signed by its duly authorized manager or, if applicable, the person designated as Tenant's chief financial officer who has been duly authorized to deliver such certificate on behalf of Tenant. 8 12 "OPTION AGREEMENT" shall mean that certain Option Agreement dated January 30,1998 entered into by and between the owners of Tenant and Balanced Care granting to Balanced Care the right to purchase the interests of such owners in Tenant. "OPTION PURCHASE DATE" shall mean February 28, 2008; provided, however that (i) if Tenant timely and properly exercises its option to extend the Term by the first Extended Term as provided in Section 3.2, the Option Purchase Date shall mean February 28, 2013, (ii) if Tenant thereafter timely and properly exercises its option to extend the Term by the second Extended Term as provided in Section 3.2, the Option Purchase Date shall mean February 28, 2018 and (iii) if Tenant timely and properly exercises its option to extend the Term by the third Extended Term as provided in Section 3.2, the Option Purchase Date shall mean February 28, 2023. "OVERDUE RATE" shall mean, as of a specified date, a rate of interest equal to the Base Rate plus five percent, but in no event greater than the maximum rate of interest then permitted under applicable law. "PAYMENT DATE" shall mean any due date for the payment of any installment of Base Rent. "PERSON" shall mean and include governmental agencies and authorities, political subdivisions, individuals, corporations, general partnerships, limited partnerships, stock companies or associations, joint ventures, associations, trusts, banks, trust companies, land trusts, business trusts and any other entity of any form whatsoever, natural person, corporation, business trust, association, company, partnership or government, or any agency or political subdivision thereof. "PERMITTED ENCUMBRANCES" shall mean the matters, if any, set forth in Exhibit B attached hereto and incorporated herein by reference. "MULTIEMPLOYER PLAN" of any Person shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by such Person or any ERISA Affiliate of such Person and which is covered by Title IV of ERISA. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PLAN" shall mean an employee benefit or other plan established or maintained by such Person or any ERISA Affiliate of such Person and which is covered by ERISA, other than a Multiemployer Plan of such Person. "PLANS AND SPECIFICATIONS" shall mean those certain plans and specifications for the Facility and the Improvements prepared by the Architect and listed on Exhibit "D" "PRIMARY INTENDED USE" shall mean the operation of an assisted living facility and provision of ancillary services customarily provided to residents of such facilities, plus such additional uses as are permitted by Landlord from time to time hereunder. "PROPERTY" shall have the meaning ascribed to such term in Section 2.1. "PROPERTY ACQUISITION AGREEMENT" shall have the meaning ascribed to such term in the Facility Agreement. 9 13 "RENT" shall mean the Base Rent, Additional Rent and Additional Charges. "RENT COVERAGE RATIO" shall mean the ratio of EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) during a Fiscal Year quarter to Rent payable during the Fiscal Year quarter. "SECURITY AND SUBORDINATION DOCUMENTS" shall mean, collectively, (i) the Guaranty of Payment and Performance made with respect to each Lease by Tenant Parent, as Guarantor, in favor of Landlord substantially in the form attached hereto as EXHIBIT E (the "GUARANTY"), (ii) the Subordination and Standstill Agreement entered into by and among Landlord, Tenant, and Guarantor, substantially in the form attached hereto as EXHIBIT F (the "STANDSTILL AGREEMENT"), (iii) the Security Agreement by Tenant in favor of Landlord substantially in the form attached as EXHIBIT G (v) the Assignment of Leases, Rents and Receivables made by Tenant in favor of Landlord substantially in the form attached hereto as EXHIBIT H (the "LEASE ASSIGNMENT") and (vi) the Deposit Pledge Agreement. "SELLER" shall mean Edwin T. Friddle and Doris A. Friddle, husband and wife. "SHORTFALL FUNDING AGREEMENT" shall mean the Shortfall Funding Agreement of even date herewith between Balanced Care and Tenant. "STATE" shall mean the __________________. "TAKING" shall mean a taking or voluntary conveyance during the Term hereof of all or any part of the Property, or any interest therein, right with respect thereto or use thereof, as a result of, incidental to, or in settlement of any condemnation or other eminent domain proceedings affecting such Property, regardless of whether such proceedings shall have actually been commenced. "TENANT'S PERSONAL PROPERTY" shall mean all machinery, equipment, furniture, furnishings, movable walls or partitions, computers or trade fixtures or other personal property, and consumable inventory and supplies, including, by way of example but not by way of limitation, sterilizer units, scrub sinks, mail boxes, desks, lamps, chairs, beds, bedstands, surgical lamps, water stills, fume hoods, non-affixed cabinetry, tables, and similar movable equipment, owned by Tenant or leased by Tenant as lessee and used or useful in Tenant's business in the Building but in no event any items included within the definition of Fixtures or Equipment. "TEN YEAR TREASURY RATE" shall mean, as of the date of determination, the monthly average yield to maturity of actively traded marketable United States Treasury securities bearing a fixed rate of interest, adjusted for a constant maturity of ten years, as calculated by the Federal Reserve Board for the preceding calendar month and published in the Federal Reserve Board's Statistical Release H.15. "TERM" shall mean the Fixed Term and any Extended Terms, as the context may require, unless earlier terminated pursuant to the provisions of this Lease. "TOTAL PROJECT COSTS" shall mean the sum of all out-of-pocket costs and amounts disbursed, advanced or incurred by Landlord in connection with the Transaction Documents or the construction of Improvements, whether pursuant to the Development Agreement or otherwise, including without limitation (i) all Advances and any other hard or soft costs of 10 14 constructing the Improvements and Facility, including site preparation and improvement, materials, labor, supervision, developer and administrative fees, costs of design, engineering and architectural and related or similar professional services and the costs of fixtures, (ii) purchase price and other acquisition costs of Landlord's acquisition of its interest in the Land and the amount of any ground rent which may be payable by Landlord (without any obligation on the part of Landlord to pay such rent), (iii) all costs incurred for providing means of access to and from the Land or parking facilities for or otherwise used by the Project, (iv) costs paid by Landlord, if any, for surveying the Land and recording fees and costs, title insurance and escrow fees and charges, (v) insurance premiums, real estate taxes, water and sewage charges, and other similar charges for or with respect to the Property paid by Landlord, if any, during the period commencing on the date of this Lease and ending on the Commencement Date, (vi)out-of-pocket expenses of Landlord and fees and expenses of legal counsel, accounting and other professional services provided to Landlord, (vii) any document, transfer, stamp or other taxes paid by Landlord with respect to the Property, (viii)any applicable regulatory or administrative fees and charges and any costs, charges, fees or expenses paid or incurred in connection with obtaining any applicable Governmental Approvals, franchises, authorizations, certificates of need, certificates of occupancy, and other authorizations and entitlements with respect to the Property, (ix) Imputed Interest and all other capitalized interest on amounts disbursed or advanced by Landlord or charges incurred by Landlord from time to time in connection with the Transaction Documents of the construction of the Improvements, (x) all fees and other amounts paid to the Developer under the Development Agreement, including without limitation both the Developer Fee and Developer Incentive Fee contemplated thereunder, (xi) the Commitment Fee and (xii) all other customary and reasonable costs and expenses incurred by Landlord in connection with the Land, the Improvements, the Fixtures, the Transaction Documents or otherwise in connection with the Property or this Lease. "TRANSACTION DOCUMENTS" shall have the meaning ascribed to such term in the Facility Agreement. "UNAVOIDABLE DELAYS" shall mean delays due to strikes, lockouts, inability to procure materials, power failures, acts of God, governmental restrictions, enemy action, war, civil commotion, riot, unavoidable casualty and other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto. 2. LEASE OF PROPERTY ----------------- 2.1. PROPERTY. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, subject to the terms and conditions hereinafter set forth, all of Landlord's right, title and interest in and to all of the following (the "Property"): (a) the Land; (b) all buildings, structures and other improvements of every kind, including but not limited to the Facility, all on and offsite improvements and building improvements shown on the Plans and Specifications, all other buildings, improvements and structures now existing or hereafter constructed upon the Land and all alleyways, connecting tunnels, walks, sidewalks, utility pipes, conduits, and lines (both on-site and off-site) parking areas, roadways, driveways, and other related on-site and off-site improvements appurtenant to such buildings and 11 15 structures presently or hereafter situated upon the Land and any and all Capital Additions paid for by Landlord pursuant to Sections 11.1 and 11.2 (collectively, the "IMPROVEMENTS"); (c) the Equipment; and (d) the Fixtures. 2.2. COMPLETION AND CONDITION OF PROPERTY. As of the Commencement Date, Landlord will have purchased the Property from Seller. Tenant acknowledges that concurrently herewith, Landlord has entered into the Development Agreement pursuant to which Developer has covenanted to construct and Finally Complete (as defined in the Development Agreement) the Facility, free and clear of all liens on or prior to the Completion Date. If for any reason Developer does not Finally Complete the Facility on or before the Completion Date or in the event of any defect in the construction of any Building or other Improvement, or if the Property shall not be delivered to Tenant free from material defects in workmanship or material, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder. Tenant hereby expressly acknowledges its review, inspection and approval of the Land and the Plans and Specifications. 3. TERM OF LEASE ------------- 3.1. TERM OF LEASE. The initial term of this Lease (the "Fixed Term") shall commence on the earlier to occur of (a) the date on which Tenant obtains and receives all Governmental Approvals (excluding a Medicare provider number) or (b) the date on which Tenant or Manager begins conducting any business activities from any portion of the Property (the "Commencement Date"), and, unless extended or terminated earlier in accordance with the provisions of this Lease, shall remain in effect for ten (10) years after the first day of the first full calendar month to commence on or after the Commencement Date. Notwithstanding the Commencement Date, if for any reason Landlord cannot deliver possession of the Property to Tenant on the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the Term hereof, but in such case, Tenant shall not be obligated to pay Rent until possession of the Property is tendered to Tenant. Tenant expressly acknowledges that (i) Landlord's obligation to acquire the Property pursuant to the Facility Agreement, Acquisition Agreement and the Property Acquisition Agreement is conditioned upon the fulfillment of the conditions stated therein and that Landlord makes no warranty that such conditions can or will be fulfilled to Landlord's satisfaction and, therefore, Landlord might not acquire (and nothing in this Lease shall obligate Landlord to acquire) the Property and (ii) Landlord is not obligated to complete the development and construction of the Improvements upon the Property, such development and construction being the obligation of Developer pursuant to the Development Agreement and (iii) Landlord makes no warranty that the conditions to Landlord's obligations stated in the Facility Agreement, Acquisition Agreement and Property Acquisition Agreement can or will be fulfilled to Landlord's satisfaction or that the Developer can or will complete the development of the Property and the construction of the Improvements as required under the Development Agreement. Therefore, Landlord might not acquire (and nothing in this Lease shall obligate Landlord to acquire) the Property and the Property might not be developed (and nothing in this Lease shall require the Landlord to develop the Property or construct the Improvements). In the event Landlord shall not acquire the Property on or before March 1, 1998 or the Improvements shall not have been completed within 180 days after the Completion Date, Tenant shall have the right, by delivery to Landlord within ten (10) days thereafter of Tenant's written notice of termination, to terminate this Lease without liability or cost to Landlord or Tenant. 12 16 3.2. OPTION TO EXTEND TERM OF LEASE. Landlord hereby grants to Tenant three consecutive options to extend the term of this Lease for additional five year renewal terms (each an "Extended Term"). The first Extended Term shall commence immediately upon the expiration of the Fixed Term and each subsequent Extended Term shall commence upon the expiration of the immediately prior Extended Term. Each Extended Term shall be on the same terms and conditions as those set forth for the Fixed Term except that Rent shall be paid at a rate equal to the then current Fair Market Rental which, unless otherwise mutually agreed to by Landlord and Tenant, shall be determined by appraisal pursuant to the provisions of Article 25 (subject however to the restrictions stated in the definition of "Fair Market Rental"). Each such option may only be exercised by Tenant if, at the time such option is exercised, (i) Guarantor irrevocably commits to cause each Tenant under a Lease executed pursuant to the Facility Agreement to exercise the next option for an Extended Term with respect to all property leased by Landlord or its Affiliates to either (x) any wholly-owned subsidiary of Guarantor or (y) any Person previously owned by Guarantor, (ii) the Lease is in full force and effect, and (iii) an Event of Default is not continuing. Each such option shall be exercised by Tenant, if at all, by delivery of Notice to that effect to Landlord not less than 270 days but not more than 450 days prior to the date upon which this Lease otherwise would terminate. If Tenant is unable to exercise any option due to the provisions of this Section 3.2, the time during which such option may be exercised shall not be extended or enlarged. Time is strictly of the essence with respect to the requirement that Tenant give timely Notice of its exercise of any options hereunder, and Tenant's failure timely to exercise any option strictly in accordance with its terms shall constitute a material, irredeemable and incurable failure to satisfy a condition precedent to the vesting of any rights in Tenant pursuant to the option, and Tenant hereby expressly waives any right to claim relief from forfeiture, or any other form of equitable relief from consequences of an untimely exercise of any such option strictly in accordance with its terms. The implied covenant of good faith and fair dealing under this Lease shall not be construed to impose upon Landlord any obligation to notify Tenant in advance of the impending deadline for the exercise of any option hereunder, nor shall it obligate Landlord to excuse the tardy exercise of any Option, however slight. The failure of Tenant to exercise any of the options for the Extended Terms within the respective times specified in this Section shall thereby terminate any option with respect to any remaining Extended Terms. 4. RENT ---- 4.1. PAYMENT OF BASE RENT. During the Term, Tenant shall pay to Landlord, in lawful money of the United States of America, in immediately available funds, without right of offset, at the address of Landlord as set forth in Section 29.8 or at such other place or to such other Person as Landlord may designate from time-to-time in a Notice, the Base Rent and all other "Additional Charges" due hereunder. 4.2. BASE RENT. Commencing on the first Business Day of the first full calendar month occurring after the Commencement Date and continuing thereafter on the first day of each calendar month occurring thereafter during the Term hereof, Tenant shall pay to Landlord the annual Base Rent payable for each year during the Term hereof in equal monthly installments; provided that the first payment of Base Rent shall include an additional payment for the partial calendar month occurring between the Commencement Date and the first payment of Base Rent required under this Section. Any payment of Base Rent for a period of less than one calendar month shall be prorated based upon a 30 day month. 4.3. ADDITIONAL RENT. Commencing on the first day of the second Lease Year and continuing on the first day of each succeeding Lease Year thereafter commencing during the 13 17 Term, Tenant shall pay, in addition to the Base Rent, an annual amount (the "ADDITIONAL RENT") equal to the sum of (i) Additional Rent, if any, payable during the immediately preceding Lease Year and (i) the product of (x) the Adjustment Factor for the immediately preceding Lease Year and (y) the sum of Base Rent plus Additional Rent, if any, payable to Landlord during the immediately preceding Lease Year. The annual Additional Rent shall be paid to Landlord in equal monthly installments paid concurrently with each payment of Base Rent. 4.4. ADDITIONAL CHARGES/LATE PAYMENTS. Tenant shall pay and discharge as and when due and payable all Impositions and other amounts, liabilities and obligations which relate to the Property. If Tenant fails or refuses to pay any of the items referred to in the immediately preceding sentence, Tenant shall promptly pay and discharge every fine, penalty, interest and cost which may arise or accrue for the non-payment or late payment of such items. The aforementioned amounts, liabilities, obligations, Impositions, fines, penalties, interest and costs and any and all other amounts which Tenant may owe to Landlord pursuant to the terms of this Lease are referred to herein as "Additional Charges." The Additional Charges shall constitute Rent hereunder. Tenant hereby acknowledges that late payment by Tenant to Landlord of any Rent due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Property. Accordingly, if any Rent shall not be paid within five (5) days of its due date, Tenant shall pay Landlord without requirement of notice or demand therefor, as an Additional Charge, a late charge equal to six percent (6%) of the amount of such overdue Rent and, in such event, the parties hereby agree that such late charge will represent a fair and reasonable estimate of the costs Landlord will incur by reason of the late payment by Tenant. No late charge may be imposed more than once for the same late payment. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any other rights and remedies to which it may be entitled hereunder. 4.5. BOND LEASE. This Lease is what is commonly called a "bond lease", it being understood that Landlord shall receive all Rent as provided in this Article net of any and all Impositions, Encumbrances, charges, costs, liabilities or expenses of any nature whatsoever in connection with the ownership and operation of the Property. (A) NO SET-OFF OF RENT. Landlord shall receive all Rent due hereunder and Rent shall be due and payable by Tenant in all events, without notice or demand and without any setoff, counterclaim, abatement, suspension, deduction or defense whatsoever. Tenant hereby irrevocably waives the application of and any rights it may have pursuant to any law or other Legal Requirement relating to valuation and appraisement. In addition to the Rent reserved by this Article, Tenant shall pay to the parties respectively entitled thereto all Impositions, insurance premiums, operating charges, maintenance charges, construction costs (excluding Total Project Costs which are expressly made the responsibility of another Person under the Transaction Documents) and any other charges, costs, liabilities and expenses which arise with respect to the Property or which otherwise may be contemplated under any provisions of this Lease during the Term hereof. All of such charges, costs, liabilities and expenses shall constitute additional rent, and upon the failure of Tenant to pay any such costs, charges, liabilities or expenses, Landlord shall have the same rights and remedies as otherwise provided in this Lease for the failure of Tenant to pay Rent. It is the intention of the parties hereto that, except as herein expressly provided this Lease shall not be terminable for any reason by Tenant. Any present or future law to the contrary shall not alter this agreement of the parties. 14 18 (b) BANKRUPTCY. Tenant covenants and agrees that it will remain obligated under this Lease in accordance with its terms, and that Tenant will not take any action to terminate, rescind, or avoid this Lease, notwithstanding the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, windingup or other proceeding affecting Landlord or any assignee of Landlord in any such proceeding and notwithstanding any action with respect to this Lease which may be taken by any trustee or receiver of Landlord or any such assignee in any such proceeding or by any court in any such proceeding. (i) In the event that Tenant shall file a petition, or an order for relief is entered against the Tenant, under Chapter 7, 9, 11 or 13 of the Bankruptcy Code (11 USC ss. 101 et seq.) (the "Bankruptcy Code"), and the trustee of Tenant shall elect to assume this Lease for the purpose of assigning the same, such assumption and/or assignment may only be made if all of the terms and conditions of subsections (ii) and (iii) of this Section 4.5((b)) are satisfied. If such trustee or debtor-in-possession, as the case may require, shall fail to elect to assume this Lease within sixty (60) days after such trustee of Tenant shall have been appointed, or the date of filing of the petition, as the case may be, at Landlord's election (and in Landlord's sole and absolute discretion) this Lease shall be deemed to have been rejected and, in such event, Landlord shall thereupon immediately be entitled to possession of the Property without further obligation to the Tenant or Tenant's trustee in bankruptcy, and this Lease shall be canceled, but Landlord's right to be compensated for damages in such bankruptcy proceeding shall survive such cancellation. (ii) No election to assume this Lease shall be effective unless in writing and addressed to Landlord and unless, in the Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, have been satisfied. (A) The trustee or the debtor-in-possession has cured or has provided Landlord "adequate assurance" (as defined hereunder) that: (1) within ten (10) days from the date of such assumption, the trustee (or debtor-in-possession) will cure all monetary defaults under this Lease; and (2) within thirty (30) days from the date of such assumption, the trustee (or debtor-in-possession) will cure all nonmonetary defaults under this Lease. (B) The trustee or the debtor-in-possession has compensated, or has provided to Landlord adequate assurance that within ten (10) days from the date of assumption Landlord will be compensated, for any pecuniary loss incurred by Landlord arising from the default of the Tenant, the trustee, or the debtor-in-possession, as recited in Landlord's written statement of pecuniary loss sent to the trustee or debtor-in-possession; (C) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under the Lease; provided, however, that: (1) the trustee or debtor-in-possession shall also deposit with Landlord, as security for the timely payment of Rent, an amount equal to three (3) months' of the then current Base Rent and other monetary charges accruing under this Lease; and 15 19 (2) the obligations imposed upon the trustee or debtor-in-possession shall continue with respect to Tenant after the completion of bankruptcy proceedings. (D) Landlord has determined that the assumption of the Lease will not: (1) breach any provision in any agreement by which Landlord is bound relating to the Property; or (2) disrupt, in Landlord's judgment, the reputation and profitability of the Property. (E) For purposes of this subsection (ii), "adequate assurance" shall mean: (1) Landlord shall determine that the trustee or the debtor-in-possession has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the trustee or debtor-in-possession will have sufficient funds to fulfill the obligations of Tenant under this Lease; and (2) an order shall have been entered segregating sufficient cash payable to Landlord and/or there shall have been granted a valid and perfected first lien and security interest in property of the Tenant, trustee or debtor-in-possession, acceptable as to value and kind to Landlord, to secure to Landlord the obligation of the Trustee or debtor-in-possession to cure the monetary and/or nonmonetary defaults under this Lease within the time periods set forth above. (iii) If the trustee or debtor-in-possession has assumed the Lease pursuant to the terms and provisions of subsections (i) and (ii) herein, for the purpose of assigning (or election to assign) the Tenant's interest under this Lease or the estate created thereby, to any other person, such interest or estate may be so assigned only if Landlord shall acknowledge in writing that the intended assignee has provided "adequate assurance" (as defined in this subsection (iii)) of future performance of all of the terms, covenants and conditions of this Lease to be performed by Tenant. For purposes of this Section, adequate assurance of future performance shall mean that Landlord shall have ascertained that each of the following conditions has been satisfied: (A) The assignee has submitted a current financial statement audited by a Certified Public Accountant which shows a net worth and working capital in amounts determined to be sufficient by Landlord to assure the future performance by such assignee of the Tenant's obligations under this Lease; (B) If requested by Landlord, the assignee shall have obtained guarantees in form and substance satisfactory to Landlord from one or more persons who satisfy Landlord's standards of creditworthiness; 16 20 (C) Landlord has obtained all consents to waivers from any third party required under any lease, mortgage, financing arrangement or other agreement by which Landlord is bound to enable Landlord to permit such assignment; (D) This assignee has deposited an adequate security deposit with Landlord; and (E) The assignee has demonstrated that its intended use of the Property is consistent with the terms of this Lease and will not diminish the reputation of the Building, or violate any "exclusive" which has been granted to another tenant in the Building. (iv) When, pursuant to the Bankruptcy Code, the trustee or debtor-in-possession shall be obligated to pay reasonable use and occupancy charges for the use of the Property or any portion thereof, such charges shall not be less than the then current Base Rent as defined in this Lease and other monetary obligations of Tenant. (v) Neither Tenant's interest in the Lease, nor any lesser interest of Tenant herein, nor any estate of Tenant hereby created, shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of the Tenant unless Landlord shall consent to such transfer in writing. No acceptance by Landlord of rent or any other payments from any such trustee, receiver, assignee, person or other entity shall be deemed to have waived, nor shall it waive the need to obtain Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without such consent. (vi) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on or after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assumption. 5. IMPOSITIONS ----------- 5.1. PAYMENT OF IMPOSITIONS. Tenant shall pay, or cause to be paid, all Impositions prior to delinquency and before any fine, penalty, interest or cost may be added for nonpayment (subject to Tenant's rights of contest pursuant to the provisions of Article 13. Such payments shall be made directly to the authorities levying or to the other persons entitled to such Impositions, if possible. Tenant shall, promptly upon request by Landlord, furnish to Landlord original or certified copies of receipts or other reasonably satisfactory evidence of such payments. Tenant's obligation to pay Impositions shall be deemed absolutely fixed upon the date such Impositions become due to the authority or person entitled thereto. If any such Imposition may, at the option of the payor, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may pay the same (and shall pay any accrued interest on the unpaid balance of such Imposition) in installments, and in such event shall pay such installments (subject to Tenant's right of contest pursuant to the provisions of Article 13) as the same become due and before any fine, penalty, premium, further interest or cost is added thereto. Landlord shall, to the extent required or permitted by applicable laws and regulations, prepare at its expense and file all returns with respect to Landlord's net income, gross receipts, sales, use, single business, transaction privilege, rent, ad valorem and franchise taxes, and with respect to taxes on Landlord's capital stock. Tenant shall, at its expense, and to the extent required or permitted by applicable laws and regulations, prepare and file all other tax 17 21 returns and reports with respect to any Imposition as may be required by governmental agencies, authorities or other persons entitled to the receipt of the Impositions. If any refund shall be due from any taxing authority or other persons entitled to the receipt of the Impositions with respect to any Imposition paid by Tenant, the same shall be paid over to and retained by Tenant unless an Event of Default shall have occurred hereunder and be continuing, in which case such refund shall be paid over to and retained by Landlord. Any such funds retained by Landlord due to an Event of Default shall be applied as provided in Article 17. Landlord and Tenant shall, each upon a request by the other, provide such information regarding the Property as is maintained by the party to whom the request is made as may be reasonably necessary to prepare any required returns or reports. If any governmental agency or authority classifies any property covered by this Lease as personal property, Tenant shall file all personal property tax returns in such jurisdictions where it may legally so file. Landlord, to the extent it possesses the same, and Tenant, to the extent it possesses the same, will provide to the other party, promptly upon request, cost and depreciation records reasonably necessary for filing returns for any property so classified as personal property. If Landlord is legally required to file any personal property tax returns, Landlord shall provide Tenant with copies of any assessment notices with respect thereto in sufficient time for Tenant to file a protest with respect thereto if it so elects pursuant to Article 13. If no Event of Default is then continuing, Tenant may at its option and sole cost and expense, upon notice to Landlord, protest, appeal or institute such other proceedings as Tenant reasonably may deem appropriate to effect a reduction of real estate or personal property assessments so long as such action is conducted in good faith and with due diligence and without prejudice to Landlord's rights or interest in or with respect to the Property or Landlord's rights under this Lease. In such event, Landlord, at Tenant's sole cost and expense, shall fully cooperate with Tenant in such protest, appeal, or other action. Tenant hereby agrees to indemnify, defend, protect, save and hold Landlord harmless from and against any and all losses, demands, claims, obligations and liabilities against or incurred by Landlord in connection with such protest, appeal or other proceeding. Billings by Landlord to Tenant for reimbursement of personal property taxes shall be accompanied by copies of a bill therefor and evidence of payment thereof which identify the personal property with respect to which such payment has been made. 5.2. NOTICE OF IMPOSITIONS. Landlord shall give prompt Notice to Tenant of all Impositions payable by Tenant hereunder of which Landlord at any time has knowledge. Notwithstanding the foregoing, however, Landlord's failure to give any such Notice shall in no way diminish Tenant's obligations hereunder to pay such Impositions, but unless Tenant or Manager otherwise had notice of such Imposition, Landlord shall be responsible for any fine, penalty or interest resulting from its failure to give such Notice and any default by Tenant hereunder shall be obviated for a reasonable time after Tenant receives Notice of any Imposition which it is obligated to pay. 5.3. ADJUSTMENT OF IMPOSITIONS. Impositions imposed with respect to the tax period during which the Term expires or terminates shall be adjusted and prorated between Landlord and Tenant, whether or not such Imposition is imposed before or after such expiration or termination, so that Tenant is only obligated to pay that portion of such Imposition(s) pertaining to the tax period within the Term. The obligation of Tenant to pay its prorated share of Impositions shall survive expiration of earlier termination of this Lease. 5.4. UTILITY CHARGES. Tenant shall pay or cause to be paid all charges for all utilities, including but not limited to electricity, power, gas, oil and water, used in the Property during the Term. 5.5. INSURANCE PREMIUMS. Tenant shall pay or cause to be paid all premiums for insurance coverage required to be maintained pursuant to Article 14. 18 22 6. TERMINATION OR ABATEMENT OF LEASE --------------------------------- 6.1. NO TERMINATION OR ABATEMENT. Without limiting the generality of Section 4.5((a)) hereof, Tenant, to the full extent permitted by law, shall remain bound by this Lease in accordance with its terms in all events unless Landlord shall elect to terminate this Lease (other than due to an Event of Default) in accordance with the terms hereof. Tenant shall not take any action without the prior written consent of Landlord to modify, surrender or terminate this Lease. The obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements, and Rent and all other sums shall continue to be payable by Tenant hereunder in any event unless the obligation of Tenant to pay the same terminates pursuant to the express provisions of this Lease by termination of this Lease (other than by reason of an Event of Default). Without limiting the generality of the immediately preceding sentence, Tenant shall not seek or be entitled to any abatement, deduction, deferment or reduction of Rent, or setoff against Rent, nor shall the respective obligations of Landlord and Tenant be otherwise affected by reason of (a) any damage to, or destruction of, all or any portion of the Property from whatever cause or any Taking of all or any portion of the Property; (b) the lawful or unlawful prohibition of, or restriction upon, Tenant's use of all or any portion of the Property, or the interference with such use or with Tenant's quiet enjoyment of the Property by any person or entity; (c) the eviction of Tenant from the Property or any portion thereof whether by paramount title or otherwise; (d) any claim which Tenant has or may have against Landlord by reason of any default or breach of any warranty by Landlord under this Lease or any other agreement between Landlord and Tenant or to which Landlord and Tenant are parties; (e) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceeding affecting Landlord or any assignee or transferee of Landlord; or (f) any other cause, whether similar or dissimilar to any of the foregoing. Tenant hereby specifically waives all rights, arising from any occurrence whatsoever, which (i) may now or hereafter be conferred upon it by law or otherwise to modify, surrender or terminate this Lease or quit or surrender all or any portion of the Property or (ii) entitle Tenant to any abatement, reduction, suspension or deferment of Rent or other sums payable by Tenant hereunder. 7. OWNERSHIP OF PROPERTY; TENANT'S PERSONAL PROPERTY SECURITY INTEREST ------------------------------------------------------------------- 7.1. OWNERSHIP OF THE PROPERTY. The Property is, and throughout the Term shall continue to be, the property of Landlord. Tenant has only the right to the exclusive possession and use of the Property, upon the terms and subject to the conditions set forth in this Lease. 7.2. TENANT'S PERSONAL PROPERTY; SECURITY INTEREST. Tenant may, at its expense, install, assemble or place on the Property any items of Tenant's Personal Property and may, subject to the conditions set forth below, remove Tenant's Personal Property upon the expiration or earlier termination of this Lease (other than a termination upon an Event of Default). Notwithstanding the foregoing, in order to secure the payment and the performance of all of Tenant's obligations under this Lease, Tenant hereby grants to Landlord a security interest in (and hereby pledges and collaterally assigns to Landlord) all of Tenant's rights, title and interest in and to Tenant's Personal Property, all whether now existing or hereafter acquired and hereby further agrees to execute and deliver to Landlord, forthwith after demand by Landlord from time to time, any security agreement in a reasonable form determined by Landlord and such additional writings and instruments, including without limitation financing statements, as may be required by Landlord for the purpose of effectuating the intent of this sentence and perfecting the security interest granted to Landlord hereunder, and Tenant agrees that Landlord shall have with respect to all of Tenant's Personal Property all rights and remedies of a secured party under the Uniform 19 23 Commercial Code as adopted by and in effect in the State, including, but not limited to, the right after the occurrence of an Event of Default to use, retain or sell Tenant's Personal Property (and any such sale may be either a private or public sale as determined in Landlord's reasonable discretion), and Landlord shall not be required to remove any of such Personal Property from the Property and in no event shall Landlord be liable to Tenant for Landlord's use or taking possession of such Personal Property. Pending disposition of such Personal Property by Landlord, the Landlord shall be entitled to use such Personal Property in connection with the operation (if any) of the Facility. Tenant shall not permit the Property or Tenant's Personal Property to become subject to any liens or encumbrances of any kind without first obtaining the prior written consent of Landlord, except that no such consent shall be required for any purchase money security interest for the acquisition of equipment constituting Tenant's Personal Property. The security interest granted Landlord hereby shall be subordinate to any such purchase money security interest. Landlord further agrees that Tenant may lease Tenant's Personal Property from third parties, and Landlord shall execute and deliver such agreements as may be reasonably required by any equipment lessor or the holder of a purchase money security interest to confirm that Landlord's lien on the item of Tenant's Personal Property in question is subordinate to the rights of such equipment lessor or lender on the express condition that, in each case, Tenant shall obtain from the holder of the purchase money debt or lessor of Personal Property, as the case may be, its agreement to (i) notify Landlord of any default by Tenant, (ii) allow Landlord an opportunity to cure any default, (iii) recognize Landlord as succeeding to Tenant's rights under the agreement in question and to the undisturbed use of the equipment, provided that Landlord fully complies with the terms of such agreement. Tenant shall provide and maintain on the Property during the entire Term such Tenant's Personal Property as shall be necessary to operate the Facility in compliance with any and all applicable licensure and certification requirements, in compliance with all Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the health care industry with respect to the Primary Intended Use then conducted on the Property by Tenant and permitted hereunder. All Tenant's Personal Property not removed by Tenant within ten (10) days following the expiration or earlier termination of this Lease shall be considered abandoned by Tenant and may be appropriated, sold, destroyed or otherwise disposed of by Landlord without first giving Notice thereof to Tenant and without any payment or obligation to account to Tenant. Tenant shall, at its sole cost and expense, restore the Property to the condition required by Section 10.1((d)), including repair of all damage to the Property caused by the removal of Tenant's Personal Property, whether effected by Tenant or Landlord. 8. CONDITION AND USE OF PROPERTY ----------------------------- 8.1. CONDITION OF THE PROPERTY. By taking possession of the Property, Tenant warrants and represents to Landlord (i) that it has examined and otherwise has approved the condition of the Property prior to accepting such possession, (ii) that Tenant has found the Property to be approved for occupancy by all appropriate governmental agencies having jurisdiction over issues related to occupancy, and (iii) that Tenant has found the Property to be satisfactory to Tenant in every respect including for its Primary Intended Use. Notwithstanding the foregoing, Tenant is leasing the Property "AS IS" irrespective of the accuracy of the facts and circumstances acknowledged and warranted and represented by Tenant as aforesaid, without any representation or warranty by Landlord of any kind and subject to all matters of every kind and description including without limitation (a) the existing state of title, including all covenants, conditions, restrictions, ground leases, easements, licenses, Legal Requirements, mortgages, deeds of trust, assignments of leases, fixture filings and other financing instruments and any and all other matters, including matters known to Tenant, all matters of record and other matters, and (b) matters which would be disclosed by an inspection of the Property or by an accurate survey of the Land, 20 24 (c) any matter relating to the construction, development or quality of the Improvements, Fixtures and any and all furnishings and equipment installed or located therein or otherwise within the Property, and (d) all other matters which should reasonably have been known or unknown to Tenant. Tenant waives any and all claims, demands and cause or causes of action heretofore or hereafter arising against Landlord with respect to the condition of the Property. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS DESIGN, CONDITION, HABITABILITY OR FITNESS FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO THE QUALITY OF DEFECTS IN THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT. TENANT ACKNOWLEDGES AND AGREES THAT, AS OF THE COMMENCEMENT DATE, THE PROPERTY SHALL BE CONCLUSIVELY DEEMED TO HAVE BEEN INSPECTED BY TENANT AND SHALL BE CONCLUSIVELY DEEMED TO BE SATISFACTORY TO IT IN ALL RESPECTS. 8.2. USE OF THE PROPERTY. (a) Tenant covenants, warrants and represents to Landlord that at the Commencement Date Tenant shall have, and shall thereafter exercise its best efforts to maintain in effect, all permits, licenses, authorizations and approvals needed to use and operate the Facility for Tenant's Primary Intended Use in accordance with all Legal Requirements. (b) Throughout the entire Term, Tenant shall use or cause the Property to be used solely for its Primary Intended Use. Tenant shall not use the Property or any portion thereof for any other purpose whatsoever without the prior written consent of Landlord. The parties agree that Landlord's consent will not be deemed to be unreasonably withheld if, in the reasonable opinion of Landlord, the Tenant's proposed use of the Property will significantly alter the character or purpose or detract from the value or operating efficiency of the Property, or significantly impair the revenue-producing capability of the Property. No use shall be made or permitted to be made of the Property and no acts shall be done which violate any Legal Requirements or Insurance Requirements or which will cause the cancellation of any insurance policy covering the Property or any part thereof, nor shall Tenant sell or permit to be kept, used or sold in, about or under the Property any Hazardous Substance or any other article which may be prohibited by the Legal Requirements or Insurance Requirements (provided, however, that Hazardous Substances comprised of medical waste or medical substances such as isotopes, alcohol, formaldehyde and other substances commonly used in the operation of medical offices and clinics similar to the Facility shall be permitted on the Property so long as all such wastes and substances are used, handled, maintained and disposed of in strict accordance with all applicable Legal Requirements and Insurance Requirements). Tenant shall, at its sole cost, comply with all Legal Requirements and Insurance Requirements. (c) Tenant shall not commit or suffer to be committed any waste nor shall Tenant cause or permit any nuisance on the Property. (d) Tenant shall neither suffer nor permit all or any portion of Tenant's Personal Property or the Property, including any Capital Addition whether or not financed or paid for by Landlord, to be used in such a manner as (i) may impair the owner's title or Landlord's entitlement thereto or to any portion thereof or (ii) may make possible a claim or claims of adverse usage, prescriptive right, adverse possession or implied dedication of all or any portion of the Property to the public, except as is necessary in the ordinary and prudent operation of the Property. 21 25 8.3. FUNDING OF MAINTENANCE AND REPAIR. Commencing in the sixth Lease Year, and continuing during each Lease Year throughout the Term, Tenant shall expend no less than $18,000 [$300 per unit ] during each Lease Year with respect to maintenance of the Property and capital repairs of existing elements of the Property. For the avoidance of doubt, expenditures with respect to repair and replacement of Tenant's Personal Property and other personal property at or about the Property shall not be included when determining whether Tenant has complied with the requirements of this Section 8.3. Upon the request of Landlord, Tenant shall deliver a written report to Landlord or its designated agent stating (i) the expenditures made by Tenant in accordance with this Section 8.3 during any prior Lease Year and (ii) the expenditures which Tenant anticipates making during the current Lease Year in order to comply with this Section 8.3. 9. LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS --------------------------------------------- 9.1. COMPLIANCE WITH LEGAL REQUIREMENTS, INSURANCE REQUIREMENTS AND INSTRUMENTS. Subject to the rights of Tenant as provided in Article 13 relating to permitted contests, Tenant, at its sole cost and expense, shall promptly (a) comply with all applicable Legal Requirements and Insurance Requirements with respect to the use, operation, maintenance, repair and restoration of the Property, whether or not compliance therewith shall require structural change in the Property or interfere with the use and enjoyment of the Property, and (b) procure, maintain and comply with all appropriate licenses, certificates of need, provider agreements, service agreements and other permits, licenses, franchises and authorizations required for the Facility, any use of the Property and Tenant's Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Property or any part thereof, including without limitation any Capital Additions. 9.2. COVENANTS REGARDING LEGAL REQUIREMENTS. Tenant covenants and agrees that it shall not use the Property or Tenant's Personal Property for any purpose which violates the Legal Requirements. Tenant shall acquire and maintain all appropriate licenses, certificates, permits, provider agreements, service agreements, franchises, authorizations and approvals necessary to operate the Property and the Facility in its customary manner for the Primary Intended Use, and any other use conducted on the Property by Tenant and permitted by Landlord hereunder. If no Event of Default has occurred and is then continuing, Tenant may, however, upon prior Notice to Landlord, contest the legality or applicability of any such Legal Requirement or any licensure decision if Tenant maintains such action in accordance with the provisions of Article 13 hereof and otherwise conducts such action in good faith, with due diligence, without prejudice to Landlord's rights or entitlement to the Property or Landlord's rights hereunder and at Tenant's sole cost and expense. If by the terms of any such Legal Requirement compliance therewith, pending the prosecution of any such proceeding, may legally be delayed without the occurrence of any lien, charge, fine, penalty or other liability of any kind against the Property or Landlord's or Tenant's leasehold interest therein and without subjecting Tenant or Landlord to any liability, civil or criminal, for failure so to comply therewith, Tenant may delay compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Tenant, subject to the prior written consent of Landlord (which consent shall not be unreasonably withheld), may nonetheless contest and/or delay as aforesaid provided that such contest or delay, as the case may be, will not affect Landlord's entitlement to the Property, subject Landlord or Tenant to criminal liability and Tenant (a) furnishes to Landlord security reasonably satisfactory to Landlord, in Landlord's sole and absolute discretion, against any loss or injury by reason of such contest or delay, and (b) prosecutes the contest at Tenant's sole cost and expense, with due diligence and in good faith. 22 26 10. CONDITION OF THE PROPERTY ------------------------- 10.1. MAINTENANCE AND REPAIR. (a) Tenant, at its sole cost and expense, shall keep the Property and all private roadways, sidewalks and curbs appurtenant thereto in good order, condition and repair and, except as may otherwise be expressly provided to the contrary in Article 15, or 16, with reasonable promptness, shall, at Tenant's sole cost and expense, make all necessary and appropriate repairs and replacements thereto of every kind and nature, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, patent or latent, foreseen or unforeseen, or arising by reason of a condition existing prior to, at or after the Commencement Date and regardless of the cause necessitating repair. Tenant shall also be obligated at its expense to make all repairs, modifications and renovations necessary to comply with all licensing, safety and health and building code, regulations applicable to the Property so that it can be legally operated for its Primary Intended Use, including all modifications or other renovations which may be required under the Americans with Disabilities Act of 1990, as from time to time amended (42 U.S.C. ss. 12101 et seq.). All repairs by Tenant shall be made by duly licensed contractors under a no-lien contract (to the extent available in the State) and shall be made in a good and workmanlike manner using materials of good quality. Tenant shall not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of all or any portion of the Property for the Primary Intended Use. Tenant shall give Landlord ten days prior written notice of any repair, replacement, modification or renovation pursuant to this Section which is reasonably expected to cost in excess of $50,000 and, prior to commencing any such repair, replacement, modification or renovation, shall provide to Landlord either (i) a lien payment and completion bond in form and substance and issued by a surety reasonably acceptable to Landlord in an amount equal to 150% of the reasonably anticipated cost of such repair, replacement, modification or renovation (which payment bond together with a copy the applicable contract shall in the form required and shall be recorded in the office of the county recorder or county register of the county in which the portion of the Property is located in the manner required under the laws of the State to prevent liens from attaching to the Property) or (ii) a payment and completion guaranty in form and substance and executed by a guarantor reasonably acceptable to Landlord. (b) Landlord shall not under any circumstances be required to build or rebuild the Building or any other improvement on the Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to the Property, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, patent or latent, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with this Lease, nor shall Landlord under any circumstances be required to maintain the Property in any other way. Tenant hereby waives, to the fullest extent permitted by law, the right to make repairs at the expense of Landlord pursuant to any law or equitable principle in effect at the time of the execution of this Lease or hereafter enacted. Landlord shall have the right to give, record and post, on the Property and otherwise, as appropriate, notices of non-responsibility under any mechanic's lien laws now or hereafter existing, and any other notices of a similar nature that Landlord may reasonably elect to give, record or post from time to time during the Term. (c) Nothing contained in this Lease, and no action or inaction by Landlord, shall be deemed or construed in any manner as (i) constituting the consent or request of Landlord, expressed or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any labor or services or the furnishing of any materials or other property for the construction, alteration, addition, repair or demolition of or to all or any portion 23 27 of the Property or (ii) giving Tenant any right, power or permission to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such a manner as would permit the making of any claim against Landlord or any portion of the Property with respect thereto, or to make any agreement that may create, or in any way may be the basis for the assertion of any right, title, interest, lien, claim or other encumbrance upon the estate of Landlord in all or any portion of the Property. (d) Subject to Section 15.7 hereof, Tenant shall, upon the expiration or earlier termination of this Lease, vacate and surrender the Property to Landlord in the condition in which the Property was originally received from Landlord, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease, and except for ordinary wear and tear (but such exception shall be subject to the obligation of Tenant under this Section 10.1 to maintain and repair the Property and make those modifications and renovations to the Property which are required to keep the Property in good order, condition and repair during the entire Term of this Lease). 10.2. ENCROACHMENTS. If any portion of a Building shall at any time during the Term impair the rights of others under any easement or right-of-way burdening the Land, provided that such restriction or easement has not been created by Landlord subsequent to the Commencement Date and without the consent of Tenant in violation of this Lease, then promptly upon the request of Landlord, or at the behest of any person affected by violation or impairment and in such case, in the event of an adverse final determination, Tenant shall, at Tenant's sole cost and expense, but in conjunction with Landlord, obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Landlord or Tenant, subject to Landlord's consent to all such settlements or waivers. In any event Tenant shall, subject to Landlord's consent, take all such actions as may be necessary in order to be able to continue the operation of the Property for the then existing use substantially in the manner and to the extent the Property was operated prior to the assertion of such violation or impairment. Notwithstanding the provisions of this Section 10.2 to the contrary, Tenant shall not be responsible for any claims to the extent such claims are covered by Landlord's title insurance policy, and Landlord agrees that any proceeds recovered under such title insurance policy shall be made available to remedy the claimed violation or restriction. 11. CAPITAL ADDITIONS ----------------- 11.1. CONSTRUCTION OF CAPITAL ADDITIONS. (a) If no Event of Default shall have occurred and be continuing, Tenant may, subject to the terms and conditions contained in this Article, construct or install Capital Additions on the Property with the prior written approval of Landlord. Tenant shall not be permitted to create any Encumbrance on the Property in connection with any such Capital Addition. (b) Prior to commencing construction of any Capital Addition, Tenant shall submit a written proposal to Landlord setting forth in detail any proposed Capital Addition which proposal shall include plans and specifications, permits, licenses, contracts and other information concerning the proposed Capital Addition. Without limiting the generality of the foregoing, the proposal shall indicate the approximate projected cost of constructing the proposed Capital Addition, the use or uses to which it will be put and a good faith estimate of the change, if any, in the Tenant's gross revenue that Tenant anticipates will be caused by the addition of the proposed Capital Addition to the Property. Tenant shall not commence to build any Capital Addition unless Tenant shall first have provided Landlord with either (i) a lien payment and completion 24 28 bond in form and substance and issued by a surety reasonably acceptable to Landlord in an amount equal to 150% of the reasonably anticipated cost of such repair, replacement, modification or renovation (which payment bond together with a copy the applicable contract shall in the form and amount required and shall be recorded in the office of the county recorder or county register of County in which the portion of the Property is located in the manner required under the law of the State to prevent liens from attaching to the Property) or (ii) a payment and completion guaranty in form and substance and executed by a guarantor reasonably acceptable to Landlord. (c) No Capital Addition shall be made which would tie in or connect any improvements on the Property with any other improvements on property adjacent to the Property (and not part of the Property covered by this Lease), including without limitation, tieins of buildings or other structures or utilities unless Tenant shall have obtained the prior written consent of Landlord. Landlord may grant, withhold or delay its consent in its sole discretion. All proposed Capital Additions shall be architecturally integrated and consistent with the use and design of Property. 11.2. CAPITAL ADDITIONS FINANCED OR PAID FOR BY LANDLORD. (a) Tenant shall request that Landlord provide or arrange financing for any Capital Addition which is reasonably expected to cost in excess of $50,000 by providing to Landlord such information about the Capital Addition as Landlord may reasonably request. Landlord may, but shall be under no obligation to, meet the request, and within 30 days of receipt of such information, Landlord shall notify Tenant as to whether it will finance the proposed Capital Addition and, if so, the terms and conditions upon which it would do so, including the terms of any amendment to this Lease (including, without limitation, an increase in Rent to compensate Landlord for the additional funds advanced by it). In no event shall the portion of such Capital Additions cost constituting charges for material, labor and fixtures comprise less than eighty-five percent (85%) of the total amount of such Capital Additions Cost. (b) If Landlord elects to finance the Capital Additions Cost of the proposed Capital Addition, Tenant shall provide Landlord with the following (unless waived by Landlord in writing): (i) prior to any disbursement of funds, such information, certificates, licenses, permits, authorizations, evidence of zoning and other documents reasonably requested by Landlord, or by any third party lender with whom Landlord has agreed or may agree to provide financing, as necessary to confirm that Tenant will be able to use the Capital Addition upon completion thereof in accordance with the Primary Intended Use for such Capital Addition, including all required federal, state or local government licenses, permits, authorizations and approvals; (ii) prior to any disbursement of funds, an Officer's Certificate and, if requested, a certificate from Tenant's architect, setting forth in reasonable line-item detail the projected (or actual, if available) Capital Additions Cost; (iii) prior to or coincident with the first disbursement of funds, an amendment to this Lease (together with a memorandum thereof in recordable form), duly executed and acknowledged, in form and substance reasonably satisfactory to Landlord, providing for the change in the Rent, the legal description of any land obtained or leased in connection with such Capital Addition and such other provisions as may be necessary or appropriate; 25 29 (iv) prior to or coincident with payment for any land obtained in connection with such Capital Addition, a deed conveying to Landlord title to such land, or, if applicable, a ground lease on terms acceptable to Landlord, which title (or leasehold, if applicable) shall be free and clear of any liens, encumbrances or other exceptions to or matters affecting title except those approved by Landlord, and, upon completion of the Capital Addition, a final as-built survey thereof reasonably satisfactory to Landlord; (v) during construction and following completion of the Capital Addition, endorsements to any outstanding policy of title insurance covering the Property, or commitments therefor reasonably satisfactory in form and content to Landlord (X) updating the same without any additional exception except such as may be reasonably permitted by Landlord and (Y) adding to its coverage any land acquired or leased in connection with such Capital Addition and increasing the coverage thereof by an amount equal to the Fair Market Value of the Capital Addition (except to the extent covered by the owner's policy of title insurance referred to in subparagraph (vi) below); (vi) following the advance of funds, if appropriate, (X) an extended coverage owner's policy of title insurance insuring fee simple title (or, if applicable, Landlord's leasehold interest) to any land conveyed (or leased) to Landlord pursuant to subparagraph (iv), free and clear of all liens and encumbrances except those approved by Landlord, and (Y) a lender's policy of title insurance reasonably satisfactory in form and substance to Landlord and to any Lender with whom Landlord has agreed or may agree to provide financing; and (vii) during or following the advancement of funds, prints of architectural and engineering drawings relating to the Capital Addition and such other certificates (including, but not limited to, endorsements increasing the insurance coverage, if any, at the time required by Section 14.1), documents, opinions of counsel, appraisals, surveys, certified copies of duly adopted resolutions of the board of directors of Tenant authorizing the execution and delivery of the lease amendment and any other instruments as may be reasonably required by Landlord and any lender from whom Landlord has agreed or may agree to obtain financing. (c) Any new mortgage or supplement to any existing mortgage entered into by Landlord with any lending institution covering the Property or any land referred to in subparagraph (v) above shall be subject to the rights of Tenant under this Lease, as this Lease may be amended from time to time. 11.3. CAPITAL ADDITIONS PAID FOR BY TENANT. If Landlord elects not to finance the cost of a Capital Addition under the terms of Section 11.2 and Tenant elects nevertheless to make such Capital Addition, (i) Tenant shall not commence any construction with respect to such Capital Addition without first obtaining the prior written consent of Landlord, (ii) Tenant shall comply with all requirements of this Lease, including without limitation Section 10.1, and (iii) Tenant shall pay all costs of such Capital Addition, and there shall be no adjustment in the Rent by reason of any such Capital Addition. 11.4. DISPOSITION OF CAPITAL ADDITIONS UPON EXPIRATION OR TERMINATION OF LEASE. Upon the expiration or earlier termination of this Lease, all Capital Additions shall pass to and become the property of Landlord, free and clear of all encumbrances, without payment by Landlord. 11.5. NON-CAPITAL ADDITIONS. Tenant shall have the right to make additions, modifications or improvements to the Property which are not Capital Additions from time to time as it, in its reasonable discretion, may deem to be desirable for the Property's uses and 26 30 purposes permitted hereunder, provided that such action shall not significantly alter the character or purpose or detract in any manner from the value or operating efficiency of the Property nor significantly impair the revenue-producing capability of the Property or materially and adversely affect the ability of Tenant to comply with the provisions of this Lease and that Tenant give Landlord ten days prior written notice of such addition, modification or improvement the cost of which exceeds $100,000, which are not Capital Additions. The cost of such noncapital additions, modifications or improvements to the Property shall be paid by Tenant, and all such non-capital additions, modifications and improvements shall, without payment by Landlord at any time, be included under the terms of this Lease, and upon expiration or earlier termination of this Lease shall pass to and become the property of Landlord. 11.6. SALVAGE. All materials which are scrapped or removed in connection with the making of either Capital Additions permitted by Section 11.1, non-capital additions permitted by Section 11.5, or repairs required by Article 10 shall be or become the property of Landlord. 12. LIENS ----- Subject to the provisions of Article 13 relating to permitted contests, Tenant shall not directly or indirectly create or allow to remain and shall promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon any portion of the Property or any attachment, levy, claim or encumbrance in respect of Rent, not including, however, (a) this Lease, (b) Permitted Encumbrances, if any, and the Leasehold Mortgage encumbering solely Tenant's interest in the Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Landlord, (d) liens for those taxes of Landlord which Tenant is not then currently required to pay hereunder, (e) subleases permitted by Article 23, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as the same are not yet payable or are payable without the addition of any fine or penalty and are in the process of being contested as permitted by Article 13, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due, provided that, notwithstanding the provisions of Article 13, at Landlord's request Tenant shall remove any such lien from record title to the Property, at Tenant's sole cost and expense, by executing undertakings, with sufficient sureties in the manner required by the Law of the State (including Indiana Statutes Section 328311) to remove such lien from record title to the Property; provided further (i) the payment of such sums shall not be postponed for more than five days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor and or (ii) any such liens are in the process of being contested as permitted by Article 13, and (h) any liens which are the responsibility of Landlord pursuant to the provisions of Article 26. 13. CONTESTS -------- Tenant, on its own or on Landlord's behalf (or in Landlord's name), but at Tenant's sole cost and expense, may contest, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy, Encumbrance, charge or claim not otherwise permitted by Article 12, provided that (a) in the case of an unpaid Imposition, lien, attachment, levy, encumbrance, charge or claim, the commencement and continuation of such proceedings shall suspend the collection thereof from Landlord and from the Property, (b) neither the Property nor any Rent therefrom nor any part thereof or interest 27 31 therein would be subject to any risk of being sold, forfeited, attached, foreclosed, or lost, (c) in the case of a Legal Requirement, Landlord would not be in any danger of civil or criminal liability for failure to comply therewith pending the outcome of such proceedings, (d) in the event that any such contest shall involve a sum of money or potential loss in excess of $50,000 then, in any such event, Tenant shall deliver to Landlord an Officer's Certificate and opinion of counsel to the effect set forth in clauses (a), (b) and (c), to the extent applicable, (e) in the case of a Legal Requirement or an Imposition, lien, encumbrance or charge, Tenant shall give such reasonable security as may be demanded by Landlord to insure ultimate payment of the same and to prevent any sale or forfeiture of the affected portion of the Property or the Rent by reason of such non-payment or non-compliance including without limitation a guaranty in form and substance acceptable to Landlord and executed by a guarantor acceptable to Landlord (g) in the case of an Insurance Requirement, the coverage required by Article 14 shall be maintained, and (h) if such contest be finally resolved against Landlord or Tenant, Tenant shall, as Additional Charges due hereunder, promptly pay the amount required to be paid, together with all interest and penalties accrued thereon, or comply with the applicable Legal Requirement or Insurance Requirement. Notwithstanding any express or implied provision of this Article to the contrary, the provisions of this Article shall not be construed to permit Tenant to contest the payment of Rent (except as to contests concerning the method of computation or the basis of levy of an Imposition) or any other sums payable by Tenant to Landlord hereunder. Landlord, at Tenant's expense, shall execute and deliver to Tenant such authorizations and other documents as may reasonably be required in any such contest and, if reasonably requested by Tenant or if Landlord so desires, Landlord shall join as a party therein. Tenant shall indemnify, defend and save Landlord harmless against any liability, cost or expense of any kind that may be imposed upon Landlord in connection with any such contest and any loss resulting therefrom. 14. INSURANCE --------- 14.1. GENERAL INSURANCE REQUIREMENTS. Tenant shall at all times maintain policies of insurance insuring the Property, and all property located in or on the Property and shall insure the Property, against the kinds of risks and in the amounts of coverage described below. All such insurance shall be written by companies of recognized responsibility authorized to conduct an insurance business in the State. Except as expressly provided to the contrary in subsection 14.1((e)) below, all such insurance (other than insurance with respect to Tenant's Personal Property) shall name Landlord as the insured and name Tenant as an additional insured. All insurance with respect to Tenant's Personal Property shall name Tenant and Landlord as co-insureds. Proceeds of insurance policies payable to compensate any loss shall be payable to Landlord or Tenant as provided in Article 15. All such insurance shall name as an additional insured or loss payee, as appropriate, the holder (a "Facility Mortgagee") of any mortgage, deed of trust or other security agreement securing any Encumbrance placed on the Property in accordance with the provisions of Article 26 ("Facility Mortgages") by way of a standard form of mortgagee's loss payable endorsement. Any loss adjustment or other settlement in excess of $100,000 shall require the written consent of Landlord and each Facility Mortgagee and any other lender of Landlord or its Affiliates ("Landlord Lender") having any contractual insurance requirements which would impact on the insurance requirements of this Lease to the extent so required and Landlord has given Tenant notice thereof. Originals or certified copies of all insurance policies obtained pursuant to this Article shall be deposited with Landlord and, if requested, with any Facility Mortgagee(s) or Landlord Lender(s). The policies on the Property, including the Building, Fixtures and Tenant's Personal Property, shall insure against the following risks: 28 32 (a) loss or damage by fire, vandalism and malicious mischief, extended coverage perils ("all risk" as such term is used in the insurance industry), and all physical loss perils insurance including but not limited to sprinkler leakage, in an amount not less than 100% of the then full replacement cost thereof (as defined below in Section 14.2) or such lesser amount as is approved by Landlord in writing, which coverage shall include an "increased cost of construction" endorsement; (b) loss or damage by explosion of steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Facility in such amounts with respect to any one accident as may be reasonably requested by Landlord from time to time; (c) Tenant's business interruption under a rental value insurance policy covering risk of loss during the lesser of the first 12 months of reconstruction or the actual reconstruction period necessitated by the occurrence of any of the hazards described in Sections 14.1((a)) or 14.1((b)) or 14.1((h)), if and to the extent available and economically feasible, in an amount sufficient to prevent Landlord from becoming a coinsurer; (d) Landlord's loss of rental, under a rental value insurance policy for not less than 12 months of scheduled Base Rent; (e) Claims for personal injury or property damage under a policy of Comprehensive General Public Liability insurance or Commercial General Liability insurance applying to the use and occupancy of the Property, or any part thereof, or any areas adjacent thereto, and the business operated by Tenant. Such insurance shall name Tenant as the named insured and name Landlord and American Health Properties, Inc. as an additional insured and shall include Broad Form Contractual Liability insurance coverage insuring all of Tenant's indemnity obligations pursuant to Section 22.1 of this Lease. Such coverage shall have a total limit of $13,000,000 with a minimum combined single limit of liability of primary policy coverage of at least $1,000,000 with a general aggregate limit as to such primary policy of at least $3,000,000 and shall have a minimum umbrella or excess limit of at least $10,000,000. Any such policy shall be written to apply to all bodily injury, property damage, personal injury and other covered losses, however occasioned, occurring during the policy term, and shall be endorsed to provide that such coverage shall be primary and that any insurance maintained by Landlord shall be excess insurance only. Such coverage shall also contain endorsements: (i) deleting any employee exclusion on personal injury coverage; (ii) including employees as additional insureds; (iii) deleting any liquor liability exclusion; and (iv) providing for coverage of employers automobile nonownership liability. All such insurance shall provide for severability of interests; shall provide that an act or omission of one of the named insureds shall not reduce or avoid coverage to the other named insureds; and shall afford coverage for all claims based on acts, omissions, injury and damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. Tenant shall also maintain employers liability insurance with a total limit of $10,500,000 with a limit as to the primary policy of no less than $500,000 per employee and $500,000 per occurrence and as to the excess or umbrella policy of at least $10,000,000; (f) claims arising out of medical malpractice in an amount not less than $13,000,000 in total with a primary coverage policy limit of not less than $1,000,000 for each person and $3,000,000 per occurrence and an umbrella policy coverage of not less than $10,000,000; (g) flood (when the Property is located in whole or in part within an area designated by an appropriate agency or authority of the United States as a flood plain) and such 29 33 other hazards (including without limitation earthquake) in such amounts as may be customary for comparable properties in the County in which the Property is located and as may be available from insurance companies, insurance pools, or other appropriate companies authorized to do business in the State at rates which are economically practicable in relation to the risks covered; and (h) During any period during which any Capital Addition is under construction, course of construction insurance and all risks insurance in such amounts as Landlord shall reasonably require. 14.2. REPLACEMENT COST. The term "full replacement cost" as used herein shall mean the actual replacement cost of the Property requiring replacement from time to time, less the standard printed exclusions provided in a normal fire insurance policy. The amount of the insurance coverage shall be sufficient to preclude either Landlord or Tenant from becoming a co-insurer under the provisions of the policy. At the option of Landlord, Tenant shall procure a "stipulated value" or "agreed amount" endorsement deleting the co-insurance provision of any insurance policy required hereunder. If either party believes that full replacement cost (the then replacement cost less such exclusions) has increased or decreased at any time during the Lease Term, it may have such full replacement cost redetermined by the insurer then providing the largest amount of fire insurance coverage carried on the Property. 14.3. ADDITIONAL INSURANCE. In addition to the insurance described in Section 14.1, throughout the Term Tenant shall maintain such additional insurance as may reasonably be required from time to time by Landlord provided that the types and amounts of any such additional insurance required by Landlord is then customarily maintained by the operators of similar health care facilities in the County in which the Property is located. Tenant shall further maintain adequate workers' compensation insurance coverage for all persons employed by Tenant on the Property. Such workers' compensation insurance shall be in accordance with the requirements of applicable local, state and federal law. 14.4. WAIVER OF SUBROGATION. All insurance policies carried by Landlord or Tenant covering the Property, the Fixtures, the Facility or Tenant's Personal Property shall expressly waive any right of subrogation on the part of the insurer against the other party. Landlord and Tenant agree that the respective policies of insurance carried by them will include such waiver clauses or endorsements so long as the same are obtainable without extra cost. If such clauses and endorsements are only available upon the payment of an extra charge, the other party, at its election, may pay the same, but shall not be obligated to do so; provided that the Tenant shall at all times be obligated to carry the policies of insurance required under this Article regardless of whether the waiver of subrogation required under this Section is available. 14.5. FORM OF INSURANCE. All of the policies of insurance referred to in this Article shall be written in a form satisfactory to Landlord, and issued by insurance companies which are duly authorized to issue such insurance in the State and are rated A-X or better in the most current issue of "Best's Insurance Guide". Landlord agrees that it will not unreasonably withhold or delay its approval as to the form of the policies or the insurance companies selected by Tenant. Tenant shall pay all of the premiums therefor, and shall deliver an original or certified copy of any policy, and each renewal thereof, to Landlord, any Facility Mortgagee and any Landlord Lender at least 10 days prior to the expiration of the existing policy to which such renewal policy relates. If Tenant either fails to effect such insurance as herein required or to pay the premiums therefor, or to deliver such policies or certified copies thereof to Landlord at the times required, Landlord shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, which premiums shall be repayable to Landlord as Rent upon demand 30 34 therefor in a Notice, and failure by Tenant to repay the same shall constitute an Event of Default within the meaning of Section 17.1((b)). Each insurer mentioned in this Article shall agree, by endorsement on the policy or policies issued by it, or by independent instrument furnished to Landlord, that it will give to Landlord (and to any Facility Mortgagee and Landlord Lender of which Tenant has notice, if required) 30 days' prior written notice before such policy or policies expire, are altered or are canceled. 14.6. CHANGE IN LIMITS. If either party shall at any time deem the limits of the personal injury or property damage public liability insurance or malpractice insurance then carried by Tenant to be insufficient or excessive, the parties shall endeavor in good faith to agree promptly upon the proper and reasonable limits for such insurance to be carried; provided that if the parties are unable to so agree, such dispute shall be submitted to arbitration in accordance with the provisions of Section 29.14 hereof. Such insurance shall thereafter be carried with the limits thus agreed upon until further change pursuant to the provisions of this Section. 14.7. BLANKET POLICY. Notwithstanding anything to the contrary contained in this Article, Tenant's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Tenant so long as (a) the coverage afforded to Landlord is not reduced or diminished or otherwise altered from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance and (b) the requirements of this Article are otherwise satisfied. 14.8. NO SEPARATE INSURANCE. Tenant shall not obtain separate insurance concurrent in form or contributing in the event of loss with that required in this Article 14 to be furnished by, or which may reasonably be required to be furnished by Tenant, nor shall Tenant increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Landlord and all Facility Mortgagees, are named therein as additional insureds, and the loss is payable under said insurance in the same manner as losses are payable under this Lease. Tenant shall immediately notify Landlord of the obtaining of any such separate insurance or of the increasing of any of the amounts of the then existing insurance. 15. INSURANCE PROCEEDS ------------------ 15.1. HANDLING OF INSURANCE PROCEEDS. All proceeds from any policy of property damage insurance required by Article 14 of this Lease shall, subject to the rights of any Facility Mortgagee, be paid to Landlord and held in trust by Landlord (subject to the provisions of Section 15.7) and shall, if paid to Landlord, be made available by Landlord for reconstruction or repair, as the case may be, of any damage to or destruction of all or any portion of the Property to which such proceeds relate and be paid out by Landlord from time to time in accordance with and subject to the provisions hereof for the cost of such reconstruction or repair, subject to reasonable and customary controls to ensure funds disbursed by Landlord are in fact used for such purpose. Any unused portion shall be retained by Landlord free and clear upon completion of such repair and restoration. If neither Landlord nor Tenant is required or elects to repair and restore, and the Lease is terminated without purchase by Tenant, then all such insurance proceeds shall be retained by Landlord as its sole property, free and clear of any claim by Tenant. All salvage resulting from any risk covered by insurance shall belong to Landlord, except that any salvage relating to Tenant's Personal Property shall be the property of Tenant. 31 35 15.2. RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY INSURANCE. (a) Except as provided in Section 15.7, if during the Term the Property is totally or substantially destroyed by a risk covered by the insurance described in Article 14 so that the Facility thereby is rendered unsuitable for its Primary Intended Use (taking into account all relevant factors, including but not limited to the amount of square footage reasonably available for use by Tenant and the type and amount of Tenant revenues lost), Tenant shall at its option either (i) restore the Facility to substantially the same condition as existed immediately before the damage or destruction in which event this Lease shall continue in full force and effect or (ii) acquire the Property from Landlord for a purchase price equal to the greater of the Minimum Repurchase Price or the Fair Market Value Purchase Price of the Property immediately prior to such damage or destruction. If Tenant restores the Facility, the insurance proceeds shall be paid out by Landlord to Tenant or its designee from time to time as necessary to pay for the reasonable costs of such restoration. If Tenant acquires the Property, all applicable insurance proceeds shall become the property of Tenant upon Landlord's receipt of the full purchase price for the Property. (b) Except as provided in Section 15.7, if during the Term the Property is partially destroyed from a risk covered by the insurance described in Article 14 but the Facility is not thereby rendered unsuitable for the Primary Intended Use (taking into account all relevant factors, including but not limited to Legal Requirements applicable to the Primary Intended Use, the amount of square footage reasonably available for use by Tenant and the type and amount of Tenant revenues lost), Tenant shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction. Such damage or destruction shall not terminate this Lease; provided, however, that if Tenant cannot, with reasonable diligence and within a reasonable time, obtain all Governmental Approvals, including building permits, licenses, conditional use permits and any certificates of need, necessary to perform all required repair and restoration work and to operate the Facility in substantially the same manner and for the Primary Intended Use, Tenant shall either (i) offer to purchase the Property for a purchase price equal to the greater of the Minimum Repurchase Price or the Fair Market Value Purchase Price immediately prior to such damage or destruction or (ii) continue with the Lease in full force and effect in which event Landlord shall be entitled to retain the insurance proceeds, less the amount needed to restore the Property so that the portion of the Facility unaffected by the casualty can be used as a complete architectural unit. If Tenant shall make such offer to purchase the Property and Landlord does not accept the same within 120 days of Landlord's receipt of such offer, Tenant may withdraw such offer, in which case this Lease shall remain in full force and effect and Tenant shall proceed to restore the Facility as soon as reasonably practicable to substantially the same condition as existed immediately before such damage or destruction. If Tenant so restores the Facility, insurance proceeds shall be paid out by Landlord from time to time to pay for the reasonable costs of such restoration, and any excess proceeds remaining after such restoration shall be retained by Landlord. (c) If Tenant elects to repair or restore any damage or destruction to the Property and the cost of any such repair or restoration exceeds the amount of proceeds received by Landlord from the insurance required under Article 14, Tenant shall contribute any and all excess amounts necessary to repair or restore the Facility. Tenant shall provide Landlord with a payment or completion guaranty in form and substance and from a guarantor reasonably acceptable to Landlord. If no acceptable guarantor is available, Tenant shall pay Landlord the amount of such difference, which amount shall be held in trust, together with any other insurance proceeds, for application to the cost of repair and restoration as such repair and restoration progresses. 32 36 (d) If Landlord accepts Tenant's offer to purchase the Property this Lease shall terminate as to the entire Property upon payment of the purchase price therefor and Landlord shall thereupon remit to Tenant all insurance proceeds pertaining to the Property less Landlord's expenses, including attorneys' fees, and assign Landlord's rights in any uncollected insurance proceeds to Tenant. 15.3. RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED BY INSURANCE. Except as provided in Section 15.7 below, if during the Term the Facility is totally destroyed or materially damaged (i) from a risk not covered by insurance described in Article 14 but that would have been covered if Tenant carried the insurance customarily maintained by, and generally available to, the operators of reputable health care facilities in the region in which the Facility is located, (ii) from a risk for which insurance coverage is voided due to any act or omission by Tenant, or (iii) as result of storm, flood or an earthquake, whether or not such damage or destruction renders the Facility unsuitable for its Primary Intended Use (taking into account all relevant factors, including but not limited to the Legal Requirements applicable to the Primary Intended Use, amount of square footage reasonably available for use by Tenant and the type and amount of Tenant revenues lost), Tenant shall restore the Facility to substantially the same condition as existed immediately before such damage or destruction and not terminate this Lease. Otherwise, if the Facility is totally destroyed or materially damaged by a risk not covered by insurance such that the Facility shall be unusable for its Primary Intended Use, Tenant shall, within 90 days of such destruction or damage, elect either (i) to restore the Property to the same condition as existed immediately prior to such damage or destruction so that the Facility shall be suitable for its primary intended use, in which event, this Lease shall continue in full force and effect or (ii) to purchase the Property from Landlord for a purchase price equal to the greater of the Minimum Repurchase Price or the Fair Market Value Purchase Price immediately prior to such damage or destruction. If such uninsured damage or destruction does not render the Property unusable for its Primary Intended Use, Tenant shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction. 15.4. PAYMENT OF PROCEEDS ON TENANT'S PROPERTY AND CAPITAL ADDITIONS PAID BY TENANT. Subject to Section 15.7, all insurance proceeds payable solely by reason of any loss of or damage to any of Tenant's Personal Property or Capital Additions fully paid for by Tenant in their entirety shall be paid to Tenant and Tenant shall hold such insurance in trust to pay the cost of repairing or replacing damaged Tenant's Personal Property or Capital Additions fully paid for by Tenant in their entirety; provided, however, that if the damaged Tenant's Personal Property or Capital Additions fully paid for by Tenant in their entirety were no longer useful to Tenant's operations prior to their destruction, Tenant shall not be obligated to repair or replace them. 15.5. RESTORATION OF TENANT'S PROPERTY. Upon any restoration of the Facility as provided in Section 15.2 or 15.3, Tenant shall either (i) at Tenant's sole cost and expense, restore all alterations and improvements made by Tenant, Tenant's Personal Property and all Capital Additions fully paid for by Tenant in their entirety, or (ii) at Tenant's sole cost and expense, replace such alterations and improvements, Tenant's Personal Property or Capital Additions fully paid for by Tenant in their entirety with improvements or items of the same or better quality and utility in the operation of the Property. 15.6. NO ABATEMENT OF RENT. Unless and until Tenant shall pay the purchase price for the Property to Landlord in accordance with this Article 15 (and the Lease thereby terminated) in the event of any damage or destruction of the Property this Lease shall remain in full force and effect and Tenant's obligation to make rental payments and to pay all other charges required by this Lease shall not be abated by reason of any damage or destruction to the Property or the subsequent loss of Landlord's entitlement to the Property. 33 37 15.7. DAMAGE NEAR END OF TERM. Notwithstanding any provisions of 15.2, 15.3 or 15.4 to the contrary, if damage to or destruction of the Facility occurs during the last 12 months of the then applicable term (whether Fixed or Extended), if Tenant has not elected to extend such term, and if such damage or destruction cannot be fully repaired and restored within six months immediately following the date of loss, then Tenant shall have the right to terminate this Lease by giving written Notice thereof to Landlord within 30 days after the date of such damage or destruction, in which event, Landlord shall collect any insurance proceeds to which it is entitled, and Tenant shall assign to Landlord Tenant's rights in all insurance proceeds to which Tenant is entitled as a consequence of such damage or destruction. Notwithstanding the foregoing, in the event that the Facility is totally destroyed or damaged during the last 12 months of the Term (i) from a risk not covered by insurance described in Article 14 but that would have been covered if Tenant carried the insurance customarily maintained by, and generally available to, the operators of reputable health care facilities in the region in which the Facility is located, (ii) from a risk for which insurance coverage is voided due to any act or omission by Tenant, or (iii) as result of an storm, flood or earthquake, whether or not such damage or destruction renders the Facility unsuitable for its Primary Intended Use (taking into account all relevant factors, including but not limited to Legal Requirements applicable to the Primary Intended Use, the amount of square footage reasonably available for use by Tenant and the type and amount of Tenant revenues lost), then Tenant shall pay to Landlord a sum equal to the amount reasonably necessary to repair such damage or destruction; provided, however, Tenant can in lieu thereof purchase the Property from Landlord in accordance with the Call Option with the Fair Market Value Purchase Price determined as of the day immediately prior to the date of any damage or destruction. 15.8. TERMINATION OF OPTIONS. Any termination of this Lease pursuant to this Article or otherwise shall cause the option granted to Tenant to extend the Term by any Extended Term to be terminated and to be without further force or effect. 15.9. WAIVER. Tenant hereby waives any rights at law, in equity and any statutory rights of termination which may arise by reason of any damage or destruction of the Facility which Landlord is obligated to restore or may restore under any of the provisions of this Lease. 16. CONDEMNATION ------------ 16.1. DEFINITIONS. (A) "CONDEMNATION" means (a) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, or (b) a voluntary sale or transfer by Landlord with Tenant's consent (provided no Event of Default has occurred and is continuing at such time) to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. (B) "DATE OF TAKING" means the first date the Condemnor has the right to immediate possession of the property being condemned. (C) "AWARD" means all compensation, sums and any other value awarded, paid or received on a total or partial condemnation. (D) "CONDEMNOR" means any public or quasipublic authority, or private corporation or individual, having the power of condemnation. 34 38 16.2. PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any Taking of all or any part of the Property or of any interest in this Lease by Condemnation, the rights and obligations of the parties shall be determined by this Article. 16.3. TOTAL OR PARTIAL TAKING. A Taking of all or part of the Property shall not affect the validity of this Lease or Tenant's obligations to pay Rent hereunder. Even if the whole of the Property shall be taken or condemned by any Condemnor, Tenant's obligation to pay Rent pursuant to this Lease shall not cease or terminate; provided, however, that if the entire Property is taken or condemned, or if the portion of the Property taken or condemned renders the Property unsuitable for its Primary Intended Use (taking into account all relevant factors, including but not limited to Legal Requirements applicable to the Primary Intended Use, the amount of square footage reasonably available for use by Tenant, and the type and the amount of Tenant revenues lost) and Landlord shall receive an Award which is equal to or greater than the greater of the Minimum Repurchase Price or the Fair Market Value of the Property (or Tenant shall pay to Landlord the difference between the actual Award received by Landlord and such amount) Landlord shall terminate this Lease and Tenant's obligation to pay Rent hereunder shall, upon such termination, be abated. 16.4. ALLOCATION OF PORTION OF AWARD. Subject to the rights of any Facility Mortgagee, the total Condemnation Award made with respect to all or any portion of the Property shall be distributed to Landlord and Tenant ratably in accordance with the value of their respective interests in and to such Award as hereafter set forth in this Section 16.4. All of the Award shall be the sole and exclusive property of Landlord and shall be payable to Landlord, subject to the rights of any Facility Mortgagee; provided that, subject to the rights of any Facility Mortgagee, any portion of such Condemnation Award which is expressly allocated by the Condemnor to the taking of any Capital Additions fully paid for by Tenant in their entirety, any loss of business by Tenant during the remaining Term of this Lease, the taking of Tenant's Personal Property, or any removal and relocation expenses of Tenant in any such proceedings shall be the sole property of and payable to Tenant; provided, further, that if the Lease is terminated pursuant to Section 16.3, Tenant shall have no right to any portion of such Condemnation Award regardless of how such Award is allocated by the court or other tribunal. In any Condemnation proceedings Landlord and Tenant each shall seek their own Award in conformity herewith, at their own expense. 16.5. PARTIAL TAKING; CONTINUED USE. If title to the fee of less than the whole of the Property shall be taken or condemned so that the Property is not rendered unsuitable for their Primary Intended Use, Tenant at its own cost and expense shall with all reasonable diligence restore the untaken portion of the Property so that the Property and the Building shall constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as existing immediately prior to such Condemnation or Taking. In such event, Landlord and Tenant shall each contribute to the cost of restoration that part of their Award specifically allocated to such restoration, if any (or if no such specific allocation is made, an allocation as is agreed upon by Landlord and Tenant or, if Landlord and Tenant are unable to agree within 30 days of the Award, by arbitration in accordance with Section 29.14 with such arbitration to require each party to contribute a portion of the Award received by such party as will fairly reflect the economic benefit to each party of the restoration of the Property), together with any and all severance and other damages awarded for any taken portion of the Building; provided, however, the amount of such contribution shall not exceed such cost. If such amounts are not sufficient to cover the cost of restoration Landlord and Tenant shall contribute any additional amounts needed for restoration in proportion to the amounts already contributed by them, provided that in no event shall Landlord have any obligation to contribute an amount to such restoration in excess of its Award. Thereafter, any excess restoration cost shall be borne solely by Tenant. 35 39 16.6. TEMPORARY TAKING. If the whole or any part of the Property or of Tenant's interest under this Lease shall be taken or condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate, and Tenant shall continue to pay, in the manner and at the times herein specified, the full amounts of Base Rent and Additional Charges. Except to the extent Tenant may be prevented from so doing pursuant to the terms of the order of the Condemnor, Tenant shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Tenant to be performed and observed as though such Taking or Condemnation had not occurred. Upon any such Taking or Condemnation described in this Section, the entire amount of any such Award made for such Taking or Condemnation allocable to the Term of this Lease, whether paid by way of damages, Rent or otherwise, shall be paid to Tenant. Tenant covenants that upon the termination of any such period of temporary use or occupancy as set forth in this Section Tenant will, at its sole cost and expense (subject to any contribution by Landlord as set forth in Section 16.5), restore the Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Taking or Condemnation, unless such period of temporary use or occupancy shall extend beyond the expiration of the Term, in which case Tenant shall not be required to make such restoration. 17. DEFAULTS AND REMEDIES --------------------- 17.1. EVENTS OF DEFAULT. Any one or more of the following events shall be deemed an "Event of Default" hereunder: (a) Tenant shall fail to pay Rent payable by Tenant under this Lease as and when the same becomes due and payable; (b) Tenant shall fail to observe or perform any other material term, covenant or condition of this Lease, or any representation or warranty made by Tenant under this Lease shall be or become incorrect in any material respect, and such failure is not cured by Tenant within a period of 30 days after Notice thereof from Landlord, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure shall not constitute an Event of Default if Tenant proceeds immediately and with due diligence to cure the failure and thereafter diligently completes the curing thereof within 90 days of Tenant's receipt of the initial Notice describing such failure; (c) Tenant or Guarantor shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition in bankruptcy or a petition to take advantage of any insolvency law, (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or (v) file a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof; (d) Tenant or Guarantor shall, on a petition in bankruptcy filed against it, be adjudicated bankrupt or have an order for relief thereunder entered against it or a court of competent jurisdiction shall enter an order or decree appointing, without the consent of Tenant or Guarantor, a receiver of Tenant or Guarantor or of the whole or substantially all of its property, or approving a petition filed against Tenant or Guarantor seeking reorganization or arrangement of such Person under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof, and such judgment, order or decree shall not be vacated or set aside or stayed within 90 days from the date of the entry thereof; 36 40 (e) Tenant or Guarantor shall be liquidated or dissolved, or shall begin proceedings toward such liquidation or dissolution, or shall, in any manner, permit the sale or divestiture of substantially all of its assets or shall become a party to a merger or consolidation of Tenant into, or a sale of substantially all of Tenant's assets to, another corporation, provided that such a merger, consolidation or asset sale shall not constitute an Event of Default under this Section 17.1(e) if (i) the survivor of such merger or the purchaser of such assets shall assume all of Tenant's obligations under this Lease by a written instrument, in form and substance reasonably satisfactory to Landlord, accompanied by an opinion of counsel, reasonably satisfactory to Landlord and addressed to Landlord stating that such instrument of assumption is valid, binding and enforceable against the parties thereto in accordance with its terms (subject to usual bankruptcy and other creditors' rights exceptions), and (ii) immediately after giving effect to any such merger, consolidation or sale, Tenant or the other corporation (if not Tenant) surviving the same, shall have a Net Worth of not less than the Net Worth of Tenant immediately prior to such merger, consolidation or sale, all as to be set forth in an Officer's Certificate and delivered to Landlord within a reasonable period of time after such merger, consolidation or sale; (f) the estate or interest of Tenant in the Property or any part thereof shall be levied upon or attached in any proceeding (excluding a foreclosure under the Leasehold Mortgage in which Balanced Care or its wholly-owned subsidiary succeeds to Tenant's interest under this Lease) and the same shall not be vacated or discharged within the later of 60 days after commencement thereof or 30 days after Notice thereof from Landlord (unless Tenant shall be contesting such lien or attachment in good faith in accordance with Article 13 hereof); (g) except as a result of damage, destruction or a partial, temporary or complete Condemnation, Tenant voluntarily ceases operations on the Property for a period in excess of 30 days; (h) Tenant or Guarantor shall continue in default of any obligation for borrowed funds owed to any Person beyond the expiration of any grace or cure period which may exist with respect to any such default; or (i) a breach or default on the part of Tenant, Guarantor, Balanced Care or any one or more of the Affiliates of any one or more of the foregoing (including without limitation Manager or Developer) shall have occurred under any one or more of the Transaction Documents (including Transaction Documents which may relate to facilities or properties which are not the subject of this Lease). Tenant shall immediately notify Landlord of the occurrence of any event set forth in subsections 17.1 (b) through (i) and the failure to do so shall constitute an immediate Event of Default. 17.2. CERTAIN REMEDIES. Upon any Event of Default, Landlord shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise. Without limiting the foregoing, if an Event of Default occurs, is not cured within the period provided in Section 17.1 for any such cure, if any, and is continuing, whether or not this Lease has been terminated pursuant to Section 17.1, Tenant shall, to the extent permitted by law and if required by Landlord so to do, immediately surrender to Landlord the Property and quit the same. To the extent permitted by law, Landlord may enter upon and repossess the Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Tenant and all other persons and any and all personal property from the Property subject to rights of any residents or patients and to any requirement of law. 17.3. DAMAGES. 37 41 (a) Upon the occurrence of any Event of Default, Landlord shall have the right either (i) to terminate this Lease and Tenant's right to possession of the Property by any lawful means, upon Notice of such termination, in which case, this Lease shall terminate and all of Tenant's rights hereunder cease and Tenant shall immediately surrender possession of the Property to Landlord and, in such event, Landlord shall be entitled to recover from Tenant all damages incurred by reason of Tenant's default, or (ii) to maintain Tenant's right to possession of the Property in which case this Lease shall continue in effect regardless of whether Tenant shall have abandoned or attempted to surrender the Property and, in such event, Landlord shall have the right to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Rent and other sums owed as such become due hereunder together with interest on such overdue Rent and any other overdue amount owed by Tenant, from the date when due until paid, at the lesser of the Overdue Rate or the maximum rate permitted by applicable law. Furthermore, Landlord shall also have all rights at law and in equity available to Landlord as a result of Tenant's breach of this Lease. If any litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, its reasonable attorneys' fees, and all costs and expenses incurred in connection therewith, including costs of litigation preparation, computerized research, staff costs, telephone and telefax expenses, mileage, depositions, postage, photocopies, process services, video tapes and other costs which may be incurred by or for counsel. Neither the termination of this Lease pursuant to this Section 17.3, the repossession of the Property, the failure of Landlord, notwithstanding reasonable good faith efforts, to relet the Property, nor the reletting of all or any portion of the Property, shall relieve Tenant of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. Upon any such termination, Tenant shall forthwith pay to Landlord all Rent due and payable with respect to the Property to and including the date of such termination. Thereafter Tenant shall promptly pay to Landlord the full amount of Landlord's damages suffered by reason of Tenant's breach of this Lease, which damages shall include, but may not be limited to the sum of: (i) the worth at the time of the award, of the unpaid Rent earned at the time of such termination, repossession or reletting; (ii) the worth at the time of the award, of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for the costs incurred in regaining possession and reletting the Property, including but not limited to brokerage fees and commissions, construction costs, rent concessions, costs of decoration, repair, cleaning and/or alteration of the Property or any portion thereof and all legal costs and expenses. (b) The "worth at the time of the award" of the amounts referred to in subparagraphs (i) and (ii) above shall be computed by allowing interest at the Overdue Rate. The "worth at the time of the award" of the amount referred to in subparagraph (iii) shall be determined by a Court having jurisdiction thereof using the lowest rate of capitalization (highest present worth) reasonably applicable at the time of such determination and allowed by applicable law. 38 42 17.4. APPLICATION OF FUNDS. Any payments normally made to Tenant hereunder which are made to and received by Landlord under any of the provisions of this Lease during the continuance of any Event of Default shall be applied to Tenant's obligations in the order which Landlord may determine or as may be prescribed by applicable laws. 17.5. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. If an Event of Default occurs under this Lease and is not cured within the time provided under this Lease with respect to such Event of Default, Landlord, without waiving or releasing any obligation of Tenant, and without waiving any such Event of Default, may (but shall be under no obligation to) at any time thereafter cure such default for the account and at the expense of Tenant, and may, to the extent permitted by law, enter upon the Property for such purpose and take all such action thereon as, in Landlord's sole judgment, may be necessary or appropriate with respect thereto. No such entry by Landlord on the Property shall be deemed an eviction of Tenant. All sums so paid by Landlord and all costs and expenses (including, with out limitation, reasonable attorneys' fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Landlord until paid, shall be paid by Tenant to Landlord on demand. The obligations of Tenant and rights of Landlord contained in this Article shall survive the expiration or earlier termination of this Lease. 17.6. WAIVER. If this Lease is terminated pursuant to the provisions of this Article, Tenant waives, to the extent permitted by applicable law, (a) any right of redemption, reentry or repossession, (b) any right to trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article, and (c) the benefit of any laws now or hereafter enforced exempting property from liability for rent or for debt. 18. CURE BY TENANT OF LANDLORD DEFAULTS ----------------------------------- 18.1. LANDLORD DEFAULT. Landlord shall be in default of its obligations under this Lease if Landlord shall fail to observe or perform any term, covenant or condition of this Lease on its part to be performed, and such failure shall continue for a period of 30 days after notice thereof from Tenant unless such failure cannot be cured with due diligence within a period of 30 days, in which case such failure shall not be deemed to continue if Landlord, within said 30 days, promptly commences its attempt to cure the failure and diligently attempts to complete the curing thereof. The time within Landlord shall be obligated to cure any such failure shall also be subject to extension of time due to the occurrence of any Unavoidable Delay. If Landlord fails to commence such cure as provided herein, Tenant may cure such default, and so long as Tenant continues to pay Rent, Tenant shall have the right (subject to Section 6.1), as Tenant's sole remedy, by separate and independent action to pursue any claim it may have against Landlord for monetary damages caused by Landlord's failure to cure such default. 18.2. MORTGAGEE CURE. Should Landlord fail to observe or perform any of the covenants or conditions contained in this Lease, before taking any action, Tenant shall give written notice to all mortgagees of Facility Mortgages or beneficiaries under other deeds of trust or encumbrances recorded against the Land or the Property setting forth the nature of Landlord's default. Such lenders shall have a reasonable period of time to cure the default. All payments made, and all acts performed by such lenders in order to cure shall be effective to prevent a forfeiture of the rights of Landlord under this Lease and a termination of this Lease as if the payments and acts were performed by Landlord instead of by the lenders. If such lenders cannot reasonably take the action required to cure Landlord's default without foreclosing Landlord's interest, the time within which the default must be cured to avoid a termination or forfeiture of 39 43 the Lease shall be extended to include the period of time required for such lenders to obtain possession and to effect a cure with due diligence if such lender gives Tenant a written agreement to cure the default. In the absence of such lenders' express written consent, such an agreement by the lenders shall not be considered an assumption by the lenders of Landlord's other obligations under the Lease and Landlord shall remain solely liable for the performance of all terms, covenants and conditions of the Lease both prior and subsequent to the lenders' exercise of any right to cure or related remedy. 19. PURCHASE OF PROPERTY BY TENANT ------------------------------ 19.1. PURCHASE OF THE PROPERTY. If Tenant purchases the Property from Landlord pursuant to the provisions of Article 15 or Article 16, Landlord shall, except as otherwise expressly provided, upon receipt from Tenant of the applicable purchase price, together with full payment of any unpaid Rent due and payable with respect to any period ending on or before the date of such purchase, deliver to Tenant a special warranty deed conveying the entire interest of Landlord in and to the Property to Tenant free and clear of all mortgages and encumbrances other than (a) those mortgages which Tenant has agreed in writing to accept and to take title subject to and (b) any other encumbrances existing on or created after the Commencement Date which are permitted hereby to be imposed on the Property excluding only liens created by Landlord to secure Landlord's payment of borrowed funds. The purchase price shall be paid in cash to Landlord or as Landlord may direct, in federal or other immediately available funds, unless otherwise mutually agreed by Landlord and Tenant. Any such purchase shall be on an "as-is" basis with Tenant purchasing the Property subject to all faults or defects whether known, unknown, latent, patent or otherwise. All expenses of conveying the Property to Tenant, including, without limitation, the cost of title insurance and attorneys' fees incurred by Landlord in connection with such conveyance and release, and documentary transfer and similar taxes, shall be paid by Tenant. Recording fees and expenses of its counsel shall also be paid by Tenant. 19.2. FAILURE TO CLOSE PURCHASE. The closing of any such sale to Tenant shall be contingent upon and subject to Tenant obtaining all required governmental consents and approvals for such transfer. If such sale shall fail to be consummated by reason of the inability of Tenant to obtain all such approvals and consents, then this Lease shall remain in effect until the sooner to occur of the end of the Term or the consummation of the purchase. 20. HOLDING OVER ------------ If Tenant for any reason remains in possession of any portion of the Property after the expiration of the Term or earlier termination of the Term, such possession shall be a month-to-month tenancy during which time Tenant shall pay to Landlord as rental each month one and one half (11/2) times the aggregate of (i) one-twelfth of the Base Rent then payable with respect to the last Lease year of the Term just expired, (ii) all Additional Charges accruing during the month with respect to which such payment relates, and (iii) all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to the Property. During such period of month-to-month tenancy, Tenant shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent mandated by law applicable to month-to-month tenancies, to continue its occupancy and use of the Property. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease. 40 44 21. RISK OF LOSS ------------ During the Term of this Lease, Tenant shall bear all risk of loss or of decrease in the enjoyment and beneficial use of the Property resulting from the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or any other cause, or resulting from foreclosures, attachments, levies, evictions or executions and, in the absence of the gross negligence, willful misconduct or willful breach of this Lease by Landlord, Landlord shall in no event be responsible therefor nor shall any of the events mentioned in this Section (nor any other event or circumstance) entitle Tenant to any abatement or setoff of Rent. 22. LIABILITY OF PARTIES -------------------- 22.1. INDEMNIFICATION BY TENANT. Notwithstanding the existence of any insurance provided for in Article 14, and notwithstanding the policy limits of any such insurance Tenant shall indemnify, defend, protect, save and hold Landlord harmless from and against any and all liabilities, losses, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by or asserted against Landlord arising out of, connected with or incidental to: (a) any Hazardous Substance located in, on or under the Property, the Land or the Building due to the act or omission of Tenant, or otherwise, during or prior to the Term hereof, including any improvements, repairs, handling, removal or other actions taken by Landlord or Tenant in order to comply with all Legal Requirements, rules and regulations promulgated by any applicable federal, state, or local government rule and regulation with respect to any such Hazardous Substance or related problems of which Landlord becomes aware; (b) any accident, injury to or death of persons, or loss of or damage to property, occurring on or about the Property including without limitation any claims of malpractice; or any such event occurring on or about adjoining sidewalks, parking areas, service delivery facilities, alleys, walkways or roadways; (c) any past, present or future use, misuse, nonuse, condition, management, maintenance or repair, by Tenant or any subtenant or other occupant of the Property or their respective contractors, licensees, invitees, agents, servants or employees, of the Property or Tenant's Personal Property (or any subtenant's personal property), wheresoever the same may occur and any litigation, proceeding or claim by governmental entities or other third parties to which Landlord is made a party or other participant related to the Property or Tenant's Personal Property or to any subtenant or other occupant of the Property or its personal property or such use, misuse, nonuse, condition, management, maintenance or repair thereof, including but not limited to any failure to perform obligations (other than condemnation proceedings) to which Landlord is made a party; (d) any Imposition; (e) any failure on the part of Tenant to perform or comply with any of the terms of this Lease; and (f) the nonperformance of any of the terms and provisions of any and all existing and future subleases of the Property to be performed by Tenant thereunder. 41 45 Any amounts payable by Tenant under this Section shall be paid within ten days after Landlord's demand therefor. If such amounts are not timely paid, they shall bear a late charge at the Overdue Rate from the date of such determination to the date paid. Tenant, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Landlord, or may, with Landlord's prior written consent, compromise or otherwise dispose of the same as Tenant sees fit. Nothing herein shall be construed as indemnifying Landlord against its own sole gross negligence or willful misconduct. 22.2. INDEMNIFICATION BY LANDLORD. Landlord shall indemnify, defend, save and hold Tenant harmless from and against any and all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by or asserted against Tenant arising out of, connected with or incidental to the sole gross negligence or willful misconduct of Landlord; provided, however, that Tenant's right to indemnification as provided herein, shall be subject to the limitation set forth in Article 27. 22.3. CONTINUING LIABILITY. Tenant's and Landlord's liability for a breach of the provisions of this Article arising during the Term hereof shall survive any termination of this Lease. 23. ASSIGNMENT AND SUBLETTING ------------------------- 23.1. ASSIGNMENT AND SUBLETTING. Subject to the provisions of Section 23.3 below and any other express conditions or limitations set forth in this Lease, Tenant may (a) upon ten (10) days prior Notice to Landlord, but without the consent of Landlord, sublet less than an aggregate of 10% of the net useable square footage of each Facility to concessionaires or other third party users or operators of portions of the Property, provided that any such subletting shall not individually as to any one such subletting, or in the aggregate, materially diminish the actual or potential gross revenues generated from the Facility in which the subletting is proposed to occur and (b) admit residents to the Facility for occupancy of units therein. Except as otherwise permitted in the immediately preceding sentence, no assignment or subletting of all or any portion of the Property shall be permitted or be effective unless the consent of Landlord is first obtained in writing, which consent Landlord may withhold in its sole and absolute discretion; provided, however, that (subject to the restrictions against Landlord consenting to any assignment of the Lease as set forth in the Working Capital Assurances Agreement and in any other Transaction Document) Landlord shall not unreasonably withhold its consent to any subletting or assignment if the assignee or sublessee is credit-worthy and reputable in the opinion of Landlord and (u) such subtenant or assignee shall pay to Landlord in cash an amount equal to two month's rent to be held by Landlord as a security deposit for the faithful performance by such subtenant or assignee of the provisions of this Lease, (v) the Net Worth of Tenant at the time of such sublease or assignment shall be equal to or greater than the Net Worth of Tenant as of the date this Lease is signed, (w) in the case of a subletting, the sublease shall comply with the provisions of Section 23.2 and is otherwise in form and substance acceptable to Landlord, (x) in the case of an assignment, the assignee assumes in writing and agrees to keep and perform all of the terms of this Lease on the part of Tenant to be kept and performed and becomes jointly and severally liable with Tenant for the performance thereof, (y) an original counterpart of each such sublease and assignment and assumption, duly executed by Tenant and such sublessee or assignee, as the case may be, in form and substance satisfactory to Landlord, is delivered promptly to Landlord, and (z) in case of either an assignment or subletting, Tenant remains primarily liable, as principal rather than as surety, for the prompt payment of Rent and for the 42 46 performance and observance of all covenants and agreements to be performed by Tenant hereunder. Tenant shall not, without Landlord's approval which Landlord may withhold in its sole and absolute discretion, permit any change in ownership or beneficial interest amounting to 50% (in the aggregate of all such transfers occurring on or after the Commencement Date) of Tenant's voting interests or assets to occur and any change in the ownership of 50% or more of the membership, voting interests or assets of Tenant, from and after the Commencement Date shall constitute an assignment of this Lease which shall require Landlord's prior written consent as hereinabove provided. Notwithstanding the foregoing to the contrary (i) the purchase by Balanced Care (or, if Balanced Care delivers to Landlord a guaranty in form and substance acceptable to Landlord, its wholly-owned subsidiary) of the outstanding interests in Tenant under the terms of the Option Agreement, (ii) the grant by Tenant of a leasehold mortgage to Balanced Care as contemplated in the Shortfall Funding Agreement, or (iii) the assignment of this Lease to Balanced Care (or, if Balanced Care delivers to Landlord a guaranty in form and substance acceptable to Landlord, its wholly-owned subsidiary) pursuant to the exercise by Balanced Care of the Asset Purchase Option set forth in the Shortfall Funding Agreement shall not constitute an assignment for purposes of this Section 23.1 so long as (x) assignee assumes in writing and agrees to keep and perform all of the terms of this Lease on the part of Tenant to be kept and performed and becomes jointly and severally liable with Tenant for the performance thereof, (y) an original counterpart of each such assignment and assumption, duly executed by Tenant and the assignee, in form and substance satisfactory to Landlord, is delivered promptly to Landlord, and (z) in case of either an assignment or subletting, Tenant remains primarily liable, as principal rather than as surety, for the prompt payment of Rent and for the performance and observance of all covenants and agreements to be performed by Tenant hereunder. 23.2. ATTORNMENT. Tenant shall insert in each sublease permitted under Section 23.1 provisions satisfactory to Landlord which provide for the benefit of Landlord that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease (b) in the event this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Landlord's option, attorn to Landlord and waive any right the sublessee may have to terminate the sublease or surrender possession under such sublease, and (c) in the event the sublessee receives a written Notice from Landlord or Landlord's assignees, if any, stating that Tenant is in default under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may otherwise direct. All rentals received from the sublessee by Landlord or Landlord's assignees, if any, as the case may be, shall be credited against the amounts owed to Landlord under this Lease. 23.3. SUBLEASE LIMITATION. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Property on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either (a) the income or profits derived by the business activities of the sublessee, or (b) any other formula such that any portion of the sublease rental would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto. 24. INFORMATION FROM TENANT ----------------------- 24.1. ESTOPPEL CERTIFICATES. At any time and from time to time, upon not less than 20 days Notice by Landlord, Tenant shall furnish to Landlord an Estoppel Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether there exists any Event of Default or any situation which, with the giving of notice, passage of time, or both, would constitute an Event of Default hereunder, whether Tenant 43 47 contends that Landlord is in default hereunder, and if Tenant so contends, the basis for such contention, the date upon which the Term terminates, and such other information as Landlord reasonably may request. The failure by Tenant to deliver such Estoppel Certificate to Landlord within twenty days of Landlord's request therefor shall constitute an immediate Event of Default hereunder and shall be conclusively deemed to be Tenant's certification (i) that this Lease is in full force and effect, without modification except as represented by Landlord; (ii) that there are no uncured defaults in Landlords performance hereunder, and (iii) that not more than one month's rent has been paid in advance. Any such certificate furnished pursuant to this Section 24.1 may be relied upon by Landlord, any prospective purchaser of the Property, and any Facility Mortgagee or Landlord Lender. 24.2. LANDLORD ESTOPPEL CERTIFICATES. At any time and from time to time, upon not less than 20 days Notice by Tenant, Landlord shall furnish to Tenant an Estoppel Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Landlord, there exists any Event of Default or any situation which, with the giving of notice, passage of time, or both, would constitute an Event of Default hereunder, whether Landlord contends that Tenant is in default hereunder, and if Landlord so contends, the basis for such contention. Any such certificate furnished pursuant to this Section 24.2 may be relied upon by Tenant or lender to Tenant. 24.3. FINANCIAL INFORMATION. Tenant shall furnish and cause Guarantor to furnish within the time periods specified below, the following statements to Landlord: (a) within 90 days after the end of each Fiscal Year, an Officer's Certificate stating that, after making due inquiry, Tenant is not in default in the performance or observance of any of the terms or conditions of this Lease, or if Tenant shall be in default to its knowledge, specifying all such defaults, the nature thereof and the steps being taken to remedy them; and (b) with reasonable promptness, such other information respecting the financial condition and affairs of Tenant, Manager or Balanced Care as Landlord may reasonably request from time to time; and (c) the most recent quarterly Financial Statements of Tenant with an Officer's Certificate of Tenant stating that such Financial Statements are true, accurate and complete and fairly reflect the financial condition of Tenant as of the end of the Fiscal Year quarter just ended, within 45 days after the last day of each Fiscal Year quarter. 24.4. LICENSING INFORMATION. Tenant shall promptly furnish to Landlord complete copies of all surveys, examinations, inspections, compliance certificates and similar reports of any kind issued to Tenant by any governmental agencies or authorities having jurisdiction over the licensing of the operation of the Property or Facility, if any, which are material to the Property or the Facility, their ownership or operation. 44 48 25. APPRAISALS OF THE PROPERTY AND LANDLORD OPTIONS ----------------------------------------------- 25.1. APPRAISERS. If at any time it becomes necessary to determine the Fair Market Rental or Fair Market Value of the Property for any purpose under this Lease, and the parties are unable to agree thereupon within thirty days of the date on which Tenant or Landlord (as the case may be) first receives Notice that such determination is necessary, the determination of the Fair Market Rental or Fair Market Value of the Property shall be submitted for decision to a panel of three arbitrators in accordance with this Section 25.1. Within ten business days after the expiration of the foregoing thirty day period, Landlord and Tenant shall each appoint one arbitrator, each of which shall be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto). Concurrently with the appointment of the arbitrators, Tenant and Landlord shall submit their proposed dollar amounts, as determined by each such party, of the Fair Market Rental or Fair Market Value of the Property. The two arbitrators appointed in accordance with this Section 25.1 shall, within fifteen days of the date of the appointment of the last appointed arbitrator, agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth above for the qualification of the initial two arbitrators. Failing such appointment, either Landlord or Tenant shall have the right to petition for the appointment of the third arbitrator by the presiding Judge of the Superior Court of the County in which the Property is located. The three arbitrators shall, within thirty days of the appointment of the third arbitrator, reach a decision as to whether Landlord's or Tenant's proposed dollar amount for the Fair Market Rental or Fair Market Value of the Property is closer to the actual dollar amount for such figure and the arbitrators' determination shall be limited solely to the issue of whether Landlord's or Tenant's proposed Fair Market Rental or Fair Market Value of the Property is closer to the actual dollar amount for such figure. The parties shall adopt the figure determined by the majority of the arbitrators to be closer to the actual figure as the Fair Market Rental or Fair Market Value of the Property and the decision of the majority of the three arbitrators in this regard shall be final and binding upon Landlord and Tenant. The cost of Landlord's appointed arbitrator shall be paid for by Landlord, the cost of Tenant's arbitrator shall be paid for by Tenant and the cost of the third arbitrator shall be paid by Landlord and Tenant equally. 25.2. TIMING OF APPRAISAL. The arbitration procedure outlined in Section 25.2 above shall be completed within thirty days of the appointment of the third arbitrator and shall be binding upon Tenant and Landlord. 25.3. LANDLORD'S OPTION TO PURCHASE TENANT'S PERSONAL PROPERTY. Effective upon not less than 90 days' prior Notice given at any time within 180 days prior to the expiration of the Term of this Lease, or upon such shorter Notice as shall be reasonable if this Lease is terminated prior to its expiration date, Landlord shall have the option to purchase all (but not less than all) of Tenant's Personal Property, if any, at the expiration or termination of this Lease, for an amount equal to the then net market value thereof (as determined by an appraisal conducted pursuant to the procedure detailed in Section 25.1) subject to, and with appropriate price adjustments for, all equipment leases, conditional sale contracts, UCC financing statements and other encumbrances to which Tenant's Personal Property is then subject. 25.4. TENANT'S OPTION TO PURCHASE ALL PROPERTIES. Provided no Event of Default has occurred and is continuing, Landlord hereby grants to Tenant the option (the "Call Option"), exercisable on not less than six months' nor more than 18 months' Notice, to purchase on the Option Purchase Date all property leased by Landlord or its Affiliates in accordance with the Facility Agreement to either (x) any wholly-owned subsidiary of Guarantor or (y) any Person previously wholly-owned by Guarantor for a purchase price (determined on a property-by- 45 49 property basis) equal to the greater of the Fair Market Value Purchase Price of each such property as of the Option Purchase Date or the Minimum Repurchase Price. Tenant's timely and proper exercise of the Call Option shall constitute Tenant's irrevocable agreement and commitment to purchase the Property from Landlord for the price and on the terms and conditions stated in this Section. If Tenant shall timely and properly exercise the Call Option, the sale of the properties shall be consummated through an escrow (the "Escrow") to be opened with a title or escrow company mutually acceptable to Landlord and Tenant (the "Escrow Holder"). The purchase price for the properties (net solely of the principal balance of any Facility Mortgages placed on a Property by Landlord and expressly assumed by Tenant) shall be deposited into Escrow in immediately available federal funds at least two business days prior to the close of Escrow and shall be paid to Landlord at the close of Escrow in immediately available federal funds. The close of Escrow shall occur as of the Purchase Option Date. Tenant acknowledges and agrees that it shall purchase all such property from Landlord "AS IS" and subject to all faults, all defects in title and all other matters whatsoever, including without limitation all matters of record. Landlord shall be conclusively deemed not to have made any warranty or representation regarding the title, condition or other status of the properties but Landlord covenants to remove Facility Mortgages against the properties to be conveyed under the Call Option solely to the extent that such Facility Mortgage both (a) was in excess of the amount permitted under Article 26 at the time it was placed against title to such property and (b) has a principal balance in excess of the purchase price to be paid for all properties subject to the Call Option pursuant to this Section 25.4. Landlord shall pay at closing any lien encumbering the Land or the Building which secures either (x) any income tax liability of Landlord or (y) a liability of Landlord unrelated to any of the Property, the Rent, the Facility or the use, occupancy or operation of the Property. All closing costs associated with the sale of the properties to Tenant pursuant to this Section shall be paid by Tenant. 25.5. NATURE OF OPTIONS. All options granted to Tenant under this Lease, including any option to extend the Term of this Lease are strictly personal to Tenant and may not be assigned by Tenant. Without limitation on the foregoing, the assignment by Tenant of its rights under this Lease, whether with or without the consent of Landlord shall, at Landlord's option, render all options of Tenant to extend the Term and any option to purchase the Property (other than pursuant to Article 15 and Article 16) null and void. 26. FACILITY MORTGAGES ------------------ Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("Encumbrance") upon the Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing provided that the principal amount of such borrowing, financing or refinancing does not exceed 80% of the then Fair Market Value of the Property. Any such Encumbrance shall contain the right to prepay (whether or not subject to a prepayment penalty). Tenant agrees that it will subordinate this Lease to any mortgage or deed of trust that may hereafter from time to time be recorded on the Property, and to any and all advances made or to be made thereunder, and to renewals, replacements and extensions thereof. Tenant's failure to deliver any reasonable written subordination document requested by Landlord in accordance with the preceding sentence within five Business Days of Landlord's demand therefor shall constitute an Event of Default hereunder. Any such subordination, however, shall be subject to the condition precedent that the mortgagee under such mortgage or the beneficiary under such deed of trust enter into a written nondisturbance and attornment agreement with Tenant, in form and 46 50 content satisfactory to Tenant, whereunder it is agreed that in the event of a sale or foreclosure under such mortgage or deed of trust, the purchaser of the Property (including the mortgagee or beneficiary under such mortgage or deed of trust), shall acquire or hold the Property subject to this Lease so long as Tenant is not in default hereunder. Tenant hereby agrees to recognize such purchaser as the landlord under this Lease and agrees to attorn to such purchaser and, if instructed to do so by such purchaser, to make rental payments directly to it. Such subordination agreement may also include an acknowledgment by Tenant that any purported cancellation of this Lease, reduction in its effective rate of rent, shortening of its term or extension of its term at a reduced effective rate of rent, shall not be binding upon any encumbrancer or any other person, firm or corporation, acquiring the Property, at any sale or other proceedings, or pursuant to the exercise of any rights, powers or remedies under any Encumbrance, without said encumbrancer's prior written consent. 27. LIMITATION OF LIABILITY ----------------------- Tenant specifically agrees that no officer, shareholder, employee or agent of Landlord or American Health Properties, Inc., a Delaware corporation or of any of its Affiliates, shall be held to any personal liability, jointly or severally, for any obligation of, or claims against Landlord, Tenant agreeing to look solely to Landlord's equity interest in the Property for recovery of any judgment from Landlord, American Health Properties, Inc., a Delaware corporation or the Affiliates of either. The provisions contained in the foregoing sentence are not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest, or any action not involving the personal liability of Landlord (original or successor), American Health Properties, Inc., a Delaware corporation or the Affiliates of either. In no event shall Landlord (original or successor) or any Affiliate of Landlord or American Health Properties, Inc., a Delaware corporation be required to respond in monetary damages from any assets other than Landlord's equity interest in the Property. Furthermore, except as otherwise expressly provided herein, in no event shall Landlord or any Affiliate of Landlord (original or successor) ever be liable to Tenant for any indirect or consequential damages suffered by Tenant from whatever cause. 28. ADDITIONAL TENANT COVENANTS --------------------------- 28.1. MINIMUM RENT COVERAGE RATIO. From and after the first day of the second Fiscal Year quarter to commence during the second Lease Year, Tenant shall maintain at all times during the Term of this Lease an average Rent Coverage Ratio during the each of the four preceding Fiscal Year quarters (but only counting those quarters commencing after the first day of the second Lease Year) of no less than 1.40:1.00. In addition, from and after the first day of the first Fiscal Year quarter to commence during the third Lease Year, Tenant shall at all times during the Term maintain a Rent Coverage Ratio with respect to each Fiscal Year quarter of no less than 1.10:1.00. 28.2. MANAGEMENT OF PROPERTY. Tenant shall do or cause to be done all things necessary and customary in the operation of similar health care facilities in the region where the Property is located to ensure the Facility is producing the maximum possible gross revenues under the circumstances then existing. Without limitation on the foregoing, but subject to the limitation stated in Section 28.2((b))((ii)), Tenant shall continuously engage a manager for the Facility who shall be acceptable to Landlord in its sole and absolute discretion which manager shall, at a minimum, be experienced in the operation of health care facilities similar to the Facility and shall perform for 47 51 the mutual benefit of Landlord and Tenant all obligations of the manager under the Management Agreement. The Manager identified in this Lease is acceptable to Landlord. (b) Tenant shall not during the Term or while any obligations of Tenant to Landlord remain outstanding: (i) Pay any compensation or fee or make any distribution to Manager or any other Person in connection with management or operation of the Facility without the prior written consent of Landlord other than compensation paid in accordance with the Management Agreement as limited by the applicable terms of the Security and Subordination Documents; or (ii) Materially alter, modify or amend, or terminate, the Management Agreement, or enter into any other agreement or arrangement for the management or operation of the Facility or enter into any agreement (other than the Option Agreement) that transfers or could result in a transfer of the ownership of Tenant or (except as provided in the Shortfall Funding Agreement) substantially all or any material portion of its assets to any other Person without the prior written consent of Landlord which may be withheld in Landlord's sole and absolute discretion. 28.3. REPRESENTATIONS AND WARRANTIES OF TENANT. Each of the representations and warranties of Tenant set forth in Article 3 of the Shortfall Funding Agreement are incorporated herein by this reference and made a part hereof and are reaffirmed to Landlord, for Landlord's benefit and reliance, to be true, accurate and complete in all respects. 28.4. PERFORMANCE OF COVENANTS. Tenant shall have complied with and fully performed each of the covenants set forth in Article 4 of the Shortfall Funding Agreement. 28.5. ERISA COMPLIANCE. (a) Neither Tenant nor any Affiliate maintains or contributes to any Employee Benefit Plan or Multiemployer Plan other than those identified on Schedule 28.3.3. (b) Tenant and each Affiliate are in compliance in all material respects with all applicable provisions of ERISA and the Code with respect to all Employee Benefit Plans. Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and each trust related to such Plan has been determined to be exempt from federal income tax under Section 501(a) of the Code. The actuarial present value of all accumulated benefit obligations under each Plan, as disclosed in the most recent actuarial report with respect to such Plan, do not exceed the fair market value of the assets of such Plan. No material liability has been incurred by Tenant or any Affiliate or any of their ERISA Affiliates which remains unsatisfied for any taxes, penalties or other amount (other than contributions in the ordinary course) with respect to any Employee Benefit Plan or any Multiemployer Plan, and to the best knowledge of Tenant no such material liability is expected to be incurred. (c) Neither Tenant nor any Affiliate has: (i) engaged in a nonexempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code; (ii) incurred any liability to the PBGC which remains outstanding other than the payment of premiums and there are no premium payments which are due and unpaid; (iii) failed to make a required contribution or payment to a Multiemployer Plan; or (iv) failed to make a required installment or other required payment under Section 412 of the Code. 48 52 (d) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan or Multiemployer Plan maintained or contributed to by Tenant or any Affiliate. (e) No material proceeding, claim (other than routine claims for benefits), lawsuit and/or investigation is existing or, to Tenant's knowledge, threatened concerning or involving any Employee Benefit Plan or Multiemployer Plan maintained or contributed to by Tenant or any Affiliate. 28.6. SECURITY; COLLATERAL ASSIGNMENT. Concurrently with the execution and delivery hereof, (i) Tenant shall execute and cause Guarantor and Manager to execute the Security and Subordination Documents and (ii) Tenant shall execute and deliver to Landlord the Collateral Assignment, pursuant to which Tenant shall assign to Landlord all of Tenant's rights under the Shortfall Funding Agreement and the Management Agreement as security for the full, timely and faithful performance of each of the obligations of Tenant under this Lease. 29. MISCELLANEOUS ------------- 29.1. LANDLORD'S RIGHT TO INSPECT. Landlord and its authorized representatives may, at any time and from time to time, upon reasonable notice to Tenant, inspect the Property during usual business hours subject to any security, health, safety or patient business confidentiality requirements of Tenant or any governmental agency, or created by any Insurance Requirement or Legal Requirement relating to the Property. 29.2. NO WAIVER. No failure by Landlord or Tenant to insist upon the strict performance of any term hereof or to exercise any right, power or remedy provided hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by applicable law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach. 29.3. REMEDIES CUMULATIVE. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Landlord or Tenant now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy. The exercise or beginning of the exercise by Landlord or Tenant of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Landlord or Tenant of any or all of such other rights, powers and remedies. 29.4. ACCEPTANCE OF SURRENDER. No surrender to Landlord of this Lease or of all or any portion of or interest in the Property shall be valid or effective unless agreed to and accepted in writing by Landlord, and no act by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, shall constitute an acceptance of any such surrender by Tenant. 29.5. NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby if the same person, firm, corporation or other entity acquires, owns or holds, directly or indirectly, this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, and the fee estate in the Property. 49 53 29.6. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Property conveys the Property in accordance with the terms hereof (other than as security for a debt), and the grantee or transferee of the Property expressly assumes all obligations of Landlord hereunder arising or accruing from and after the date of such conveyance or transfer, Landlord or such successor owner, as the case may be, thereupon shall be released from all liabilities and obligations of Landlord under this Lease. 29.7. QUIET ENJOYMENT. So long as Tenant pays all Rent as the same becomes due and fully complies with all of the terms of this Lease and fully performs its obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Property for the Term hereof, free of any claim or other action by Landlord or anyone claiming by, through or under Landlord, but subject to all liens and encumbrances of record as of the date hereof or hereafter consented to by Tenant. Except as otherwise provided in this Lease, no failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Lease or abate, reduce or make a deduction from or offset against the Rent or any other sum payable under this Lease, or to fail or refuse to perform any other obligation of Tenant hereunder. Notwithstanding the foregoing, Tenant shall have the right, subject to the limitation set forth in this Lease, by separate and independent action, to pursue any claim it may have against Landlord as a result of a breach by Landlord of the covenant of quiet enjoyment contained in this Section. 29.8. NOTICES. All notices, demands, requests, consents, approvals and other communications ("Notice" or "Notices") hereunder shall be in writing and delivered by personal delivery, courier or messenger service, express or overnight mail, or by registered or certified mail, return receipt requested and postage prepaid, addressed to the respective parties as follows: If to Tenant: c/o Hakman & Co. 1350 Old Bayshore Highway, Suite 300 Burlingame, California 94010 Attention F. David Carr If to Landlord: _________________________ c/o American Health Properties, Inc. 6400 S. Fiddler's Green Circle; Suite 1800 Englewood, Colorado 80111 Attention: President & General Counsel or to such other address as either party may hereafter designate. Personally delivered Notice and Notices sent by courier or messenger service or by express or overnight mail shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five (5) days. 29.9. SURVIVAL OF TERMS; APPLICABLE LAW. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Tenant or Landlord arising prior to any date of termination of this Lease shall survive such termination for two years, except for third party claims based on alleged tortious actions and omissions of Tenant during the term of this Lease, which third party claims shall survive the term of this Lease for the period of limitations applicable to such claims under applicable law. If any term or provision of this Lease or any application thereof shall be invalid or unenforceable for any reason whatsoever, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charge or any interest rate provided for in any provision of this Lease based 50 54 upon a rate in excess of the maximum rate permitted by applicable law, such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision hereof may be changed, waived, discharged, modified or terminated except by an instrument in writing and in recordable form, signed by Landlord and Tenant. Subject to any limitations on assignment contained in this Lease, all the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules. 29.10. EXCULPATION. This Lease is made on behalf of Landlord by an officer of Landlord, not individually, but solely in his capacity in such office as authorized by the directors of Landlord pursuant to its by-laws. The obligations of this Lease are not binding upon, nor shall resort be had to, the private property of any of the directors, shareholders, officers, employees or agents of Landlord, American Health Properties, Inc. or the Affiliates of either, but shall bind only Landlord's equity interest in the Property as provided in Article 27. Notwithstanding any provision of this Lease or applicable law to the contrary, in no event shall Landlord ever be liable to Tenant for any indirect or consequential damages suffered by Tenant from whatever cause. 29.11. TRANSFERS FOLLOWING TERMINATION. Upon the expiration or earlier termination of the Term, Tenant shall use its best efforts to transfer to Landlord or Landlord's nominee, or to cooperate with Landlord or Landlord's nominee in connection with the processing by Landlord or Landlord's nominee of any applications for, all licenses, operating permits and other governmental authorizations and all contracts (including all Government Approvals and contracts with governmental or quasi-governmental entities) which may be necessary for the operation of the Facility. 29.12. TENANT'S WAIVERS. Tenant waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein. 29.13. MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly upon the request of either party, enter into a short form memorandum of this Lease and all options contained herein, in form suitable for recording under the laws of the State in which the Property is located. Tenant shall pay all costs and expenses of recording such memorandum of this Lease. 29.14. ARBITRATION. Any controversy arising out of, connected with or incidental to this Agreement (other than with respect to the nonpayment of any Rent) shall be decided by arbitration under the Expedited Procedures of the American Arbitration Association, at Denver, Colorado, provided that claim is made within the applicable period of limitation. Depositions to obtain discovery may be taken upon good cause, upon leave to do so granted by the arbitrator. The provisions of this Section 29.14 shall not limit Landlord's rights to obtain damages and possession of the Property by summary eviction or similar proceedings in the event of Tenant's default hereunder. 29.15. ATTORNEYS' FEES. If either party commences an action against the other to interpret or enforce any of the terms of this Lease or because of the breach by the other party of any of the terms hereof, the losing or defaulting party shall pay to the prevailing party reasonable attorneys' fees, costs and expenses incurred in connection with the prosecution or defense of such action, whether or not the action is prosecuted to a final judgment. 51 55 29.16. TIME IS OF THE ESSENCE. Time is hereby expressly made of the essence with respect to each and every term and provision of this Lease, including, but in no way limiting the generality of the foregoing, with respect to each and every time constraint and deadline imposed by the terms of this Agreement together with the obligation of the Tenant to exercise any option within the time period set forth herein. The parties intend that they be strictly bound by the provisions concerning the timing of performance of their respective obligations contained in this Lease. Further, if any attempt is made by either party to perform an obligation required by it to be performed or comply with a provision of this Lease required by it to be complied with, in any manner, other than in strict compliance with the time constraints applicable thereto, even if such purported attempt is but one day late, then such purported attempt at performance or compliance shall be deemed (i) a violation of this "Time is of the Essence" clause, (ii) in contravention of the intent of the parties thereto and (iii) null and void and of no force and effect. 29.17. ENTIRE AGREEMENT; INCORPORATION OF EXHIBITS; MODIFICATIONS. This Lease and the exhibits attached to this Lease or referred to herein, each of which is hereby incorporated by reference as if set forth at length herein, constitutes the entire agreement between the parties with respect to the letting to Tenant of the Property. This Lease supersedes all prior written and oral communications between the parties with respect to the subject matter hereof and there are no covenants, promises, warranties or representations regarding the subject matter stated above which are not stated in this Lease. No provision of this Lease may be amended, supplemented or otherwise modified except by an agreement in writing signed by the parties hereto or their respective successors in interest. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date first above written. ______________________ By: ------------------------------------------ _________________________________________ a Delaware limited liability company, By: Assisted Care Operators, LLC a Delaware limited liability company its Manager and authorized representative By: ------------------------------------------ Name: Title: Its Authorized Representative
52 EX-10.33 33 BALANCED CARE CORPORATION 1 Exhibit 10.33 SCHEDULE TO FORM OF AHP LEASE AND SECURITY AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Dated as of Seller Architect Fiscal Year - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN January 30, 1998 Edwin T. Friddle and KWM Group, Inc. and July 1 to June 30 Doris A. Friddle Charles D. Foster Architect, P.A. Evansville, IN June 16, 1998 William E. Harp, Moore Pumphrey January 1 to Jr. a/k/a Earl Harp Associates, Inc. December 31 Jackson, TN January 30, 1998 Milton D. Cravens, KWM Group, Inc. and July 1 to June 30 James H. Wallace, Moore Pumphrey Jr., Jimmy D. Associates, Inc. Harris, t/a Parkway Partners, Woodside Developments, Inc. Facility Location Facility Secondary Parent Land Location Manager - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN 60 units Oakhaven Senior City of Anderson, County Balanced Care at Living, Inc. of Madison, State of Anderson, Inc. Indiana Evansville, IN 106 units Oakhaven Assisted City of Evansville, Balanced Care at Living, Inc. County of Vanderburgh, Evansville, Inc. State of Indiana Jackson, TN 60 units Oakhaven Senior City of Jackson, County Balanced Care at Living, Inc. of Madison, State of Jackson, Inc. Tennessee
Option Agreement Date by Which Dated as of Landlord Shall Facility Location Acquire Property - -------------------------------------------------------------------------------- Anderson, IN January 30, 1998 March 1, 1998 Evansville, IN June 16, 1998 July 1, 1998 Jackson, TN September 18, 1998 March 1, 1998
EX-10.35 34 BALANCED CARE CORPORATION 1 Exhibit 10.35 SCHEDULE TO FORM OF AHP DEVELOPMENT AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Date Owner Location of Property Facility - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN January 30, 1998 AHP of Indiana, Inc. Anderson, Indiana 60 units, 39,116 square feet Evansville, IN June 16, 1998 AHP of Indiana, Inc. Evansville, Indiana 106 units, 68,826 square feet Jackson, TN January 30, 1998 AHP of Tennessee, Jackson, Tennessee 60 units, 39,116 Inc. square feet Facility Location Tenant Manager Architect Architect Agreement Dated as of - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN Assisted Care BCC at Anderson, Inc. KWM Group, Inc. and November 24, 1997 Operators of Charles D. Foster with KWM Group, Inc. Anderson, LLC Architect, P.A. and January 23, 1998 with Charles D. Foster Architect, P.A. Evansville, IN Assisted Care BCC at Evansville, Moore Pumphrey June 16, 1998 Operators of Inc. Associates, Inc. Evansville, LLC Jackson, TN Assisted Care BCC at Jackson, Inc. KWM Group, Inc. and October 22, 1997 Operators of Moore Pumphrey with KWM Group, Inc. Jackson, LLC Associates, Inc. and Moore Pumphrey Associates, Inc.
Completion Date Prime Contractor Contractor Agreement Date Agreement Dated as of Executed - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN January 30, 1999 Adena Construction January 30, 1998 February 1, 1998 Evansville, IN June 30, 1999 R.L. Turner June 15, 1998 June 16, 1998 Corporation Jackson, TN January 30, 1999 May Construction January 30, 1998 February 1, 1998
EX-10.36 35 BALANCED CARE CORPORATION 1 Exhibit 10.36 FORM OF OPTION AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of ________________, between Assisted Care Operators, LLC, a Delaware limited liability company and Oakhaven Senior Living, Inc., a California corporation (collectively, the "OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, collectively, Optionor is the owner of 100% of the equity interests (the "EQUITY INTERESTS") of _______________________________ _____________, a Delaware limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate numbers 1 & 2 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company executed and delivered that certain Lease and Security Agreement dated as of ________________ (the "LEASE") whereby the Company leased from ____________________, an _______ corporation (the "LESSOR") property, together with all improvements built or to be built thereon, located in _______________________ as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and _______________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of ________________ (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionor and the Company have entered into that certain Shortfall Funding Agreement dated as of _______________ (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests shall be paid to Optionor on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor, which Option Payments shall be 2 payable over a nine year period (until the exercise of the Option) in quarterly installments, as follows: on the first day of each calendar quarter, beginning on July 1, 1998, and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), one-fourth of an amount calculated as 25% per annum of the Working Capital Reserve actually funded by the Optionor, compound on an annual basis; provided, however, BCC shall pay on April 2, 1998 a pro-rata amount calculated as 25% per annum of the Working Capital Reserve actually funded by Optionor from the date hereof through April 2, 1998, plus an amount equal to one-fourth of an amount calculated as 25% per annum of the Working Capital Reserve actually funded by Optionor as of April 2, 1998, which April 2, 1998 Option Payment represents Option Payments through the end of the first calendar quarter of 1998, and Option Payments payable in advance for the second calendar quarter of 1998. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. (d) The "PURCHASE PRICE" as used herein shall mean (i) an amount equal to the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, plus (ii) an amount calculated as 25% per annum of the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, compounded annually through the Closing Date (as defined below), plus (iii) the aggregate amount of all Advances and all other obligations due and payable by Lessee or the Optionor to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement), minus (iv) any Option Payments (including, for purposes of this Subsection, payments made pursuant to Subsection (ii) of this Section 1(d)). The aggregate amount of all Advances and all other obligations due and payable by Lessee or the Optionor through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), whether pursuant to the exercise of the Option or pursuant to the provisions of Section 9 below, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionor shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. (b) Notwithstanding anything to the contrary contained herein or in the other 2 3 Transaction Documents and without in any way implying that such actions are permissible under the Transaction Documents, if and to the extent that the funding of the Working Capital Reserve is advanced in the form of a loan to the Company (such advances, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Optionor shall give BCC prior written notice before authorizing the Company to make any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. 3. COVENANTS OF OPTIONOR/LEGEND/PLEDGE. (a) Optionor shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute Equity Interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF ________________. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Stock Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionor shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionor's ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionor shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not, and shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of Optionor or the Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company or Optionor (provided, however, this restrictions shall not be construed to prohibit Optionor's Members or shareholders from receiving Option Payments in accordance with the terms and conditions of this Agreement), (iii) engage in any business venture 3 4 or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of Optionor or the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative or management service for the benefit of either Optionor or the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owners of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) each Optionor is validly organized and in good standing under the jurisdiction of its formation, this Agreement and the other Transaction Documents to which the Optionors are a party have been duly authorized by all requisite action and this Agreement and the other Transaction Documents to which each Optionor is a party constitutes the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws, (iii) no Person or Entity holds any Equity Interests in the Company, other than the Optionor, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (v) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vi) Optionor (and each person or Entity that has an ownership in Optionor) has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) Optionor (and each person or Entity that has an ownership interest in Optionor) has the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and has not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionor's investment in the Company and (viii) Optionor (and each person or Entity that has an ownership interest in Optionor) understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and Optionor (and each person or Entity that has an ownership interest in Optionor) must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal 4 5 representatives, successors and assigns. 6. ASSIGNMENT. Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC. BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor; provided, however, no such transfer or assignment shall relieve BCC of its obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. To remove any doubt, in the event that BCC fails to make Option Payments as provided herein, Optionor shall have the right, after providing ten (10) days prior written notice to BCC, to terminate BCC's right to acquire the Equity Interests pursuant to the Option. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 Attention: F. David Carr (ii) If to BCC at 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 9. FUNDING OF WORKING CAPITAL RESERVES. Optionors intend to fund Working Capital Reserves for five (5) separate and distinct development projects with Lessor, with the total amount of all fundings not to exceed $4,200,000. Optionors covenant and agree to make such 5 6 fundings into Working Capital Reserves, at the direction of BCC, as follows: (i) as of the date hereof, Optionors have deposited a total of $400,000 into two Collateral Accounts as initial capital for two projects, (ii) on April 2, 1998, Optionors shall deposit in Collateral Accounts designated by BCC the additional sum of $800,000, (iii) upon ten (10) business days notice (which notice may not be provided prior to April 2, 1998) Optionors shall deposit in one or more Collateral Accounts as designated by BCC the additional sum of up to $1,000,000 for funding of the Working Capital Reserve for the third project to be developed with Lessor and (iv) upon ten (10) business days notice (which notice may not be provided prior to May 1, 1998), Optionors shall deposit in one or more Collateral Accounts as designated by BCC the additional maximum sum of up to $2,000,000 for the funding of the remaining Working Capital Reserves for the fourth and fifth projects with Lessor. Time is of the essence with respect to each funding described in this Section. In the event that Optionors fail in a timely fashion to fund the sums required by this Section, BCC shall have the right, not withstanding any other provision of this Agreement or the other Transaction Documents to the contrary, to acquire all Equity Interests of Optionors in all lessees of such projects for an amount equal to the actual funds deposited into one or more Collateral Accounts for projects with Lessor, together with an amount equal to the pro-rata portion of 25% per annum of the Working Capital Reserve actually funded by Optionors (minus all Option Payments actually made), and upon such payment, Optionors shall transfer and convey to BCC (or any other party designated by BCC) such Equity Interests, free and clear of all Liens, in the manner provided in this Agreement for such transfer in connection with the exercise of the Option. 10. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. WITNESS: ASSISTED CARE OPERATORS, LLC ______________________________________ By: ___________________________ Title:_________________________ ATTEST/WITNESS: OAKHAVEN SENIOR LIVING, INC. By: __________________________________ By: ___________________________ Title: _______________________________ Title:_________________________ ATTEST/WITNESS: BALANCED CARE CORPORATION By:_______________________________ By: ___________________________ Title:_____________________________ Title: ________________________ 7 EX-10.37 36 BALANCED CARE CORPORATION 1 Exhibit 10.37 SCHEDULE TO FORM OF AHP OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Company Lessor Management Firm - -------- ------- ------ ---------------- Anderson, IN Assisted Care Operators AHP of Indiana, Inc. Balanced Care at of Anderson, LLC Anderson, Inc. Jackson, TN Assisted Care Operators AHP of Tennessee, Inc. Balanced Care at of Jackson, LLC Jackson, Inc.
EX-10.38 37 BALANCED CARE CORPORATION 1 Exhibit 10.38 OPTION AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of June 16, 1998 between Assisted Care Operators, LLC, a Delaware limited liability company and Oakhaven Assisted Living, Inc., a California corporation (collectively, the "OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, collectively, Optionor is the owner of 100% of the equity interests (the "EQUITY INTERESTS") of Assisted Care Operators of Evansville, LLC, a Delaware limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate numbers 1 & 2 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company executed and delivered that certain Lease and Security Agreement dated as of June 16, 1998, (the "LEASE") whereby the Company leased from AHP of Indiana, Inc., an Indiana corporation (the "LESSOR") property, together with all improvements built or to be built thereon, located in Vanderburgh County, Indiana, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and Balanced Care at Evansville, Inc., a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of June 16, 1998 (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionor and the Company have entered into that certain Shortfall Funding Agreement dated as of June 16, 1998 (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests shall be paid to Optionor on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor: (1) on the earlier of one day after the issuance of the certificate of occupancy for the Facility or twelve months following the closing of 2 the acquisition of the site by AHP of Indiana, Inc. under the Development Agreement (the "First Payment Date"), an amount equal to the Current Yield (as hereinafter defined) on the Working Capital Reserve actually funded by Optionor through such date, payable in arrears for period commencing on the funding date or dates through the First Payment Date, plus an amount equal to the Current Yield on the Working Capital Reserve actually funded by Optionor through such date for the next succeeding 12 month period, payable in advance, (2) on that date which is twelve months after the First Payment Date (the "Second Payment Date"), an amount calculated as 25% of the Current Yield on the Working Capital Reserve actually funded by the Optionor through such date, representing the first quarterly installment of the annual Current Yield for the following 12 month period, payable in advance, and (3) thereafter, on the first day of each three-month period following the Second Payment Date and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), 25% of the Current Yield on the Working Capital Reserve actually funded from time to time by the Optionor, compounded on an annual basis, representing quarterly installments of the annual Current Yield, payable in advance. "Current Yield" as used in this Agreement means an annual return equal to 27.5% of the Working Capital Reserve actually funded from time to time through the date of such calculation. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. (d) The "PURCHASE PRICE" as used herein shall mean (i) an amount equal to the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, plus (ii) an amount calculated as the Current Yield on the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, compounded annually through the Closing Date (as defined below), plus (iii) the aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement), minus (iv) any Option Payments. The aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. To avoid any doubt, BCC shall receive a credit against the Purchase Price for Option Payments paid as Current Yield in advance, to the extent that such advanced Option Payments are attributable to Current Yield accruing after the Closing Date. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), pursuant to the exercise of the Option, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionor shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably 2 3 request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents and without in any way implying that such actions are permissible under the Transaction Documents, if and to the extent that the funding of the Working Capital Reserve is advanced in the form of a loan to the Company (such advances, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Optionor shall give BCC prior written notice before authorizing the Company to make any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. 3. COVENANTS OF OPTIONOR/LEGEND/PLEDGE. (a) Optionor shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute Equity Interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF JUNE 16, 1998. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionor shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionor's ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionor shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not, and shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of Optionor or the 3 4 Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company or Optionor (provided, however, this restrictions shall not be construed to prohibit Optionor's Members or shareholders from receiving Option Payments in accordance with the terms and conditions of this Agreement), (iii) engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of Optionor or the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests in the Company or options, warrants or other rights to purchase any equity interests in the Company or any securities convertible or exchangeable for equity interests in the Company, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative or management service for the benefit of either Optionor or the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owners of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) each Optionor is validly organized and in good standing under the jurisdiction of its formation, this Agreement and the other Transaction Documents to which the Optionors are a party have been duly authorized by all requisite action and this Agreement and the other Transaction Documents to which each Optionor is a party constitutes the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws, (iii) no Person or Entity holds any Equity Interests in the Company, other than the Optionor, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (v) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vi) Optionor (and each person or Entity that has an ownership in Optionor) has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) Optionor (and each person or Entity that has an ownership interest in Optionor) has the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and has not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionor's investment in the Company and (viii) Optionor (and each person or Entity that has an ownership interest in Optionor) understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and Optionor (and each person or Entity that has an 4 5 ownership interest in Optionor) must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 6. ASSIGNMENT. Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC. BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor; provided, however, no such transfer or assignment shall relieve BCC of its obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. (c) Notwithstanding the provisions of Section 7(b) and so long as an Event of Default has not occurred under any Transaction Document or Lease Document which was caused by either Optionor or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, Optionor shall have the following remedies and rights, which remedies and rights shall be the sole and exclusive remedies and rights of Optionor in the case of such failure: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Company pursuant to the Shortfall Agreement shall automatically be amended to provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary after the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Option Payments and an opportunity to cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as Optionors may reasonably request to effect the provisions of Subsections (c)(i), (c)(ii) and (c)(iii) above. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or 5 6 sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: c/o Hakman & Co, Incorporated 1350 Old Bayshore Highway; Suite 300 Burlingame, CA 94010 Attention: F. David Carr (ii) If to BCC at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 Attention: Legal Department or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 9. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. ATTEST/WITNESS ASSISTED CARE OPERATORS, LLC a Delaware limited liability company By: RETIREMENT OPERATORS FUNDING, LLC, its Manager By: RETIREMENT OPERATORS MANAGEMENT, INC., its Manager By: By: /s/ F. David Carr ------------------------------- ------------------------------- F. David Carr, President ATTEST/WITNESS: OAKHAVEN ASSISTED LIVING, INC. By: By: /s/ D. Mark Brosche ------------------------------- ------------------------------- Title: Title: ---------------------------- ---------------------------- ATTEST/WITNESS: BALANCED CARE CORPORATION By: By: /s/ Brian L. Barth ------------------------------- ------------------------------- Title: Title: Chief Development Officer ---------------------------- ---------------------------- S - 1 Option Agreement - Evansville EX-10.40 38 BALANCED CARE CORPORATION 1 Exhibit 10.40 SCHEDULE TO FORM OF AHP SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Date Location of Property Management Firm Management Agreement Dated As Of - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN January 30, 1998 Anderson, Indiana Balanced Care at January 30, 1998 Anderson, Inc. Evansville, IN June 16, 1998 Evansville, Indiana Balanced Care at June 16, 1998 Evansville, Inc. Jackson, TN January 30, 1998 Jackson, Tennessee Balanced Care at January 30, 1998 Jackson, Inc. Facility Location Collateral Account Capitalization of Pro Rata Percent For Return Percent For Deposit Lessee Defaults Asset Purchase Price - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN $200,000 Deposit of $600,000 25% 25% by April 2, 1998 Evansville, IN $150,000 Deposit of 27.5% 27.5% $1,000,000 by March 30, 1999 Jackson, TN $200,000 Deposit of $600,000 25% 25% by April 2, 1998
EX-10.42 39 BALANCED CARE CORPORATION 1 Exhibit 10.42 SCHEDULE TO FORM OF AHP WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Date Deposit Pledge Manager Capitalization Of Lessee Agreement Executed Facility Location Amount As Of - ----------------------------------------------------------------------------------------------------------------------- Anderson, IN January 30, $600,000 BCC at Anderson, $600,000 by April 2, 1998 February 1, 1998 1998 Inc. Evansville, June 16, 1998 $1,000,000 BCC at Evansville, $600,000 each to the June 16, 1998 IN Inc. Jackson Lessee and the Anderson Lessee by July 31, 1998; $1,000,000 to the Lessee by March 30, 1999 Jackson, January 30, $600,000 BCC at Jackson, $600,000 by April 2, 1998 February 1, 1998 TN 1998 Inc.
EX-10.43 40 BALANCED CARE CORPORATION 1 Exhibit 10.43 FORM OF LEASE AGREEMENT ----------------------- THIS LEASE AGREEMENT (the "Lease") is made and entered into this ____ day of ___________ by and between __________________________________________, a Delaware limited liability company ("Tenant"), and ______________________, a Florida corporation or its designee and its successors and assigns ("Landlord"). WHEREAS, on or about the date hereof, Landlord has acquired fee title to certain property as defined herein from ___________________________________; WHEREAS, Landlord, Tenant and BCC Development and Management Co. ("BCC") have entered into a Development Agreement of even date herewith (the "Development Agreement") which calls for the construction by BCC and Tenant on behalf of Landlord of a ________ personal care home with assisted living services and related personalty, fixtures and amenities on the Real Property (as defined below); and WHEREAS, the Landlord and Tenant have executed this Lease pursuant to the Development Agreement with the understanding that the Lease shall become effective upon satisfaction of certain conditions referenced herein and of all terms and conditions under and the absence of a Default under the Development Agreement, the terms of which are incorporated herein by reference. NOW THEREFORE, in consideration of the mutual covenants contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: SECTION 1. THE PREMISES. SECTION 1.1 FACILITY. Landlord hereby demises and leases to Tenant and Tenant hereby leases and takes from Landlord, the Real Property described in EXHIBIT 1.1A (the "Real Property"), together with those certain improvements (the "Improvements") thereon to be constructed on behalf of Landlord pursuant to the Development Agreement, consisting of a personal care home with assisted living services (the "Facility") as more particularly described and provided for in Exhibit D to the Development Agreement and incorporated herein by this reference (the "Scope of Work"), subject to those encumbrances and other matters of record set forth on EXHIBIT 1.1B attached hereto made a part hereof (the "Permitted Encumbrances"). The Real Property, the Improvements and the Personal Property (defined below) shall collectively constitute the "Premises." SECTION 1.2 PERSONAL PROPERTY. Landlord hereby further demises and leases to Tenant, and Tenant hereby leases and takes from Landlord, all equipment, furniture, furnishings, and fixtures which are to be installed as part of the Improvements pursuant to the "Plans and Specifications" (as that term is defined in the Development Agreement) approved by Landlord and Tenant, as provided for in the Scope of Work, together with any -1- 2 additional items added thereto from time to time by written agreement between Landlord and Tenant (such equipment, furniture, furnishings and fixtures, together with all additions thereto or replacements thereof will hereinafter be referred to as the "Personal Property"). If any equipment, in addition to the Personal Property, is necessary or convenient to operate the Facility, all such additional equipment shall be acquired by and at the cost of Tenant and the same shall be and remain the property of Tenant in accordance with the terms of SECTION 1.2.1 below. SECTION 1.2.1 Tenant shall keep all of the Personal Property in good working order and condition at Tenant's sole cost and expense, and at the expiration or termination of the Lease Term (as defined below) shall return and deliver all of such property to Landlord in good working order and condition, reasonable wear and tear excepted. If necessary for the proper operation of the Facility, Tenant shall, during the Lease Term, replace part or all of the items of Personal Property which have been damaged or destroyed or become worn out or obsolete, and, except as provided in SECTION 3.5 with respect to the utilization of the Capital Reserve Account, such replacement shall be at the sole cost of Tenant, but any such equipment which has been acquired for the purpose of replacing Personal Property previously provided by Landlord shall be and remain the property of Landlord. Tenant shall not place additional property on the Premises (not required for replacement of property covered in this Lease) without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed and the same shall be and remain the property of Tenant ("Tenant's Equipment"). SECTION 2. TERM. SECTION 2.1 INITIAL LEASE TERM. The effective date and term of this Lease shall commence on written notice by Landlord to Tenant that the conditions precedent set forth in EXHIBIT 2.1 hereto have been satisfied and approved by Landlord, or, at Landlord's option, waived in writing in its sole discretion (the "Commencement Date") and shall continue for a period of sixty (60) months following the Commencement Date (the "Lease Term") In the event the Lease Term expires on any day other than the last day of a calendar month, the Lease Term shall be automatically extended by the number of days necessary to cause the Lease Term to expire on the last day of the month. Notwithstanding the above, the provisions of SECTIONS 19, 22 AND 23 shall be effective on the date hereof. SECTION 3. RENT. SECTION 3.1 BASE RENT. During the Lease Term, Tenant covenants to pay to Landlord, without previous demand therefor, and without offset or deduction whatsoever, a net fixed annual minimum rent (the "Base Rent") for each year of the Lease Term according to the following formula: The Base Rent shall be calculated based on the Total Project Cost (as defined below) multiplied by the Lease Rate (as defined below) as follows: -2- 3 Annual Base Rent = Total Project Cost x Lease Rate The "Lease Rate" during the Lease Term shall be _____% (the "Lease Rate"). The Lease Rate shall be calculated on a three hundred sixty (360) day year applied to actual days. The "Total Project Cost" as defined herein shall mean all costs set forth in the Budget as defined in the Development Agreement and EXHIBIT 3.1 hereto, as and when such costs are advanced by Landlord pursuant to the Development Agreement. The parties agree that Tenant shall be provided copies of monthly advances of the Budget which shall be prima facie evidence of Total Project Cost, without the need for further documentation, provided Tenant shall have the right to object to any mathematical errors and receive appropriate adjustment therefor as set forth in Section 5C of the Development Agreement. Any increase in Base Rent with respect to payments made pursuant to Section 32.12 of Exhibit B to the Development Agreement shall commence to accrue on the day of such advance. The increased Base Rent from the day of such advance to the day preceding the regularly scheduled Base Rent installment date which occurs at least five (5) days following the notice from Landlord to Tenant of the increased Base Rent amount and the first adjusted monthly Base Rent amount shall be due on the regularly scheduled Base Rent installment date which occurs at least five (5) days following notice from Landlord to Tenant of the increased Base Rent and such increased Base Rent shall thereafter be payable as otherwise provided herein. SECTION 3.1.1 The obligation to pay the Base Rent and Additional Rent (as defined in 3.2.1) shall commence on the Commencement Date. Base Rent shall be paid in advance in equal monthly installments on the first day of each month. For purposes of this Lease, a Lease Year shall be the twelve (12) month period commencing on the Commencement Date, or if the Commencement Date is a day other than the first day of a month, the first Lease Year shall be such partial month plus the following twelve (12) months and each Lease Year thereunder shall be twelve (12) months. In the event the date of Commencement Date shall be other than the first day of the month, Tenant shall pay to Landlord a pro rata portion of rent for the month. SECTION 3.2. PAYMENT OF BASE RENT. Except as specifically provided for herein, the Base Rent shall be payable without offset, abatement or other deduction to Landlord at the address set forth in SECTION 16, or to such other person, firm or corporation at such other address as Landlord may designate by notice in writing to Tenant. SECTION 3.2.1 This Lease is intended to be absolutely net to Landlord, so that this Lease shall yield the Base Rent net to the Landlord. Tenant shall pay to Landlord, net throughout the Lease Term, the Base Rent prescribed by SECTION 3.1, free of any offset, abatement, or other deduction, except as may be expressly set forth herein. Except as may otherwise be expressly set forth herein, Landlord shall not be required to make any payment of any kind with respect to the Premises and Tenant agrees to pay as they become due and payable all costs, expenses, and obligations of every kind relating to the Premises whether usual or unusual, ordinary or extraordinary, foreseen or unforeseen, which may arise or become due following the -3- 4 Commencement Date (the "Additional Rent"). Base Rent and Additional Rent are sometimes referred to collectively herein as "Rent". Notwithstanding the foregoing, Landlord shall be responsible for making all payments due with respect to any mortgage or deed of trust secured by the Premises (the "Facility Mortgage") and all income taxes assessed against Landlord, and all estate, succession, transfer or inheritance taxes of Landlord. SECTION 3.2.2 This Lease shall continue in full force and effect, and the obligations of Tenant hereunder shall not be released, discharged or otherwise affected for any cause whatsoever, including, without limitation, casualty. SECTION 3.2.3 If any payment of any sums required to be paid by Tenant to Landlord under this Lease and payments made by Landlord under any provision hereof for which Landlord is entitled to reimbursement by Tenant is not paid within ten (10) days after the same is due, interest at the "Lease Rate" plus four percent (4%) per annum, shall accrue on such sum and be paid to Landlord from the original date due until actually paid and a late charge of 5% of such overdue amount shall be due to Landlord. No failure by Landlord to insist upon the strict performance by Tenant of Tenant's obligation to pay such interest or late charges shall constitute a waiver by Landlord of its rights to enforce the provisions of this Section in any instance thereafter occurring. SECTION 3.2.4. Subject to SECTION 23 and SECTION 24, during the period prior to Stabilization (as defined below) (the "Pre-Stabilization Period"), Landlord may utilize the Letter of Credit (as defined in SECTION 23), to the extent available, proceeds of the Mandatory Sweep Account (as defined in SECTION 24) and to the extent the Letter of Credit and the Mandatory Sweep Account are depleted, the proceeds from the Operating Deficit Loans (as defined in SECTION 24) to fund operating deficits and make the payments of Base Rent and/or Additional Rent during the Pre-Stabilization Period. Notwithstanding the above and any other contrary term in this Lease, Landlord's rights under the Letter of Credit, Mandatory Sweep Account, Operating Deficit Loan Documents (as defined in SECTION 24) and under any Transaction Document shall upon the occurrence of an Event of Default be cumulative and non-exclusive with Landlord having the right to exercise its rights under all or any of such instruments or documents in such order as Landlord shall determine.3.2.4. SUBJECT TO SECTION 23 AND SECTION 24, DURING THE PERIOD PRIOR TO STABILIZATION (AS DEFINED BELOW) (THE "PRE-STABILIZATION PERIOD), LANDLORD MAY UTILIZE THE LETTER OF CREDIT (AS DEFINED IN SECTION 23) AND, TO THE EXTENT AVAILABLE, PROCEEDS OF THE MANDATORY SWEEP ACCOUNT (AS DEFINED IN SECTION 24) TO FUND OPERATING DEFICITS AND MAKE THE PAYMENTS OF BASE RENT AND/OR ADDITIONAL RENT DURING THE PRE-STABILIZATION PERIOD. NOTWITHSTANDING THE ABOVE AND ANY OTHER CONTRARY TERM IN THIS LEASE, LANDLORD'S RIGHTS UNDER THE LETTER OF CREDIT, MANDATORY SWEEP ACCOUNT, HEREUNDER AND UNDER ANY TRANSACTION DOCUMENT SHALL UPON THE OCCURRENCE OF AN EVENT OF DEFAULT BE CUMULATIVE AND NON-EXCLUSIVE WITH LANDLORD HAVING THE RIGHT TO EXERCISE ITS RIGHTS UNDER ALL OR ANY OF SUCH INSTRUMENTS OR DOCUMENTS IN SUCH ORDER AS LANDLORD SHALL DETERMINE. -4- 5 Subject to SECTIONS 23 AND 24, the Tenant will be solely responsible for payment of all Base Rent irrespective of availability under the Letter of Credit, Mandatory Sweep Account or Operating Deficit Loan Documents. "Stabilization" shall occur upon written notice by Landlord to Tenant of satisfaction of the following conditions precedent, all of which shall have been observed or satisfied, as required, by Tenant: (a) There shall be no Event of Default or Default under the terms of the Development Agreement, Lease, Guaranty of Payment and Performance (the "Guaranty") of even date herewith by Senior Care Operators, LLC and Oakhaven Senior Living, Inc. (collectively, the "Guarantors") or any other document executed to secure the same or with respect to any of the foregoing (the "Transaction Documents"); (b) The Facility shall have been issued a final and unconditional Certificate of Occupancy with respect to all of the dwelling units contained therein and all dwellings units shall be available for occupancy; (c) Title to the Facility shall be free and clear of any mechanics', materialmen's (unless such mechanics' or materialmen's lien has been bonded over to the reasonable satisfaction of Landlord and in a bonded amount satisfactory to Landlord in its sole discretion and provided further that any such mechanic's or materialman's lien does not exceed $75,000), or other liens, other than those liens that arise out of materials supplied or work performed at the request of Landlord unless required to be performed by Tenant hereunder or under the Development Agreement and Tenant failed to perform such work as required; (d) All licenses and permits for the administration, operation, occupancy and use of the Facility as a personal care home with assisted living services shall be in full force and effect and free from default, from any federal, state, or local agency or authority having jurisdiction including, but not limited to, any license, certification or filing required by the Pennsylvania Department of Public Welfare for a personal care home; (e) There shall have been no material adverse change in the financial condition of the Tenant, Balanced Care Corporation or any of the Guarantors; (f) The Facility shall have achieved ninety percent (90%) occupancy for the six calendar months immediately preceding. Occupancy shall be defined as: 90% of the total units for the Facility under executed leases for which prepaid non-refundable rent has been received; and (g) The Facility shall have maintained a minimum Lease Payment Coverage Ratio (as defined in Section 24(b)(3) hereof) of 1.30 : 1.00 for the six calendar months immediately preceding. -5- 6 SECTION 3.3. RENT INCREASES. Effective as of the expiration of each Lease Year, the Base Rent shall be adjusted upward by an amount equal to the increase, if any, in the Consumer Price Index (as that term is defined below) determined in the manner provided for below; provided, however, in no event shall the Base Rent be adjusted downward. As used herein the term "Consumer Price Index" shall mean the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index, All Urban Consumers, All Items, for Northeast Urban (1982-1984= 100). If at any time there shall not exist the Consumer Price Index in the same format as recited in this SECTION 3.3, Landlord shall substitute any official index published by the Bureau of Labor Statistics or successor or similar governmental agency, as may then be in existence and shall be most equivalent thereto. The increase in the Consumer Price Index shall be determined by the percentage increase, if any, between the index published and in effect thirty (30) days preceding the annual adjustment date and the index published and in effect on the Commencement Date. As used herein the term "Consumer Price Increase shall mean the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index, All Urban Consumers, All Items, for Northeast Urban (1982-1984=100). If at any time there shall not exist the Consumer Price Index in the same format as recited in this SECTION 3.3, Landlord shall substitute any official index published by the Bureau of Labor Statistics or successor or similar governmental agency, as may then be in existence and shall be most equivalent thereto. The increase in the Consumer Price Index shall be determined by the percentage increase, if any, between the index published and in effect thirty (30) days preceding the annual adjustment date and the index published and in effect on the Commencement Date. SECTION 3.4. TAXES/DEPOSITS/SECURITY SECTION 3.4.1. Unless Tenant shall be escrowing estimated Tax payments with Landlord as provided below or otherwise paying such amounts through Landlord as provided below, Tenant shall pay directly to the applicable taxing authority, by the applicable due date or, if permitted by applicable law or regulation, the date by which penalties, sanctions or interest shall begin to be charged, all "Taxes" (as that term is defined below) for each fiscal period wholly included in the Lease Term (and a prorated amount thereof for partial years occurring during the first and last Lease Year of the Lease Term) assessed with respect to the Premises which payments shall be deemed Additional Rent hereunder, in addition to the Base Rent hereinbefore set forth, and Tenant shall provide Landlord with reasonable evidence of such payment. Any interest or penalties which accrue as a result of Tenant's failure to make such payment within the time required by this SECTION 3.4 shall be the responsibility and obligation of Tenant unless the failure to make such payment within the time required by this SECTION 3.4 was caused by any action or inaction of Landlord (not caused by Tenant) then any such interest or penalties shall be the responsibility and obligation of Landlord. At such time as Landlord receives any bill for Taxes, Landlord shall promptly notify Tenant and Tenant agrees to pay to -6- 7 Landlord at least one (1) business day prior to delinquency of such Taxes calculated in the manner provided for above. "Taxes" shall mean all real estate taxes, general and special assessments, personal property taxes, and other public charges which are assessed, levied, confirmed, or imposed upon the Premises during the Lease Term, and all sales taxes and other taxes that are now or hereafter may be payable in connection with the Base Rent payable hereunder during the Lease Term. SECTION 3.4.2. Any Taxes and assessments relating to a fiscal period of any authority, a part of which is already included within the Lease Term and a part of which is included in a period of time before or after the Lease Term, shall be adjusted pro rata between Landlord and Tenant and each party shall be responsible for its pro rata share of any such taxes and assessments. In no event shall Tenant extend payment of any Taxes or assessments over any period other than the period initially assessed by the relevant taxing authority. SECTION 3.4.3. Nothing herein shall require Tenant to pay income taxes assessed against Landlord, or estate, succession, transfer or inheritance taxes of Landlord. SECTION 3.4.4. Tenant may contest, in its own name or in the name of Landlord, with Landlord's consent, which Landlord can withhold in its reasonable discretion, the legality or validity of any such tax or assessment or of any law under which the same shall be imposed. This must be done in good faith, with due diligence, and at Tenant's own expense. If Tenant does so contest such tax or assessment beyond the time limit for payment thereof by Tenant, Tenant shall either pay such amount under protest or procure and maintain a stay of all proceedings with adequate bond to enforce collection of such tax or assessment. Landlord shall also have the right, at Landlord's sole cost and expense, to contest in good faith and with due diligence any assessment with respect to the Real Property. Landlord and Tenant agree to reasonably cooperate with each other with respect to any permitted contest under this SECTION 3.4.4. SECTION 3.4.5. Subject to Landlord's prior consent above, Tenant shall have the power and authority, at Tenant's cost to make and file and prosecute any statement or report or claim for refund which may be required or permitted by law, as the basis of or in connection with the assessment, determination, equalization, reduction or payment of any and every tax or assessment or license or charge which Tenant is required to pay or discharge hereunder. SECTION 3.4.6. Landlord shall not be required to join in any proceedings referred to in this Section, unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by and/or in the name of Landlord, in which event Landlord shall join in such proceedings or permit the same to be brought in its name. Landlord shall not ultimately be subjected to any liability for the payment of any costs or expenses in connection with any such proceedings, and Tenant will indemnify, defend and save harmless Landlord from any such costs and expenses. Tenant shall be entitled to any refund of any taxes and assessments and penalties or interest thereon received by Landlord but previously paid or reimbursed in full by Tenant. -7- 8 SECTION 3.4.7. Upon the termination of any such proceeding, Tenant shall pay the amount of such taxes and assessments or part thereof as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, interest, penalties or other liabilities in connection therewith. SECTION 3.4.8. At the option of Landlord, which may be exercised at any time, Tenant shall, upon written request of Landlord, on the first day of the calendar month immediately following such request, and on the first day of each calendar month thereafter during the Lease Term (each of which dates is referred to as a "Monthly Deposit Date"), pay to and deposit with Landlord a sum equal to one-twelfth (1/12th) of the Taxes to be levied, charged, filed, assessed or imposed upon or against the Premises within one (1) year after said Monthly Deposit Date. If the amount of the Taxes to be levied, charged, assessed or imposed within the ensuing one (1) year period shall not be fixed upon any Monthly Deposit Date, such amount for the purpose of computing the deposit to be made by Tenant hereunder shall be reasonably estimated by Landlord with an appropriate adjustment to be promptly made between Landlord and Tenant as soon as such amount becomes determinable. In addition, Landlord may, at its option, from time to time require that any particular deposit be greater than one-twelfth (1/12th) of the estimated amount payable within one (1) year after said Monthly Deposit Date, if such additional deposit is required in order to provide to Landlord a sufficient fund from which to make payment of all Taxes on or before the next due date of any installment thereof. SECTION 3.4.9 USE OF DEPOSITS. The sums deposited by Tenant under this SECTION 3.4 shall be held by Landlord and shall be applied to payment of the Taxes when due. Any such deposits may be commingled with other assets of Landlord, and shall be deposited by Landlord at OCWEN Federal Bank FSB. Landlord shall not be responsible to Tenant for any loss of principal so deposited at such depository bank due to financial failure or any act of omission of such depository. The income from such investment or interest on such deposit shall be paid to Tenant on a semi-annual basis as long as no Event of Default has occurred. Tenant shall give not less than ten (10) days prior written notice to Landlord in each instance when a Tax is due, specifying the Tax in full (or in installments as otherwise provided for herein), together with any penalty or interest thereon, provided, however, Tenant shall not be in default hereunder if it fails to receive notice from the applicable taxing authority and such notice was sent directly to the Landlord. Landlord may change its estimate of any Tax for any period on the basis of a change in an assessment or tax rate or on the basis of a prior miscalculation or for any other good faith reason; in which event, within ten (10) days after demand by Landlord, Tenant shall deposit with Landlord the amount in excess of the sums previously deposited with Landlord for the applicable period which would theretofore have been payable under the revised estimate. Landlord shall provide Tenant with an annual statement of all amounts deposited and interest earned thereon under this SECTION 3.4. SECTION 3.4.10 OTHER PROPERTIES. If any Tax shall be levied, charged, filed, assessed, or imposed upon or against the Premises, and if such Tax shall also be a levy, charge, assessment, or imposition upon or for any other real or personal property owned by Tenant that does not -8- 9 constitute a part of the Premises, then the computation of the amounts to be deposited under this SECTION 3.4 shall be based upon the entire amount of such Tax and Tenant shall not have the right to apportion any deposit with respect to such Tax owed by Tenant. SECTION 3.4.11 TRANSFERS. In connection with any assignment of the Landlord's interest under this Lease, the original Landlord named herein and each successor in interest shall have the right to transfer all amounts deposited pursuant to the provisions of this SECTION 3.4 and still in its possession to such assignee (as the subsequent holder of Landlord's interest in this Lease) and upon such transfer, the original Landlord named herein or the applicable successor in interest transferring the deposits shall thereupon be completely released from all liability with respect to such deposits so transferred and Tenant shall look solely to said assignee, as the subsequent holder of Landlord's interest under this Lease, in reference thereto. SECTION 3.4.12 SECURITY. All amounts deposited with Landlord pursuant to the provisions of this SECTION 3.4 shall be held by Landlord as additional security for the payment and performance of all obligations of Tenant under the Lease and, upon the occurrence of any Event of Default, Landlord may, in its sole and absolute discretion, apply said amounts towards payment or performance of such obligations. SECTION 3.4.13 RETURN. Upon the expiration or earlier termination of this Lease, provided, that, all of the Lease obligations have been fully paid and performed, any sums then held by Landlord under this SECTION 3.4 shall be refunded to Tenant. SECTION 3.4.14 RECEIPTS. Tenant shall deliver to Landlord copies of all notices, demands, claims, bills and receipts in relation to the Taxes promptly upon receipt thereof by Tenant and Landlord shall deliver to Tenant copies of all notices, demands, claims, bills and receipts in relation to Taxes within a reasonable time upon receipt thereof by Landlord. SECTION 3.4.15 FEES. Tenant agrees to pay reasonable administrative or other fees associated with Landlord or its designees holding, disbursing and otherwise managing the Deposits. SECTION 3.5 CAPITAL RESERVES. Tenant shall pay, as Additional Rent hereunder on the first day of each month, commencing with the thirteenth (13th) full calendar month after the Commencement Date, into a capital reserve fund (the "Capital Reserve Account"), the amount of $29.17 per unit, which funds shall be deposited into an interest bearing escrow account in Tenant's name to be disbursed from time to time in accordance with EXHIBIT 3.5 hereto to pay for replacements and correction of deferred maintenance items. Landlord shall also be entitled to use such funds to cure any Event of Default hereunder pursuant to the Assignment and Pledge of Deposit Account Agreement between the parties of even date herewith. Funds held in the Capital Reserve Account shall be deposited by Landlord at OCWEN Federal Bank FSB. Landlord shall not be liable to Tenant for any consequent loss of principal so deposited at such depository bank. Any funds remaining in the Capital Reserve Account at -9- 10 Lease expiration or earlier termination shall be retained by Landlord unless Tenant exercises and consummates the Purchase Option (as defined herein). SECTION 4. USE OF THE PREMISES/COMPLIANCE WITH LAWS. SECTION 4.1 PERMITTED USES. The Premises may be used only as a 60 unit personal care home with assisted living services and for no other purpose. Tenant assumes full responsibility for confirming that such use is permitted under all laws, statutes, ordinances, regulations, and orders governing the Real Property and for obtaining any license or other authorization required to operate such use and/or to provide assisted living services within the Facility and to obtain the necessary building permit and certificate of occupancy for the Improvements and for assuring that the Improvements constructed by Tenant comply with all applicable laws, statutes, ordinances, rules, regulations, orders, restrictions and other governmental requirements of any governmental entities and divisions having regulatory authority over Tenant and the Improvements by virtue of the health care business conducted by Tenant. Landlord makes no representation or warranty as to the compliance of such use under any such laws, statutes, ordinances, regulations, and orders governing the Real Property and/or insurance requirements. Any failure by Tenant to obtain or maintain any required authorization or approval shall not affect Tenant's obligation to pay Rent or perform any other obligation hereunder. SECTION 4.2 OPERATING APPROVALS. Tenant covenants to comply, or shall cause any manager of the Facility to comply, with all notification and reporting requirements imposed on an operator or proposed operator of a personal care home and to maintain, or cause to be maintained in the case of any manager of the Facility, all approvals and licenses to operate the Facility and to provide assisted living services therein under applicable state and federal law (collectively, the "Operating Approvals") and shall maintain the same in full force and effect throughout the Lease Term. Tenant acknowledges that its obligation to pay Rent is not contingent upon the receipt and maintenance of any such Operating Approvals. SECTION 4.3 COMPLIANCE WITH INSURANCE. After the Commencement Date, Tenant shall neither use nor permit to be used the Premises, or any part thereof for any purpose which will cause the cancellation of any insurance policy covering the Premises of any part thereof, nor shall Tenant sell or permit to be kept, used or sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost, comply with all of the requirements pertaining to the Premises of any insurance organization or company necessary for the maintenance of insurance, as herein provided, covering the Premises. SECTION 4.4 WASTE/COMPLIANCE WITH LAWS. Tenant covenants and agrees that the Premises shall not be used for any unlawful purpose. Tenant shall not commit or suffer to be committed any waste on the Premises, nor shall Tenant cause or permit any nuisance thereon. Tenant further covenants and agrees that Tenant's use of the -10- 11 Premises and the maintenance, alteration, and operation thereof shall at all times conform to all applicable and lawful local, state, and federal laws, ordinances, and regulations, including orders of agencies which regulate or are responsible for accrediting personal care home with assisted living services. Tenant shall make such alterations to the Premises (whether capital or non-capital in nature) as may become necessary after the Commencement Date to maintain the Premises in compliance with applicable laws at Tenant's sole cost and expense. SECTION 4.5 ENVIRONMENTAL COMPLIANCE. SECTION 4.5.1 Tenant shall use the Premises in compliance with all applicable Environmental Laws (as defined below). Tenant shall not generate, store or use any hazardous materials in or on the Premises, nor permit any Person to do so on the Premises, except those customarily generated, stored and used in the operation of a personal care home with assisted living services, and then only in compliance with all Environmental Laws, insurance requirements and applicable industry standards. Tenant shall not dispose of hazardous materials on the Premises (or permit any person to do so) to any other location except a properly licensed disposal facility and then only in compliance with all applicable Environmental Laws. Tenant shall, at its sole cost and expense, promptly remove or clean up any hazardous materials introduced onto the Premises by Tenant or with its permission or at its sufferance (other than hazardous materials introduced onto the Premises solely by Landlord's actions). Such removal or cleanup shall be in compliance with all applicable Environmental Laws. Tenant hereby agrees to indemnify and hold Landlord and any mortgagee under a Facility Mortgage (a "Facility Mortgagee") harmless and agrees to defend Landlord and any Facility Mortgagee from all losses, damages, claims and liabilities and fines, including costs and reasonable attorneys' fees, of any nature whatsoever in connection with the actual presence upon the Premises of any hazardous materials introduced by Tenant. For purposes hereof, the term "Environmental Laws" shall mean any and all applicable governmental laws, regulations and requirements relating to environmental and occupational health and safety matters and hazardous materials, substances or wastes (as defined from time to time under any applicable federal, state or local laws, regulations or ordinances). The provisions of this SECTION 4.5.1 shall survive the expiration or earlier termination of this Lease. SECTION 4.5.2 HAZARDOUS MATERIALS. The term "hazardous materials" shall mean any chemical, substance, waste, material, gas or emission which is deemed hazardous, toxic, a pollutant, or a contaminant under any statute, ordinance, by-law, rule, regulation, executive order or other administrative order, judgment, decree, injunction or other judicial order of or by any governmental authority, now or hereafter in effect, relating to pollution or protection of human health or the environment. By way of illustration and not limitation, "Hazardous Materials" includes asbestos, radioactive materials, and "oil", "hazardous materials", "hazardous waste", "hazardous substance" and "toxic material" as defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET M., as amended, the Resource Conservation and Recovery Act of 1976, 42 U.S. C. Section 2601 et seq., as amended, the regulations promulgated thereunder, and the provisions of the Pennsylvania ______________ Code and the regulations promulgated thereunder. -11- 12 SECTION 5. REPORTING REQUIREMENTS. Notwithstanding anything set forth in this Lease to the contrary, for the purposes of this SECTION 5 and all other sections of this Lease, Landlord acknowledges and agrees that the determination by Tenant and/or the Manager (as defined below) as to whether either of them desire to become a participating provider under any reimbursement program, including but not limited to, Medicaid, Medicare or other governmental or private third party program, and whether to continue to be such a participating provider shall be within their respective sole discretion. Tenant hereby agrees as follows: SECTION 5.1 From and after the Commencement Date, Tenant shall provide Landlord with the following financial statements and information on a continuing basis: (a) Within one hundred and twenty (120) days after the end of each fiscal year, audited financial statements of the Tenant prepared by a nationally recognized certified public accounting firm or other independent certified public accounting firm acceptable to the Landlord, prepared in accordance with GAAP, and including a balance sheet, and a statement of income and expenses for the year then ended. (b) Within thirty (30) days after the end of each fiscal year quarter (i) unaudited financial statements of the Tenant prepared in accordance with GAAP for the quarter then ended including a balance sheet and statement of income and expenses, prepared on a basis consistent with the annual statements, and certified by the chief financial officer of the Tenant to be true and correct, (ii) a certificate from the chief financial officer of Balanced Care at Shippensburg, Inc. (the "Manager") or the chief financial officer of the Tenant, in form reasonably acceptable to Landlord, that, to such chief financial officer's knowledge after due inquiry, as of the date of the certificate, no event has occurred (that has not been cured) and no condition currently exists that constitutes an "Event of Default" or would by giving of any required notice or expiration of any applicable cure period constitute an "Event of Default" and (iii) a quarterly census information of the Facility in sufficient detail to show, unit occupancy on a daily average basis for such quarter. (c) Within fifteen (15) days of the end of each calendar month (i) an aged accounts receivable report for the Facility, certified by the Tenant to be true and correct, and (ii) monthly census information for the Facility in sufficient detail to show census on a daily average basis for such month. (d) Within three (3) business days of the receipt by the Tenant, Facility or the Manager at the Facility, any and all notices (regardless of form) from any licensing, reimbursement and/or certifying agency that any Operating Approvals, certifications or any reimbursement contract is being revoked, downgraded or suspended or that action is pending or being considered to revoke or suspend any such Operating Approvals, certifications, permits, or any reimbursement contract or any rights thereunder. -12- 13 (e) If the Facility should hereafter be required to file any cost report as a condition of participation pursuant to a reimbursement contract, then within ten (10) days of the date of the required filing of cost reports of such Facility with the appropriate State Medicaid, Medicare or other applicable agency or pursuant to any reimbursement contract, or of the date of actual filing of such cost report by the Facility, whichever is earlier, furnish to Landlord a complete and accurate copy of the annual cost report for such Facility, which will be prepared in accordance with the requirement of the applicable reimbursement contract, and any amendments filed with respect to such reports and all responses, audit reports or inquiries with respect to such reports. (f) Such financial statements of Guarantors as and when required in the Guaranty. (g) Within fifteen (15) days of the end of each calendar month during the Pre-Stabilization Period (i) monthly financial and operating statements for the Facility certified by the chief financial officer of the Manager or the Tenant, (ii) a current rent roll statement with respect to the Facility and (iii) a status report from the chief financial officer of the Manager or the Tenant as to the projected date when Stabilization will occur. (h) Furnish to Landlord within ten (10) days of receipt a copy of any licensing agency (or, to the extent Tenant or any Manager becomes a participating provider and elects to remain so in any Medicaid, Medicare or other reimbursement agency), or reimbursement authority survey or report (and any amendment thereto) and any statement of deficiencies, and within the time period required by the particular agency or authority for furnishing a plan of correction furnish or cause to be furnished to Landlord a copy of the plan of correction generated from such survey or report for the Facility or any Manager and any responses, audit reports or inquiries with respect to same, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure (or, to the extent Tenant or the Manager becomes a participating provider and elects to remain so) 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, Medicare or reimbursement contract coverage by the date required for cure by such agency or authority (plus extensions granted by such agency or authority). (i) Furnish promptly to Landlord such information as Landlord may reasonably require concerning costs, progress of any construction, and such other factors as Landlord may reasonably require regarding the Facility; notify Landlord promptly of any material litigation instituted or threatened against Tenant or any of the Guarantors, and any material deficiencies asserted or liens filed by the Internal Revenue Service against Tenant or any of the Guarantors; notify Landlord promptly of any condemnation or similar proceedings with respect to the Premises, any proceeding seeking to enjoin the Facility or intended use of any of the Improvements, and of all material changes in governmental requirements pertaining to the Facility, utility unavailability, the receipt by Tenant of any notice, claim or demand which alleges Tenant is in violation of any license, reimbursement contract, law, rule or regulation applicable to the Facility. The Tenant shall promptly commence and diligently pursue or cause the diligent pursuit of the correction of the subject of each deficiency notice (or if such deficiency can be appealed or contested without the incurrence of interest, penalties, liens, or -13- 14 sanctions, to so contest or appeal such deficiency as permitted by applicable law), and shall correct or cause the correction of the subject of the deficiency notice promptly, but in any event prior to the expiration of any period allowed by the governmental agency for correction. The Tenant shall at the Landlord's request promptly provide from time to time such cost estimates, reports and other information as the Landlord may reasonably require to demonstrate to the Landlord's reasonable satisfaction that the Tenant or the responsible party has the financial and other ability to effect the correction and is taking the actions required by this subsection, and any other matters which could reasonably be expected to adversely affect Tenant's or such responsible party's ability to perform its obligations with respect to such deficiency correction. The Landlord reserves the right to reasonably require such other financial information (including tax returns, detailed cash flow information and contingent liability information) of Tenant, Manager and any of the Guarantors, all at such times as Landlord shall reasonably deem necessary, and Tenant agrees promptly to provide such information to Landlord. All financial statements must be in the form and detail as the Landlord shall from time to time reasonably request. In any event Tenant shall provide Landlord with (i) an annual cash flow statement within 30 days of year end and (ii) filed tax returns within 120 days from year end or 255 days from year end if an extension is granted. Landlord may sell participation interests in the Lease, may sell or transfer the Lease, or may place the Lease in a pooling of leases for syndication and sale of interests therein to investors. In such event Tenant consents to the Landlord's disclosure and distribution of financial and other information that has been provided by Tenant to Landlord pursuant to this Lease to prospective participants, purchasers, investors, rating agencies and others involved in any participation, sale, pooling or syndication. At the time of furnishing the quarterly financial statement and census data for the Facility required under the foregoing section, Tenant shall furnish to Landlord a compliance certificate in the form attached hereto as EXHIBIT 5.1 with all information completed and certified by the chief financial officer of the Manager or the Tenant as true and correct. SECTION 6. OPERATING REQUIREMENTS. SECTION 6.1 STANDARDS OF OPERATION. From and after the Commencement Date and during the Lease Term, Tenant shall thereafter cause the Facility to be properly operated as a personal care home with assisted living services and no other use. Without limiting the foregoing, Tenant shall and/or cause any Manager to: (a) maintain the standard of care for the residents of the Facility at all times at a level necessary to insure quality care for the residents of the Facility; (b) operate the Facility in a prudent manner in compliance with applicable, licenses, laws and regulations relating thereto and cause all licenses, permits, if any, and any other -14- 15 agreements necessary for the use and operation of the Facility as a personal care home with assisted living services; (c) maintain sufficient inventory and equipment of types and quantities at the Facility to enable Tenant adequately to perform all operations at the Facility; and (d) keep all Improvements and Personal Property located on or used or useful in connection with the Facility in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition. SECTION 7. RESIDENCY AGREEMENTS. Tenant shall establish as policy and will require that any and all residents or other persons for which the Tenant (or the Manager) provides services execute and deliver to the Tenant a residency agreement approved as to form by Landlord, which approval shall not be unreasonably withheld or delayed. SECTION 8. MAINTENANCE, REPAIR - ALTERATIONS AND UTILITIES. SECTION 8.1 TENANT'S MAINTENANCE. Tenant shall, at its own cost, and without expense to the Landlord, maintain the Premises, including all sidewalks, buildings, building systems, water, sewer and other utility lines on the Real Property serving the Facility, surface parking lots, exterior lighting and improvements of any kind which may be a part thereof in good, sanitary, neat and first-rate order, condition and repair, ordinary wear and tear, casualty, condemnation and acts of God excepted. Tenant's obligations shall include, without limitation, replacements of structural components, roof and building systems, and other necessary capital expenditures, as required by the previous sentence. Tenant shall maintain the Premises in such a manner as may be necessary to operate the Facility in accordance with applicable state and/or federal laws or regulations. Tenant shall perform all interior and exterior painting, and maintain the grounds of the Facility in a good and sightly appearance. All costs of the foregoing maintenance and replacement obligations shall be paid (i) with insurance proceeds, if applicable, in accordance with SECTION 11 hereof, (ii) with funds from the Capital Reserve Account, if applicable, in accordance with SECTION 3.5 hereof, and (iii) otherwise by Tenant. Tenant shall not commit or suffer to be committed any waste upon or about the Premises, and shall promptly at its cost and expense, make all necessary replacements, restorations, renewals, and repairs to the Premises and appurtenances thereto, whether interior or exterior, structural or non-structural, ordinary or extraordinary, and foreseen or unforeseen, ordinary wear and tear excepted. Repairs restorations, renewals, and replacements shall, to the extent possible, be at least equivalent in quality to the original work or the property replaced, as the case may be. Tenant shall not make any claim or demand upon or bring any action against the Landlord for any loss, cost, injury, damage, or other expense caused by any failure or defect, structural or non-structural, of the Premises or any part thereof. -15- 16 Landlord shall not under any circumstances be required to build any improvements on the Premises, or to make any repairs, replacements, alterations, or renewals of any nature or description to the Premises or to any of the Improvements, whether interior or exterior, ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever in connection with this Lease or to inspect or maintain the Premises in any way. Tenant hereby waives the right to make repairs, replacements, renewals, or restorations at the expense of Landlord pursuant to all applicable laws and Tenant shall not make any claim or demand upon or bring any action against Landlord for any loss, cost, injury, damage or other expense caused by any failure or defect, structural or non-structural, to the Premises or any part thereof. Tenant acknowledges that, pursuant to the Development Agreement, Landlord has contracted with Tenant and BCC to construct the Improvements, that the Improvements will be constructed pursuant to the Development Agreement and that although title to the Improvements rests in Landlord in fee, Landlord has made no representation, warranty or covenant regarding the suitability, workmanship or freedom of defects of the Improvements as a result of the Development Agreement, any act of approval of Landlord's agents, consultants or engineers thereunder or by virtue of this Lease, or any statement or provision in the Transaction Documents to the contrary notwithstanding. LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, EITHER AS TO ITS FITNESS FOR ANY PARTICULAR PURPOSE OR USE, ITS DESIGN OR CONDITION OR OTHERWISE, OR AS TO DEFECTS IN QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL RISKS RELATING TO THE DESIGN, CONDITION OR USE OF THE PREMISES ARE TO BE BORNE BY TENANT. TENANT HEREBY ASSUMES ALL RISK OF THE PHYSICAL CONDITION OF THE PREMISES AND THE SUITABILITY OF THE PREMISES FOR TENANT'S PURPOSES ARE TO BE BORNE BY TENANT. TENANT ASSUMES ALL RISK OF AND THE COMPLIANCE OR NON-COMPLIANCE OF THE PREMISES WITH ALL APPLICABLE REQUIREMENTS OF LAW, INCLUDING BUT NOT LIMITED TO ENVIRONMENTAL LAWS AND ZONING OR LAND USE LAWS. SECTION 8.2 ALTERATIONS. Tenant will not alter, add to, improve, remove or demolish any improvement or building which is part of the Premises or any portion thereof or allow it to be removed or demolished, without the prior written consent of Landlord, which may be withheld at Landlord's sole discretion; provided, that no consent shall be required of Landlord for any alteration, addition or improvement that costs less than $25,000 in the aggregate. If Tenant fails to obtain Landlord's prior written consent for any alteration, and such consent is required under this Lease, then such alteration must be removed/restored at the end of the Lease Term. All alterations, approved by Landlord shall be in quality and class at least equal to the original work and shall meet all building and fire codes, and all other applicable codes, rules, regulations, laws and ordinances. Tenant also agrees to maintain builder's risk insurance and shall cause its contractors to carry the types of insurance as a prudent owner or tenant would -16- 17 require. Landlord shall have the right to approve the plans and specifications for any alteration in excess of $50,000 in the aggregate, which approval may be withheld in Landlord's sole discretion. SECTION 8.3. UTILITIES. Tenant shall arrange for, furnish and pay all charges for water, electricity, gas, sewage, waste, trash and garbage disposal, telephone, cable television, and other services furnished to the Premises from and after the Commencement Date and during the Lease Term. Except as set forth below, Landlord shall not be responsible in any manner for any suspension, interruption or curtailment of any services or utilities to the Premises regardless of the cause thereof, and no such suspension, interruption or curtailment shall give rise to any claim for abatement of Rent or other compensation to Tenant from Landlord, nor may Tenant claim any damages on account thereof, nor shall this Lease or any obligation of Tenant hereunder be affected thereby, nor shall Tenant claim the same as a constructive eviction. SECTION 9. LIENS AGAINST THE PREMISES. SECTION 9.1. LIENS. Except as provided for herein and except for any lien, charge or encumbrance granted by Landlord with respect to the Premises, Tenant will not permit the Premises to become subject to any lien, charge, or encumbrance. Tenant shall maintain the Premises free from all orders, notices, and violations filed or entered by any public or quasi-public authorities. SECTION 9.2. LANDLORD'S RIGHTS. Should a judgment on any lien, charge, encumbrance, order, notice or, violation be rendered against the Premises for any work performed by or for Tenant or any person claiming through or under Tenant and should Tenant fail to discharge such judgment within thirty days of receipt of notification thereof by Tenant (or if notification is sent to Landlord within thirty days of Landlord's notification to Tenant of the same), Landlord shall have the right, but not the obligation, to discharge said judgment. If Landlord exercises that option, any amounts paid by Landlord shall be due from Tenant as Additional Rent. Such Additional Rent shall be due and payable on the next date after such expense was incurred. SECTION 9.3 MECHANIC'S LIENS. Tenant shall take all reasonable steps necessary to ensure that no lien arising under Pennsylvania law as a result of construction done at the Premises at Tenant's request shall extend to the interest of Landlord in the Premises. Tenant shall pay all costs incurred by Tenant in connection with the construction, alteration, demolition, maintenance and repair of any and all improvements on the Premises. Should a lien or claim of lien be filed against the Landlord's interest in the Premises by any contractor, subcontractor, mechanic, laborer, materialman or any other person whomsoever retained by Tenant, Tenant shall, within thirty (30) days after receipt of notice thereof, cause the same to be discharged of record. SECTION 9.4 NO LIABILITY TO LANDLORD. Nothing contained in this Lease shall be construed as constituting the consent of Landlord, express or implied, to, or for the performance -17- 18 by, any materialman, contractor, mechanic, labor or other person furnishing any labor, services, materials, supplies or equipment in connection with any capital additions to any part of the Premises. Tenant shall not, and shall have no power to, grant any lien, mortgage or other encumbrance upon the reversionary or other estate of Landlord, or any interest of Landlord in the Premises. NOTICE IS HEREBY GIVEN THAT LANDLORD IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR TO ANYONE HOLDING ANY PART OF THE PREMISES, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD IN AND TO THE PREMISES. Tenant shall notify any contractor, subcontractor, laborer, materialman or vendor providing any labor, services or materials to the addition of the foregoing provisions of this SECTION 9.4. SECTION 10. NON-LIABILITY AND INDEMNIFICATION. SECTION 10.1 TENANT'S INDEMNITY. During the Lease Term, Tenant agrees to defend, protect, indemnify and save harmless Landlord and any Facility Mortgagee from and against all claims arising out of or connected with the use, misuse, occupancy, possession or unoccupancy of the Premises by Tenant any person claiming by, through or under Tenant, or its respective officers, directors, servants, agents, licensees, guests, customers, concessionaires, sublessees, contractors, employees or invitees and shall pay all costs and expenses incurred by Landlord and any Facility Mortgagee (each an "Indemnified Party") in connection with such claims, including without limitation, court costs and reasonable attorney's fees for trial and appellate proceedings. The Indemnified Parties shall be protected hereby from all claims arising during the Lease Term from loss of or damage to property, or death or personal or bodily injury to persons except to the extent such loss, damage, death or injury is caused by the gross negligence or willful actions of Landlord or any person-claiming by, through or under Landlord. Promptly after the assertion by any party of any claim against any Indemnified Party that, in the judgment of such Indemnified Party, is a claim for which such Indemnified Party would be entitled to indemnification pursuant to this Lease, such Indemnified Party shall deliver to Tenant a written notice describing in reasonable detail such claim and Tenant shall assume the defense of the Indemnified Party against such claim (including the employment of counsel, who shall be reasonably satisfactory to such Indemnified Party, and the payment of expenses), unless such claim relates to a defense which Landlord considers relevant to Landlord's business as a whole (limited to the ownership, operation or leasing of the Facility) in which case Landlord may defend the claim at the expense of Tenant. Any Indemnified Party shall have the right to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of Tenant unless (i) Tenant shall have failed, within a reasonable time after having been notified by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim, or such claim relates to a defense which Landlord considers relevant to Landlord's business as a whole (limited to the ownership, operation or leasing of the Facility), (ii) the employment of such counsel has been specifically authorized in writing by Tenant, or (iii) the named parties to any such action (including any impleaded parties) include both such -18- 19 Indemnified Party and Tenant and such Indemnified Party shall have been advised in writing by such counsel that there may be one or more legal defenses available to the Indemnified Party or Tenant which are not available to, or the assertion of which would be adverse to the interests of, the other party. Tenant shall not be liable to indemnify any Indemnified Party for any settlement of any such action or claim effected without the consent of Tenant, which shall not be unreasonably withheld, but if settled with the written consent of Tenant, or if there be a final judgment for the plaintiff in any such action, Tenant shall indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of such settlement or judgment. The provisions of this Section shall survive the termination or expiration or earlier termination of this Lease. SECTION 10.2 LIMITATION ON LIABILITY. Neither Landlord nor any agent of Landlord shall be liable to Tenant, or any other person whatsoever for any damage, injury, loss, compensation, or claim (including, but not limited to, any claim for the interruption of or loss to any business conducted on the Premises) based on, arising out of or resulting from any cause whatsoever (except to the extent such damage, injury, loss, compensation or claim is caused by the gross negligence or willful misconduct of Landlord or any person claiming by, through or under Landlord), including, but not limited to, the following: (a) repairs to the Premises, (b) interruption in use of the Premises, (c) any accident or damage resulting from the use or operation of the Premises or any business conducted thereon, (d) the termination of this Lease by reason of casualty or condemnation, (e) any fire, theft or other casualty or crime, (f) the actions, omissions or misconduct of any other person, (g) damage to any property, or (h) any damage from the flow or leaking of water, rain or snow. All Personal Property and the personal property of any other person on the Premises (including, without limitation, Tenant's Equipment) shall be at the sole risk of Tenant and Landlord shall not in any manner be held responsible therefor. During the Lease Term of this Lease, the risk of loss or of decrease in the enjoyment and beneficial use of the Premises in consequence of any damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, levies or executions of liens (other than those granted by Landlord) is assumed by Tenant and, Landlord shall in no event be answerable or accountable therefor nor shall any of the events mentioned in this SECTION 10.2 entitle Tenant to any abatement of Rent. It is expressly agreed by the parties that in no case shall Landlord (or its partners any individuals or entities comprising Landlord) be personally liable, under any express or implied covenant, agreement or provision of this Lease, for any damages whatsoever to Tenant beyond Landlord's interest in the Premises plus insurance proceeds. Landlord shall have no liability hereunder for indirect or consequential damages. SECTION 11. INSURANCE. SECTION 11.1 All insurance policies required by this SECTION 11 shall be issued by a good and solvent insurance company or companies licensed to do business in the Commonwealth of Pennsylvania, with a BEST'S KEY RATING GUIDE rating of A- and a financial rating of XII or better, selected by Tenant and reasonably satisfactory to Landlord, and shall include Landlord and each -19- 20 mortgagee of which Landlord has notified Tenant as additional insureds as their interests may appear. Tenant shall provide a copy of binders for insurance policies conforming to the requirements of this Lease for Landlord's review at least thirty (30) days prior to the Commencement Date. Tenant agrees to deliver certificates of such insurance to Landlord as of the Commencement Date and thereafter not less than thirty (30) days prior to the expiration of any such policy. Such insurance shall not be canceled, materially changed, or non-renewed without thirty (30) days' written notice to Landlord. Landlord and Tenant shall each give prompt notice to the other of all losses, damages or injuries to any person or damage to any property which may in any way be related to this Lease and for which a claim might be made against the other party. Each party shall promptly report to the other party all such claims, whether related to matters insured or uninsured. Landlord and Tenant shall assist and cooperate with any insurance company in the adjustment or litigation of all claims and losses arising under this Lease. 11.2 PROPERTY INSURANCE. From and after the Commencement Date, Tenant shall obtain and keep in force throughout the Lease Term, at its expense, "all-risk" property insurance upon the Improvements and Personal Property against fire and such other hazards, casualties and contingencies (including boiler and machinery coverage on a comprehensive basis) as are from time to time customarily covered by all-risk policies for similar buildings used for similar purposes as Tenant is then making of the Facility with endorsements insuring against earthquake and subsidence. The limit of such insurance shall never be less than 100% of the actual replacement cost at the time and place of loss (without deduction for depreciation), and the policy shall include an agreed amount endorsement. This policy shall include coverage for increased cost of construction, demolition and contingent liability as a result of compliance with then existing applicable legal requirements. Such insurance will be subject only to such deductibles as are approved by Landlord (Tenant agreeing to pay to Landlord, upon demand as Additional Rent, the amount of any such deductible following any casualty loss). The policy shall include rent continuation coverage payable to Landlord, of no less than twelve (12) months rent (including Base Rent and Additional Rent). Landlord agrees to apply the proceeds of any rent continuation coverage received by Landlord to Base Rent and Additional Rent due hereunder, and the balance, if any, to Tenant for payment of normal operating expenses in Landlord's reasonable discretion. Any such proceeds remaining after the completion of restoration as permitted hereunder shall be paid over to Tenant provided no Event of Default exists hereunder. If such Event of Default exists, Landlord may utilize such proceeds to cure such Event of Default. All such policies shall name Landlord as the named insured and each Facility Mortgagee as a loss payee as its interest may appear (so long as, as to any Facility Mortgagee, such Mortgagee has agreed in writing with Tenant and Landlord to allow use of the insurance proceeds as provided herein). In the event that Landlord receives a notice of cancellation of such insurance policy or policies without a corresponding notice regarding the issuance of new insurance prior to the effective date of such cancellation, Landlord may, in addition to and without thereby waiving any other remedies, pay the premiums necessary to prevent such cancellation and bill Tenant -20- 21 therefor. Tenant shall reimburse Landlord therefor by paying such amount, together with interest at the rate set forth in SECTION 3.2.3, to Landlord, as Additional Rent, within five (5) days after demand therefor by Landlord. SECTION 11.3 LIABILITY INSURANCE. Tenant shall provide or cause to be provided at its expense, and keep in force during the Lease Term: (a) Commercial general liability insurance (without any so-called employee exclusion or the like) in an amount reasonably required by Landlord from time to time based on the then current practice for similar buildings used for senior housing or personal care homes providing assisted living services located within the vicinity of the Real Property, but in any event not less than the greater of (i) One Million Dollars ($1,000,000.00) per occurrence, Three Million Dollars ($3,000,000.00) aggregate, or (ii) the liability coverage typically carried by Tenant in similar facilities, including contractual liability coverage. Such policy shall name Tenant as a named insured and Landlord and each Facility Mortgagee of which Landlord has notified Tenant, as additional insureds with respect to any claim arising from Tenant's use, occupancy, repair or operation of the Premises; (b) Comprehensive automobile liability insurance including personal injury and property damage in the amount of a combined single limit of One Million Dollars ($1,000,000.00) each occurrence. Coverage must include owned, leased, hired and non-owned vehicles; (c) Worker's compensation and occupational disease insurance with statutory limits; (d) Professional liability insurance with a limit not less than Five Million Dollars ($5,000,000.00) per occurrence; and (e) Excess liability policy in umbrella form with a minimum limit of liability of ___________________ ($_____________) applying in excess of the coverages listed in (a), (b) and (d) above. (f) All liability insurance shall be on an occurrence basis. Tenant may not elect to carry claims made commercial general liability insurance unless occurrence coverage is generally unavailable at commercially reasonable rates in the marketplace. Tenant's insurance shall state that it is primary and not contributing with any insurance purchased by Landlord. Tenant's insurance shall also state that it is severable with respect to all insureds under the policy and that acts of one insured will not abrogate coverage for other insureds. SECTION 11.4 PERSONAL PROPERTY INSURANCE. Tenant shall obtain and keep in force throughout the Lease Term, at its expense, "all-risk" property insurance on Tenant's Equipment, including but not limited to furniture, machinery and equipment, for the full replacement cost. -21- 22 SECTION 11.5 MORTGAGEE'S OTHER REQUIREMENTS. Tenant shall maintain any other insurance reasonably required by Landlord or the Facility Mortgagee to the extent such insurance is available in Pennsylvania and is customarily carried by owners or operators of personal care homes with assisted living services. Flood insurance shall be required for the maximum amount required through the federal flood program if any of the Improvements are located in a designated flood hazard zone as identified in the Flood Disaster Act of 1973. SECTION 11.6 BLANKET INSURANCE. Nothing contained in this SECTION 11 shall prohibit Landlord or Tenant from obtaining a policy or policies of blanket insurance which may cover other properties of Landlord or Tenant provided that (a) any such blanket policy expressly allocates to the Premises not less than the amount of insurance required hereunder to be maintained and (b) such blanket policy shall not diminish the obligations to insure hereunder, so that proceeds from such policies shall be an amount no less than the proceeds that would be available under a separate policy. SECTION 11.7 WAIVER OF SUBROGATION. Landlord and Tenant, each for itself and its insurer, hereby waive all claims and rights against the other and their respective officers, directors, employees, contractors, servants, and agents, for any damage to or destruction of real or personal property of Landlord or Tenant to the extent covered by the insurance required to be maintained hereunder. All property insurance policies carried at any time during the Lease Term by either party covering the Premises shall include a clause to the effect that such waiver of subrogation shall not adversely affect or impair such policies or prejudice the rights of the insureds to recover thereunder. The provisions of this SECTION 11.7 shall survive the expiration or earlier termination of this Lease. SECTION 11.8 DEPOSIT OF INSURANCE PREMIUMS. At the option of Landlord, which may be exercised at any time, Tenant shall, upon written request of Landlord, on the first day of the calendar month immediately following such request, and on the first day of each calendar month thereafter during the Lease Term (each of which dates is referred to as a "Insurance Monthly Deposit Date"), pay to and deposit with Landlord a sum equal to one-twelfth (1/12th) of the insurance premiums required by this SECTION 11 (the "Insurance Premiums") with respect to the Premises within one (1) year after said Insurance Monthly Deposit Date. If the amount of the insurance premiums within the ensuing one (1) year period shall not be fixed upon any Insurance Monthly Deposit Date, such amount for the purpose of computing the deposit to be made by Tenant hereunder shall be reasonably estimated by Landlord with an appropriate adjustment to be promptly made between Landlord and Tenant as soon as such amount becomes determinable. In addition, Landlord may, at its option, from time to time require that any particular deposit be greater than one-twelfth (1/12th) of the estimated amount payable within one (1) year after said Insurance Monthly Deposit Date, if such additional deposit is required in order to provide to Landlord a sufficient fund from which to make payment of all insurance premiums on or before the next due date of any installment thereof. -22- 23 SECTION 11.9 USE OF DEPOSITS. The sums deposited by Tenant under this SECTION 11 shall be held by Landlord and shall be applied to payment to the insurance premiums when due. Any such deposits may be commingled with other assets of Landlord, and shall be deposited by Landlord at OCWEN Federal Bank FSB. Landlord shall not be responsible to Tenant for any loss of principal so deposited at such depository bank due to financial failure or any act of omission of such depository. The income from such investment or interest on such deposit shall be paid to Tenant on a semi-annual basis as long as no Event of Default has occurred. Tenant shall give not less than ten (10) days prior written notice to Landlord in each instance when an insurance premium is due, specifying the amount of the insurance premium in full (or any installment), together with any penalty or interest thereon, provided, however, Tenant shall not be in default hereunder if it fails to receive notice from the applicable insurance company and such notice was sent directly to the Landlord. Landlord may change its estimate of any Insurance Premium on the basis of a change in any invoice received or on the basis of a prior miscalculation or for any other good faith reason; in which event, within ten (10) days after demand by Landlord, Tenant shall deposit with Landlord the amount in excess of the sums previously deposited with Landlord for the applicable period which would theretofore have been payable under the revised estimate. Landlord shall provide Tenant with an annual statement of all amounts deposited and interest earned thereon under this SECTION 11. In connection with any assignment of the Landlord's interest under this Lease, the original Landlord named herein and each successor in interest shall have the right to transfer all amounts deposited pursuant to the provisions of this SECTION 11 and still in its possession to such assignee (as the subsequent holder of Landlord's interest in this Lease) and upon such transfer, the original Landlord named herein or the applicable successor in interest transferring the deposits shall thereupon be completely released from all liability with respect to such deposits so transferred and Tenant shall look solely to said assignee, as the subsequent holder of Landlord's interest under this Lease, in reference thereto. All amounts deposited with Landlord pursuant to the provisions of this SECTION 11 shall be held by Landlord as additional security for the payment and performance of all obligations of Tenant under the Lease and, upon the occurrence of any Event of Default, Landlord may, in its sole and absolute discretion, apply said amounts towards payment or performance of such obligations. Upon the expiration or earlier termination of this Lease, provided that, all of the Lease obligations have been fully paid and performed, any sums then held by Landlord under this SECTION 11 shall be refunded to Tenant. Tenant agrees to pay reasonable administrative or other fees associated with Landlord or its designees holding, disbursing and otherwise managing the deposits under this SECTION 11. SECTION 12. DAMAGE AND DESTRUCTION. SECTION 12.1 REPAIR OR RESTORATION AFTER MAJOR CASUALTY. In the event that any part of the Improvements or the Personal Property shall be damaged or destroyed by fire or other casualty for which Tenant is required to maintain insurance hereunder and the cost to repair such casualty is greater than $200,000, (any such event being called a "Major Casualty"), Tenant shall promptly replace, repair and restore the same as nearly as possible to its condition immediately prior to such Major Casualty, in accordance with all of the terms, covenants and conditions and other requirements of this Lease. If, pursuant to -23- 24 this SECTION 12, Tenant shall be obligated to make repairs, the Premises shall be so replaced, repaired and restored as to be substantially the same character as prior to such Major Casualty. The plans and specifications for such restoration shall be first submitted to and approved in writing by Landlord, which approval may be withheld in Landlord's sole discretion. Landlord agrees to provide its approval or disapproval of plans and specifications within fifteen (15) days of submission to Landlord by Tenant together with reasonable detail as to how such plans or specifications are deficient or can be approved, if applicable. Tenant may elect to retain, at its expense, an independent architect, reasonably approved by Landlord, who shall oversee such repairing, restoring or replacing. Tenant covenants that it will give to Landlord prompt written notice of any casualty affecting the Premises or any portion thereof. Notwithstanding the above Landlord shall have no obligation to restore the Premises; Landlord's sole obligation shall be to disburse any available insurance proceeds pursuant to the procedures and to the extent described herein. Landlord agrees that Landlord shall make the net proceeds of insurance (after payment of Landlord's costs and expenses of collection) available to Tenant for Tenant's repair, restoration and replacement of the Improvements and Personal Property damaged on the following terms and subject to Tenant's satisfaction of the following conditions: (a) At the time of such loss or damage and at all times thereafter while Landlord is holding any portion of such proceeds, there shall exist no Event of Default; (b) In Landlord's judgment, the Improvements and Personal Property to which loss or damage has resulted shall be capable of being restored to its pre-existing condition and utility in all material respects with a value equal to or greater than that existing prior to such loss or damage and, in Landlord's judgment, Substantial Completion of such repair, replacement and restoration can be achieved within 6 months of the casualty or prior to the expiration of Lease Term, whichever is earlier. As used herein "Substantial Completion" shall have the same meaning for such term used in the Development Agreement (modified as needed to reflect any partial casualty); (c) Within thirty (30) days from the date of such loss or damage Tenant shall have given Landlord a written notice electing to have the proceeds applied for such purpose; (d) Within sixty (60) days following the date of notice under the preceding subparagraph and prior to any proceeds being disbursed to Tenant, Tenant shall have provided to Landlord all of the following: i) complete plans and specifications for restoration, repair and replacement of the Improvements and Personal Property damaged to the condition, utility and value required by (b) above, ii) if loss or damage exceeds $200,000, a fixed-price or guaranteed maximum cost bonded construction contracts for completion of the repair and restoration work to the -24- 25 Improvements in accordance with such plans and specifications and firm price quotes good for the period of restoration for the Personal Property which must be repaired or replaced, iii) builder's risk insurance for the full cost of construction with Landlord named under a standard mortgagee loss-payable clause, iv) such additional funds as in Landlord's reasonable opinion are necessary to complete the repair, restoration and replacement, which funds may be made available in cash or by delivery of a letter of credit in a form and from an issuer acceptable to Landlord, and v) copies of all permits and licenses necessary to complete the work in accordance with the plans and specifications and any applicable regulatory approvals; (e) Landlord may, at Tenant's expense, retain an independent inspector to review and approve plans and specifications and completed construction and to approve all requests for disbursement, which approvals shall be conditions precedent to release of proceeds as work progresses; (f) No portion of such proceeds shall be made available by Landlord for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing the Improvements and Personal Property for which a loss or damage has occurred unless the same are covered by such insurance; (g) Tenant shall commence such work within ninety (90) days of such loss or damage and shall diligently pursue such work to completion; (h) Each disbursement by Landlord of such proceeds and deposits shall be funded subject to conditions and in accordance with disbursement procedures which a commercial landlord would typically establish in the exercise of sound practices and shall be made only upon receipt of disbursement requests on an AIA G702/703 form (or similar form approved by Landlord) signed and certified by the Tenant and its architect and general contractor with appropriate invoices and lien waivers as required by Landlord; (i) In the event Tenant fails to timely make such election or having made such election fails to timely comply with the terms and conditions set forth herein, Landlord shall be entitled without notice to or consent from Tenant to apply such proceeds, or the balance thereof, at Landlord's option either (i) to the full or partial payment or prepayment of the Base Rent and to sums advanced under the Transaction Documents by Landlord or (ii) to the repair, restoration and/or replacement of all or any part of such Improvements and Personal Property for which a loss or damage has occurred. Any excess insurance proceeds which remain after payment in full for the restoration to the Premises hereunder shall be paid to Tenant provided no Event of Default exists hereunder, in which case Landlord may utilize such proceeds to cure such Event of Default. -25- 26 Tenant appoints Landlord as Tenant's attorney-in-fact to cause the issuance of or an endorsement of any policy to bring Tenant into compliance herewith and, as limited above, at Landlord'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 Landlord be liable for failure to collect any amounts payable under any insurance policy. SECTION 12.2 EXCEPTION FOR MAJOR CASUALTY DURING LAST TWO LEASE YEARS AND UNINSURED CASUALTY. Notwithstanding the foregoing, in the event of a Major Casualty (a) occurring during the last two Lease Years of the Lease Term or (b) resulting from a flood, nuclear accident, war or other event for which Tenant is not obligated to maintain insurance hereunder and which, in the opinion of Landlord, renders the Premises unsuitable for Tenant's use as a personal care homes with assisted living services as operated by Tenant prior to the Casualty, then, subject to the rights of Tenant as provided in SECTION 12.9 hereof, Landlord shall have the right to terminate this Lease upon written notice to Tenant and, in such event, all insurance proceeds attributable to the Real Property, Improvements and Personal Property shall be payable to the Facility Mortgagee or, if none, to Landlord and all insurance proceeds attributable to Tenant's Equipment shall be payable to Tenant. Termination rights under this Section shall be exercised by written notice to Tenant sent within thirty (30) days after the occurrence of the destruction or damage and shall take effect fifteen (15) days after Tenant's receipt of such notice. SECTION 12.3 FAILURE BY TENANT TO COMPLETE REPAIRS. In the event that (a) Tenant has not procured the necessary permits and approvals for the restoration and/or has not commenced repair and restoration of the Premises within ninety (90) days of the date of the Major Casualty, or (b) Tenant's work has not reached Substantial Completion within the earlier of 6 months following commencement of repair and restoration or the expiration of the Lease Term, then, in either event, Landlord may give written notice to Tenant and any Facility Mortgagee of Landlord's intention to terminate this Lease as provided in SECTION 12.2 or assume responsibility for completion of such repair and restoration of the Premises. SECTION 12.4 TERMINATION. Notwithstanding anything to the contrary contained in this SECTION 12, Tenant shall not be obligated to rebuild following a Major Casualty if the repairs or reconstruction of the damage cannot be made under existing laws, ordinances, statutes or regulations of any governmental authority applicable thereto. In the event Tenant is unable to rebuild in accordance with the provisions hereof, and such casualty causes the Premises to be rendered unsuitable for use as a personal care home with assisted living services, then, subject to the rights of Tenant as provided in SECTION 12.9 hereof, this Lease shall terminate. In such event all insurance proceeds shall be payable to any Facility Mortgagee or, if none, to Landlord within ten (10) days of said Lease termination date free and clear of all liens or claims, and all insurance proceeds attributable to Tenant's Equipment shall be payable to Tenant. -26- 27 In the event of such termination, Tenant shall promptly, at its own expense, remove from the Premises any of Tenant's Equipment not so damaged or destroyed. SECTION 12.5 RENDERED UNSUITABLE. For the purposes of this SECTION 12, the Facility shall be deemed to have been rendered unsuitable for use as a personal care home with assisted living services if, in the good faith judgment of Landlord, the Facility cannot after any such loss be operated on a commercially practicable basis as a personal care home with assisted living services of the type and quality existing and licensed immediately prior to such loss, taking into account, among other relevant factors, the number of units, dining and kitchen facilities, parking lots, driveways, or walkways affected by such loss. SECTION 12.6 REPAIR OR RESTORATION AFTER MINOR CASUALTY. In the event that any part of the Improvements or Personal Property shall be damaged or destroyed by fire or other casualty and the cost to repair such casualty is $200,000 or less (a "Minor Casualty"), then Tenant shall promptly repair and restore the same as nearly as possible to its condition immediately prior to such Minor Casualty, in accordance with all of the applicable terms, covenants and conditions and other requirements of this Lease in the event of such Minor Casualty (except Section 12.1(d)(ii)), and Tenant shall be entitled to the use of all insurance proceeds available therefor. SECTION 12.7 ABATEMENT OF RENT. This Lease shall remain in full force and effect during the period of any casualty, repair and restoration and Tenant shall be entitled to no abatement of Rent for any reason whatsoever. SECTION 12.8 NO LESSOR OBLIGATION. Landlord shall not, under any circumstances, be required to build or rebuild any improvements on the Premises (or any private roadways, sidewalks or curbs appurtenant thereto), or to make any repairs, replacements, renovations, alterations, restorations, modifications, or renewals of any nature or description to the Premises (or any private roadways, sidewalks or curbs appurtenant thereto), whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen. SECTION 12.9 TENANT'S RIGHTS TO ACQUIRE PREMISES AFTER CASUALTY. In the event Landlord elects to terminate the Lease pursuant to SECTIONS 12.2 OR 12.4 hereof, then for the period of time commencing on the delivery of notice by Landlord to Tenant of Lease termination and ending fifteen (15) days after Tenant's receipt of such notice, Tenant shall have the option to elect to purchase the Premises in its "as is" condition (the "Casualty Option") on the same terms and conditions as are set forth in SECTION 21 hereof, except as follows: (i) Closing on the purchase shall occur within 90 days after the date Tenant exercises the Casualty Option; (ii) the purchase price shall equal the greater of (a) Total Project Costs less insurance proceeds recovered by Landlord (but not below zero) or (b) 50% of (the Appraised Value of the Premises (without utilization of insurance proceeds to restore the Premises, transaction costs or the Letter of Credit) less the amounts set forth in clause (a) above), plus the amounts set forth in clause (a) above; (iii) if Tenant delivers Tenant's Casualty Option notice and Closing does not occur due to a default -27- 28 by Tenant, Tenant shall have no further right to purchase the Premises under this Lease, Landlord may retain the Deposit and the Lease shall terminate. SECTION 13. CONDEMNATION. SECTION 13.1 TAKING OF WHOLE. SECTION 13.1.1 Subject to the provisions of SECTION 13.4 below, during the Lease Term, so much of the Premises are taken or condemned in fee for a public or quasi-public use that in the judgement of Landlord, the Premises are rendered unsuitable for use as a personal care home with assisted living services, this Lease shall terminate. Termination will be effective without entry or notice. Termination shall occur as of the day when possession is required to be surrendered to the taking or condemning authority. SECTION 13.1.2 For purposes of this SECTION 13, the Premises shall be deemed to have been rendered unsuitable for use as a personal care home with assisted living services if, in the good faith judgment of Landlord, the Premises after such loss cannot be operated on a commercially practicable basis as a personal care home with assisted living services of the type and quality existing and licensed immediately prior to such loss taking into account, among other relevant factors, the number of units and/or parking lots, driveways, dining and kitchen facilities, or walkways affected by such loss. SECTION 13.2 TAKING OF A PORTION. If during the Lease Term, a portion of the Premises and/or the Facility is taken or condemned in fee for a public or quasi-public use such that the Facility is not rendered unsuitable for use as a personal care home with assisted living services, this Lease shall not terminate. If, however, as a result of the taking, the number of units available for operation of the Facility as a personal care home with assisted living services of the type and quality existing and licensed prior to-the taking has been or must be reduced, Tenant shall be entitled to an abatement of Rent. The rent abatement shall be to the extent that is fair, just and equitable to both Tenant and Landlord, taking into consideration, among other relevant factors, the number of units and/or parking lots, driveways, dining and kitchen facilities or walkways affected by such loss. SECTION 13.3 DAMAGES FOR TAKING. All damages awarded in connection with the taking of the Premises shall vest in Landlord. In the event of a partial taking where the Lease is not terminated, Landlord shall apply or make available to Tenant that portion of the proceeds reasonably necessary for the repair or reconstruction of the Premises. Notwithstanding anything to the contrary contained in any Facility Mortgage or related document, all damages awarded (or otherwise sought by Tenant) in connection with the taking of Tenant's Equipment, and all moving and relocation costs, shall vest in Tenant. SECTION 13.4 TENANT'S RIGHT TO ACQUIRE PREMISES AFTER TAKING. In the event Landlord elects to terminate the Lease pursuant to Section 13.1, then for the period of time commencing on the delivery of notice by Landlord to Tenant of Lease termination -28- 29 and ending fifteen (15) days after Tenant's receipt of such notice, Tenant shall have the option to elect to purchase the remaining portion of the Premises in its "as is" condition (the "Taking Option") on the same terms and conditions as are set forth in SECTION 21 except as follows: (i) Closing shall occur within ninety (90) days after the date Tenant exercises the Taking Option; (ii) the Purchase Price shall equal the greater of (a) Total Project Costs less condemnation proceeds recovered by Landlord (but not below zero) or (b) 50% of (the Appraised Value of the remaining Premises (without utilization of condemnation awards to restore the Premises, transaction costs or Letter of Credit) less the amounts set forth in clause (a) above), plus the amounts set forth in clause (a) above; (iii) if Tenant delivers Tenant's Taking Option notice and Closing does not occur due to a default by Tenant, Tenant shall have no further right to purchase the Premises under the Lease, Landlord may retain the Deposit and this Lease shall terminate. SECTION 14. QUIET ENJOYMENT. Landlord covenants and agrees that, so long as Tenant observes and performs all of the covenants, conditions, and stipulations of this Lease, Tenant may, subject to all the terms and conditions hereof, lawfully and quietly hold, occupy and enjoy the Premises during the Lease Term. SECTION 15. ASSIGNMENT AND SUBLETTING. SECTION 15.1 LANDLORD'S CONSENT. Except as provided in SECTIONS 15.4, 15.7(D) AND 15.8 below, Tenant may not sublease, assign, pledge or in any way transfer this Lease or any interest in Tenant or any member of Tenant without the prior written consent of Landlord. If Tenant wishes to assign or sublease this Lease and Landlord's consent is required hereunder, Tenant shall deliver to Landlord (i) a true and complete copy of the proposed instrument of assignment or sublease containing all of the terms and conditions of such proposed assignment or sublease, (ii) information as to the identity and experience of the assignee/sublessee as Landlord may reasonably require, (iii) such financial information concerning the proposed assignee or sublessee as Landlord may reasonably require, and (iv) except in the case of a sublease entered into pursuant to SECTION 15.5 below, a written agreement, in form reasonably approved by Landlord, between such proposed assignee or sublessee and Landlord in which such proposed assignee or sublease agrees with Landlord to perform and observe all of the terms, covenants and conditions of this Lease, as well as all of the other documents executed and delivered to Landlord in connection with the Lease, jointly and severally with Tenant, all of which Landlord may consider in determining whether to grant its consent. Landlord agrees to notify Tenant within 30 days following delivery of the foregoing information, as to whether or not Landlord shall grant its consent. If Landlord fails to notify Tenant in writing within said 30 day period, Landlord shall be deemed to have not consented to said assignment or sublease. If Landlord consents to an assignment or sublease, then prior to such assignee or sublessee taking occupancy of the Premises, Tenant shall deliver to Landlord an original of the fully-executed instrument of assignment and, if applicable, of the agreement described in clause (iv) of the preceding paragraph of this Section. -29- 30 SECTION 15.2 LANDLORD'S ASSIGNMENT RIGHTS. Landlord may at any time assign, participate or securitize all or part of its rights and obligations under this Lease. SECTION 15.3 SUBSEQUENT ASSIGNMENTS OR SUBLEASES. No assignment or subletting that is approved pursuant to this SECTION 15 shall be deemed to remove any subsequent assignment or subletting from the provisions of this SECTION 15, it being the intent hereof that every assignment and subletting, whenever occurring, shall require the same approval as is set forth herein for an original assignment or subletting. SECTION 15.4 RESIDENTIAL LEASES. Notwithstanding anything to the contrary contained herein, Tenant shall be permitted, without obtaining Landlord's consent, to sublease individual units pursuant to a form approved in advance in writing by Landlord, which approval shall not be unreasonably withheld or delayed, provided (i) the term of each sublease does not exceed one (1) year and (ii) the sublease does not provide for any periods of reduced or no rent, or other similar concessions. Tenant shall obtain Landlord's consent which consent shall not be unreasonably withheld or delayed to any material changes which may be made to the standard form. SECTION 15.5 COMMERCIAL LEASES. Landlord acknowledges and understands that Tenant may enter into one or more commercial subleases covering portions of the Premises with sublessees who shall provide certain specialized services and amenities to the residents of the Facility (e.g. beauty parlor, convenience store, bank outlet). Tenant shall obtain Landlord's prior written consent to such subleases, and in no event shall (i) the term of such sublease be greater than one (1) year, (ii) the square footage to be subleased exceed three thousand (3,000) square feet in the aggregate for all subleases, and (iii) such sublease (other than residential unit subleases) survive termination or expiration of this Lease. Any such sublease shall be in form and substance reasonably satisfactory to Landlord including the provision of professional liability and general liability insurance as Landlord shall reasonably require. Upon the request of Landlord, Tenant shall provide copies of any such executed subleases to Landlord and obtain subordinations, if applicable, of such subleases to this Lease. SECTION 15.6 EFFECT OF ASSIGNMENT OR SUBLETTING. In all events, notwithstanding any assignment or subletting permitted hereunder, Tenant's liability to Landlord shall remain direct and primary. Any assignee or sublessee of Tenant's interest in the Premises, other than a sublessee under a sublease entered into pursuant to SECTION 15.4 or SECTION 15.5 hereof to whom such joint and severally liability provisions shall not apply, shall be deemed to have agreed directly with Landlord to be jointly and severally liable with Tenant for the performance of Tenant's obligations hereunder and such assignee or sublessee shall upon request execute and deliver such instruments as Landlord reasonably requests in confirmation thereof (and agrees that its failure to do so shall be subject to the default provisions of this Lease). At any time after the occurrence of an Event of Default hereunder, Landlord may collect rent and other charges from any assignee or sublessee (and upon notice any assignee or -30- 31 sublessee shall pay such sums directly to Landlord) and apply the amount collected to the rent and other charges herein reserved. No consent to assignment or collection of rent by Landlord directly from any assignee or sublessee or failure so to collect such rent shall be deemed a waiver of the provisions of this SECTION 15, an acceptance of such assignee or sublessee as a tenant hereunder, or a release of Tenant from direct and primary liability for the performance of all of the covenants of this Lease. SECTION 15.7 OTHER PROVISIONS REGARDING SUBLEASES AND ASSIGNMENTS. (a) (i) A copy of any sublease fully executed and acknowledged by the Tenant and the sublessee, shall be mailed to Landlord within ten (10) days from effective date of such subletting. (ii) Such assignment and/or subletting shall be subject to all the provisions, terms, covenants, and conditions of this Lease and the Tenant-assignor (and any guarantor(s) of this Lease) and such assignee(s) shall continue to be and remain liable hereunder, it being expressly understood and agreed that no assignment or subletting of the Premises shall in any way relieve Tenant or any subsequent assignee(s) from the performance of any of the agreements, terms, covenants, and conditions of this Lease. (iii) Each sublease permitted under this SECTION 15 shall contain provisions to the effect that (A) such sublease is only for the actual use and occupancy by the sublessee, and (B) unless Landlord elects otherwise, such sublease is subject and subordinate to all of the terms, covenants, and conditions of this Lease and to all of the rights of Landlord thereunder, and (C) such sublease shall expire prior to the expiration or earlier termination of the Lease Term (except residential unit subleases). (b) Notwithstanding anything contained in this Lease to the contrary, and notwithstanding any consent by Landlord to any sublease of the Premises or any assignment of this Lease, no sublessee shall assign its sublease nor further sublease the Premises, or any portion thereof, and no assignee shall further assign its interest in this Lease nor sublease the Premises, or any portion thereof, without Landlord's prior written consent in each of such cases. (c) Tenant's failure to comply with all of the provisions and conditions of this SECTION 15 and all of the subsections hereof shall at Landlord's option, render any purported assignment or subletting null and void and of no force and effect. (d) In the event that Tenant hereunder or any of the Guarantors shall, at any time, be a corporation, limited liability company or partnership, any change in one or a series of related transactions in the outstanding capital stock, equity, beneficial or membership interest of Tenant (or such Guarantors) without the prior written consent of Landlord, shall constitute a sublease or assignment hereunder requiring Landlord consent other than the transfer of all membership interests in Tenant to Balanced Care Corporation (or a wholly owned subsidiary of Balanced Care Corporation) provided that in each case Balanced Care Corporation guarantees the -31- 32 obligations of Tenant to Landlord in form and substance satisfactory to Landlord in its sole discretion pursuant to that certain Option Agreement, dated the date hereof, by and among Tenant, Guarantors and Balanced Care Corporation; provided, that Balanced Care Corporation or said wholly owned subsidiary of Balanced Care Corporation shall provide evidence satisfactory to Landlord that as the sole member of Tenant such entity is unrestricted in making capital contributions or equity infusions into Tenant for the purpose of funding Tenant's obligations and agreements hereunder. (e) Without the prior written consent of Landlord, Tenant may not mortgage, pledge, or otherwise encumber its leasehold estate hereunder, and any attempt to mortgage, pledge, or otherwise encumber such estate shall be null and void and of no force and effect. Notwithstanding the foregoing, (i) the Tenant's leasehold interest in the Lease may be mortgaged as security for the obligations of Tenant to Balanced Care Corporation under the Operating Deficit Loan Documents (as defined below); provided, that, Balanced Care Corporation shall not otherwise assign or transfer such mortgage and (ii) subject to Tenant's assignment of its interest in the Lease to Balanced Care Corporation or a wholly owned subsidiary of Balanced Care Corporation pursuant to Section 15.8 hereof, Balanced Care Corporation shall have a right to pledge any accounts receivables arising from any permitted subleases at the Facility to a third-party creditor subject to Landlord's first priority security interest in such accounts receivables and the execution and delivery to Landlord of an intercreditor agreement with such third-party creditor in form and substance satisfactory to Landlord in its sole discretion. SECTION 15.8 PERMITTED ASSIGNMENT. Tenant may assign its entire interest in the Lease to Balanced Care Corporation (or a wholly owned subsidiary of the Balanced Care Corporation, provided that Balanced Care Corporation guarantees the obligations of such entity to Landlord in form and substance satisfactory to Landlord in its sole discretion) at any time without the consent of Landlord pursuant to Section 1.03 of the Shortfall Funding Agreement, dated the date hereof, by and between Tenant and Balanced Care Corporation (the "Shortfall Funding Agreement"); provided, that, Tenant shall deliver to Landlord an original of the fully-executed instrument of assignment and, if applicable, of the agreement described in clause (iv) of SECTION 15.1 hereof. Upon any such permitted assignment, Tenant shall no longer be liable for any obligations of Tenant occurring after the date of such assignment but Tenant shall not be released from and shall remain liable for any obligations under the Lease that arose or occurred prior to the date of such assignment. Tenant has delivered a copy of the fully-executed Shortfall Funding Agreement and the various documents and instruments being executed and delivered therewith (collectively, the "Shortfall Documents") to Landlord and Tenant agrees not to modify, amend or terminate the Shortfall Documents without Landlord's prior written consent, which may be withheld in Landlord's sole discretion. SECTION 16. NOTICES. No notice or other communication shall be deemed given unless sent in any of the manners, and to the persons, specified in this SECTION 16. All notices and other communications hereunder shall be in writing and shall be deemed given (i) upon receipt if delivered personally (unless subject to clause (ii)) or if mailed by registered or -32- 33 certified mail, (ii) at noon on the date after dispatch if sent by overnight courier or (iii) upon the completion of transmission on or before 4:30 p.m. local time of the recipient if received on a business day (which is confirmed by telephone or by a statement generated by the transmitting machine (if transmitted by telecopy of other means of facsimile which provides immediate or near immediate transmission to compatible equipment in the possession of the recipient), or on the next business day following receipt if received after 4:30 p.m. local time of the recipient on any business day, in any case to the parties at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as will be specified by like notice): If to Landlord: 1675 Palm Beach Lakes Boulevard, Suite 900 West Palm Beach, Florida 33401 Attention: Secretary Telecopy Number: (561) 681-8177 Confirmation Number: (561) 681-8517 cc: Vice President Multifamily Finance Telecopy Number: (561) 681-8174 Confirmation Number: (561) 681-8719 If to Tenant: Senior Care Operators of Shippensburg, LLC c/o Hakman Capital Corp. 1350 Old Bayshore Highway, Suite 300 Burlingame, CA 94010 Telecopy Number: (650) 348-6493 Confirmation Number: (650) 348-1700 With a copy to: Barry Graynor, Esq. Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, CA 94111 Telecopy Number: (415) 951-3699 Confirmation Number: (415) 693-2000 With a copy to: Steven J. Adelkoff, Esq. Kirkpatrick & Lockhart, LLP 1500 Oliver Building Pittsburgh, PA 15222-2312 Telecopy Number: (412) 358-6501 Confirmation Number: (412) 355-6500 SECTION 17. MORTGAGEE PROTECTION. SECTION 17.1 ATTORNMENT. Tenant, including, without limitation, any permitted assigns or successor to Tenant and any holder of a leasehold mortgage granted by Tenant (collectively, the "Tenant Parties"), covenants and agrees that, if by reason of a default -33- 34 upon the part of the Landlord in the performance of any of the terms and conditions of any Facility Mortgage, the estate of Landlord thereunder is terminated by summary disposition proceedings or otherwise, Tenant Parties will attorn to the then Facility Mortgagee or the purchaser in such foreclosure proceedings, as the case may be, and will recognize such Facility Mortgagee or such purchaser as the Landlord under this Lease. Tenant Parties covenant and agree to execute and deliver, at any time and from time to time, upon reasonable request of Landlord or the holder of such mortgage or the purchaser in foreclosure, any instrument which may be reasonably necessary to evidence such attornment, subject to Tenant's receipt of a non-disturbance agreement from Landlord's Facility Mortgagee in form reasonably required by such Facility Mortgagee providing that Tenant's tenancy hereunder and Tenant's purchase options under this Lease will not be disturbed so long as no Event of Default exists under this Lease in the event of a default by Landlord and foreclosure under the Facility Mortgage. SECTION 17.2 ESTOPPEL STATEMENTS. The parties hereto shall, at any time and from time to time upon not less than ten (10) days prior written notice from the other party, execute, acknowledge and deliver to such other party, in form reasonably satisfactory to such other party or to such other party's mortgagee, a written statement certifying (if true) that this Lease is unmodified and in full force and effect (or if there have been modifications stating the nature thereof), that, to the best of such signer's knowledge, such other party is not in default hereunder (or specifying the nature of any default), the date to which rental and other charges have been paid and such other information as may be reasonably required by such other party. It is intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective purchaser or mortgagee of the Premises any permitted assignee of this Lease or permitted sublessee and their permitted respective successors and assigns. SECTION 17.3 SUBORDINATION. This Lease and any permitted leasehold mortgage encumbering Tenant's interest in the Lease shall, at the request and option of the holder of any Facility Mortgage, be subordinated to the lien of any Facility Mortgage; provided that as to any such lien recorded after the date of this Lease such subordination shall only occur so long as Landlord shall provide Tenant at Landlord's expense with a non-disturbance agreement from Landlord's Facility Mortgagee in form reasonably required by such Facility Mortgagee providing that Tenant's tenancy hereunder and Tenant's purchase options under this Lease will not be disturbed so long as no Event of Default exists under this Lease in the event of a default by Landlord and foreclosure under the Facility Mortgage. SECTION 17.4 RENT ASSIGNMENT. If from time to time Landlord assigns this Lease or the rents payable hereunder to any person or entity, whether such assignment is conditional in nature or otherwise, such assignment shall not be deemed an assumption by the assignee of any obligations of Landlord and Tenant shall comply with the terms of any such assignment so long as the same are not inconsistent with the rights of Tenant hereunder; but the assignee shall be responsible only for non-performance of Landlord's obligations which occur after it succeeds to and only while it holds Landlord's interest in the Premises or is a mortgagee in possession of the Premises. -34- 35 SECTION 17.5 NOTICE TO MORTGAGEE. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or a termination of this Lease unless (i) Tenant shall have first given written notice of Landlord's act or failure to act to each of the holders under any Facility Mortgage specifying the act or failure to act on the part of Landlord which could or would give basis to Tenant's rights, and (ii) such mortgage holder, after receipt of such notice, has failed or refused to correct or cure the condition complained of within a reasonable time thereafter; but nothing contained in this SECTION 17.5 shall be deemed to impose any obligation on any such mortgage holder to correct or cure any such condition. Tenant's obligation to send a notice to Landlord's mortgagee in the preceding sentence shall be limited to mortgagees of which Landlord has supplied Tenant with names and addresses. "Reasonable time" as used above shall mean a period of not more than thirty (30) days and shall include (but not be limited to) a reasonable time to obtain possession of the Premises if the mortgagee elects to do so and a reasonable time to correct or cure the condition if such condition is determined to exist. The agreements in this Lease with respect to the rights and powers of a mortgagee constitute a continuing offer to any such third party beneficiary which may be accepted by taking a mortgage of the Premises. SECTION 18. LANDLORD INSPECTION. Landlord may enter upon the Premises during normal business hours and upon three (3) days prior written notice for any purpose in its sole discretion; provided, that Landlord shall not unreasonably interfere with Tenant's business operations. SECTION 19. REPRESENTATIONS AND WARRANTIES. SECTION 19.1 TENANT'S REPRESENTATIONS AND WARRANTIES. Tenant represents, warrants and covenants to Landlord both as of the date hereof and as of the Commencement Date as follows: (a) Tenant is a Delaware limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware. (b) Tenant is, and during the entire time that this Lease remains in force and effect shall be, engaged in no business, trade or activity on the Premises other than the operation of the Facility for the primary intended use. Balanced Care at Shippensburg, Inc. (the "Manager") or any other permitted manager is, and during the entire time that this Lease remains in force and effect shall be, engaged in no business, trade or activity on the Premises other than the management of the Facility for its primary intended use. (c) Tenant has full right and power to enter into, or perform its obligations under this Lease, has taken all requisite action to authorize the execution, delivery and performance of this -35- 36 Lease, and this Lease is enforceable against Tenant in accordance with its terms and does not violate any agreement, operating agreement, decree or law by which Tenant is bound. (d) Except as set forth in Exhibit 19.1(d), the Real Property is not subject to any agreement which will require Landlord to construct or install, or cause to be constructed or installed, or bear the expense of liability thereof, any improvements whatsoever outside the boundaries of the Real Property. (e) The Real Property is free of all waste, debris, contamination, and Hazardous Materials, and the Real Property is not now used nor in the past has been used for the storage or dumping of any of the Hazardous Materials; provided, however, if any such Hazardous Materials are discovered on the Real Property, Tenant shall not be deemed in default hereunder because of the existence of such Hazardous Materials so long as Tenant and/or any of the other Indemnitors under that certain Environmental Indemnity Agreement dated the date hereof (the "Environmental Indemnity Agreement") which has been delivered to Landlord are remediating such Hazardous Material as required pursuant to such Environmental Indemnity Agreement. (f) There are no pending, or, to the knowledge of the Tenant, threatened (i) condemnation proceedings affecting the Real Property, (ii) investigations before or by any state or federal court or administrative agency against the Tenant, the Manager, any of the Guarantors or the Facility or (iii) litigation against the Tenant or the Real Property that in any respect, may affect the Real Property, Tenant or the Facility; and, as of the Commencement Date Tenant shall provide Landlord with a written list and explanation of any such condemnation proceedings, investigations or litigation of which Tenant has become aware prior to the Commencement Date. (g) There are no violations of any law or ordinance, order or requirement relating to the Real Property. (h) Tenant has no knowledge of any circumstances that would limit Landlord's ability, after compliance with (i) the various construction related permits and approvals which have already been obtained by Tenant, (ii) the applicable building code and (iii) any governmental regulations relating to a personal care home providing assisted living services, to receive permits authorizing construction and occupancy of a personal care home providing assisted living services on the Real Property. (i) There are no encroachments, easements or rights other than the Permitted Encumbrances and those arising after the date of execution of this Lease as permitted herein. (j) All bills and claims for labor performed and materials furnished to or for the benefit of the Real Property by or on behalf of Tenant for all periods have been paid in full. (k) The Real Property has legal access and there are no inoperable or unavailable public utilities related to the Real Property, including but not limited to, sanitary and storm sewers, solid waste disposal, gas and electricity, water and telephone. -36- 37 (l) Tenant is not in violation of any agreement, the violation of which might reasonably be expected to have a materially adverse effect on its business or assets, and Tenant is not in violation of any order, judgment, or decree of any state or federal court, or any statute or governmental regulation to which it is subject. (m) All financial statements heretofore or hereafter provided by the Tenant, Manager, or the Guarantors are and will be true and complete in all material respects as of their respective dates and fairly and will fairly present the financial condition of the Tenant, Manager, or the Guarantors, as the case may be, and there are, and will be, no liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements which are not reflected therein or in the notes thereto or in a written certificate delivered with such statements. The financial statements of the Tenant have been and will be prepared in accordance with GAAP. There has been no material adverse change in the financial condition, operations, or prospects of the Tenant since the dates of such statements previously provided except as fully disclosed in writing with the delivery of such statements. (n) Upon completion of the Facility pursuant to the Development Agreement, the Facility will be duly licensed under the applicable laws of the Commonwealth of Pennsylvania as a personal care home providing assisted living services for 60 units. To the extent applicable, the Tenant and the Manager are in compliance in all material respects with the requirements for the licensure of the Improvements as a personal care home and issuance to the Manager of all relevant permits or licenses to provide assisted living services at the Facility and operate the same and all approvals for the Facility and applicable provisions of personal care facility laws, rules, regulations and published interpretations to which the Facility is subject. No waivers of any laws, rules, regulations or requirements (including, but not limited to, minimum square footage requirements per bed) are required for the existing Improvements to operate at the foregoing licensed bed capacity. Tenant is in good standing with the respective governmental, quasi-governmental and other third party payors and regulatory agencies under such applicable licenses and any applicable reimbursement contracts. Tenant is current in payment of all so-called provider specific taxes or other assessments, if any, with respect to such reimbursement contracts. (o) The Tenant has not granted to any third party the right to reduce the number of licensed beds in any Facility or to apply for approval to move the right to any or all of the licensed beds to any other location. (p) The Tenant has filed all federal, state, and local tax returns which are required to be filed and has paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to such returns or to assessments received by Tenant, including, without limitation, provider taxes, if any. (q) The Security (as hereafter defined) constitutes a first lien upon and security interest in all collateral described therein, prior to all other liens, including those which may -37- 38 hereafter accrue. Tenant shall not be permitted to obtain any secured financing with respect to the Security except for purchase-money or lease financing with respect to Tenant's Equipment in the ordinary course of Tenant's business, or subordinate unsecured financing, in form and substance satisfactory to Landlord in its reasonable discretion, or as provided herein. (r) The location of Tenant's principal place of business and chief executive office are as set forth in SECTION 16 and Tenant shall notify Landlord in writing at least thirty (30) days prior to any change in location of the principal place of business and chief executive office. (s) All information furnished or to be furnished by Tenant to the Landlord in connection with the Lease or Development Agreement, 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 reasonably necessary to provide the Landlord a true and accurate knowledge of the subject matter. (t) The ownership of all the beneficial interests of Tenant and Manager for the Facility are fully and accurately set forth on EXHIBIT 19.1(t) hereto and no change in such ownership shall occur except as permitted in this Lease. (u) As of the date of the execution of the Lease, neither the Improvements, the Real Property, the Tenant nor the Manager is in violation of or subject to any existing, pending, or, to the knowledge of Tenant, threatened investigation or inquiry by any governmental authority or any response costs or remedial obligations under any applicable environmental laws, and this representation and warranty would continue to be true and correct following disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Improvements, the Real Property, or the Tenant. Tenant has not obtained and is not required to obtain, any permits, licenses or similar authorizations to construct, occupy, operate or use any Improvements at the Real Property by reason of any Applicable Environmental Law (except such permits, licenses and authorizations which have been obtained or which are described in the legal opinion dated the date hereof which was provided to Landlord by Tenant's counsel). No petroleum products, oil, or Hazardous Materials or solid wastes have been disposed of or otherwise released on or are otherwise located on the Real Property except those customarily generated, stored and used in the operation of a personal care home with assisted living services in accordance with all applicable laws and regulations; provided, however, if any such materials are discovered on the Real Property, Tenant shall not be deemed in default hereunder because of the existence of the same so long as Tenant and/or the other Indemnitors under the Environmental Indemnity Agreement are remediating such material as required pursuant to such Environmental Indemnity Agreement. The use of the Real Property as previously operated and hereafter intended to be operated by the Tenant will not result in the location on or disposal or other release of any petroleum products, oil, or Hazardous Materials or solid wastes on or to the Real Property except those customarily generated, stored and used in the operation of a personal care home with assisted living services in accordance with Applicable Environmental Laws (as defined in the Environmental Indemnity Agreement). Tenant agrees to permit Landlord to have access to the Facility and the Real Property at all reasonable times upon -38- 39 prior notice to Tenant in order to conduct any investigation and testing which Landlord deems necessary to ensure that Tenant, the Improvements, and the Real Property are in compliance with all Applicable Environmental Laws. Tenant and the Guarantors have entered into the Environmental Indemnity Agreement, and Tenant agrees to perform its obligations thereunder. (v) Tenant represents and warrants that it is solvent within the meaning of 11 U.S.C. ss. 548 and GAAP, and the Lease will not render the Tenant insolvent within the meaning of 11 U.S.C. ss. 548 and GAAP. (w) Except as itemized in Exhibit 19.1(w) all licenses and permits and regulatory approvals, including building permits, have been obtained to permit construction of the Facility in accordance with the Plans and Specifications; all public utility and public sanitary sewage services necessary for the construction and use of the Facility are available to the Facility and Tenant has received permission to make such use thereof as is necessary for construction and to make permanent connections thereto upon substantial completion; and dedicated and publicly maintained roads necessary for the full use of the facility for their intended purposes have been completed to the Real Property. Except as itemized in Exhibit 19.1(w)(1), there are no unsatisfied conditions and no offsite roads, sewage systems, water systems or other improvements which must be completed prior to issuance of a final unconditional certificate of occupancy for the Facility once completed. (x) All financial information heretofore furnished to the Landlord with respect to the Tenant, Manager, the Guarantors and the Facility, is complete and correct and fairly presents the financial condition of the Tenant, Manager, Guarantors and the Facility, respectively. There are no liabilities, direct or indirect, fixed or contingent, of the Tenant which are required to be disclosed under GAAP except or with respect to the Facility as reflected therein or in the notes thereto. There has been no material adverse change in the financial condition or operations of the Tenant, Manager, Guarantors or the Facility since the date of such financial information (and to the Tenant's knowledge, no such material adverse change is pending or threatened), and the Tenant has not guaranteed the obligations of, or made any investments in or advances to, any person other than as expressly described and noted as a contingent liability in financial statements provided to Landlord prior to the date hereof and approved by Landlord in writing. (y) In connection with the sale and purchase of the Real Property and this Lease, neither party has dealt with any real estate broker, agent or finder, and there is no other commission, charge or other compensation due on account thereof other than a fee due to Hakman and Company, Incorporated ("Hakman"), which will be paid by Tenant. Landlord and Tenant expressly agree that such fee shall not be part of Total Project Costs, and that Tenant shall be solely responsible for the payment of such fee. Tenant agrees to indemnify and hold Landlord harmless from and against any claims for any brokerage fee or commission on account of this transaction by any person or entity, including without limitation Hakman. SECTION 20. SURRENDER. Upon Lease termination, Tenant shall quit and surrender the Premises free and clear of all tenants, occupants, liens, and encumbrances -39- 40 whatsoever except (i) Permitted Encumbrances and (ii) subleases entered into in accordance with SECTION 15.4 AND 15.5 hereof, and (iii) encumbrances restrictions or reservations caused by or consented to in writing by Landlord. Tenant shall, surrender the Premises to Landlord broom clean and in good order, condition and repair, reasonable wear and tear (and casualty and condemnation damage; provided Tenant was not obligated to replace, repair and replace the Premises or any portion thereof as provided in Sections 12 and 13 hereof) excepted, with all Tenant's Equipment removed. Any of Tenant's Equipment which is not removed from the Premises by the termination date shall be deemed abandoned to Landlord and Landlord may dispose of the same as it sees fit, at Tenant's expense. All alterations which Landlord approved shall become part of the Premises and remain following surrender. Tenant shall repair any damage caused by the removal of any alterations or any of Tenant's Equipment and restore the Facility or the surface of the Real Property, as the case may be, to substantially the condition in which it was prior to such removal. SECTION 21. TENANT'S OPTION TO PURCHASE. SECTION 21.1 CONDITIONS TO OPTION. On the conditions (which conditions Landlord may waive, at its sole option, by notice to Tenant at any time) that (a) at the time of exercise of the Purchase Option, there is no Event of Default hereunder, and no fact or circumstance exists which constitutes or with the passage of time, or giving of notice, or both could constitute a default and (b) Tenant strictly complies with the provisions of this SECTION 21, then Tenant shall have the option to purchase the Premises, at the price and upon the terms hereinafter set forth (the "Purchase Option"). SECTION 21.2 EXERCISE OF OPTION. Beginning on the first day of the forty-ninth (49th) full calendar month of the Lease Term and ending on the last day of the fifty-sixth (56th) full calendar month of the Lease Term, the Tenant shall have the option to purchase the Premises (or arrange for such purchase) for an amount equal to the greater of: (i) the Total Project Cost or (ii) the Net Economic Value (the "Purchase Price"). In the event Tenant decides to purchase the Premises, Tenant shall within ten (10) days after determination of the Purchase Price as set forth in this SECTION 21, deposit with Landlord a nonrefundable Purchase Option deposit (the "Deposit") equal to three times the monthly Base Rent for the month the Tenant exercises the Purchase Option, which Deposit shall be held in escrow and applied to the Purchase Price or forfeited to Landlord as provided in SECTION 21.11 below. Closing on the purchase shall occur within ninety (90) days after the date Tenant exercises the Purchase Option. Upon closing on the purchase of the Premises as provided hereunder, Tenant shall be entitled to receive a credit for fifty percent (50%) of the Value Creation (as defined below) in the Premises. Landlord will give the Tenant credit for 50% of the Value Creation on the settlement statement, as well as a credit equal to the balances, if any, in any reserve accounts and escrow accounts and a credit equal to any Excess Project Costs (as defined with respect to Force Majeure in SECTION 17.2 of Exhibit B to the Development Agreement). Value Creation is defined as the Purchase Price less the Total Project Cost less the Letter of Credit Amount . The Letter of Credit Amount is defined as the Letter of Credit (as defined below) less amounts returned to Tenant up -40- 41 to an amount not to exceed $__________. The Tenant shall purchase the Premises in an "as is" condition, which title shall be good and marketable of record and subject only to the Permitted Encumbrances plus subleases, encumbrances, restrictions or reservations which were made or caused by Tenant or by Landlord at the request of Tenant. NET ECONOMIC VALUE. Net Economic Value is defined as the then-current Appraised Value of the fee simple interest in the Premises less an amount of up to 3% of such Net Economic Value which represents actual costs paid by the Tenant relative to the exercise of the Purchase Option including but not limited to commissions, management fees (not to exceed 5% of Operating Revenues (as defined below)), legal fees, etc. APPRAISAL PROCEDURE. The Appraised Value of the Premises for purposes of calculating Net Economic Value of Premises shall be determined not more than ninety (90) days prior to the date of closing on the purchase of the Premises. To that end, Tenant and Landlord shall first attempt to agree in writing upon the Appraised Value of the fee simple interest in the Premises. In the event that Tenant and Landlord are unable to agree in writing upon the Appraised Value of the Premises within ten (10) days, then Landlord shall appoint an Appraiser (the "Landlord's Appraiser"), and Tenant shall appoint an Appraiser (the "Tenant's Appraiser"). If the Appraised Value of the Premises as determined by Landlord's Appraiser and the Appraised Value of the Premises as determined by Tenant's Appraiser differ by ten percent (10%) or less, then the Appraised Value of the Premises shall be determined by averaging the two appraisals. The Appraisers chosen shall be MAI's and active in the business of appraisals for facilities providing assisted living services. If the appraisals differ by more than ten percent (10%), then Landlord's Appraiser and Tenant's Appraiser shall mutually agree on a third Appraiser (the "Mutual Appraiser") to determine the Appraised Value of the Premises. If the Mutual Appraiser's determination of the Appraised Value of the Premises shall be identical to the Appraised Value of the Premises as determined by either the Landlord's Appraiser or the Tenant's Appraiser, then the Appraised Value of the Premises as determined by the Mutual Appraiser shall be final and shall be deemed to be the Appraised Value of the Premises. If the Appraised Value of the Premises as determined by the Mutual Appraiser shall be different than the Appraised Value determined by Landlord's Appraiser and the Appraised Value determined by Tenant's Appraiser, then the Appraised Value of the Premises shall be determined by selecting among the three Appraisals the two numerically closest appraisals and then calculating the arithmetic mean thereof. If the three appraisals shall differ by the same numerical amount, then the Appraised Value of the Premises shall be determined by calculating the arithmetic average of the three Appraisals. Notwithstanding the foregoing, if Tenant notifies Landlord in writing of its intention to exercise its Purchase Option and the price at which Tenant would be willing to buy, Landlord will notify Tenant in writing within five (5) business days after receipt of Tenant's notice either (i) that Landlord approves the sale price; or (ii) that Landlord does not approve the sale price. If the Landlord approves the sale price, then the Tenant may buy the Premises at the price specified in its notice and such price shall be binding and conclusive on the parties. If the Landlord does -41- 42 not approve the sale price, then the Tenant may initiate the appraisal process as previously described to determine the Appraised Value for purposes of calculating the Net Economic Value. The price approved by Landlord, or established by the appraisal procedure set forth above shall be valid for a period of not more than ninety (90) days from the date of Landlord's approval or of the completion of the appraisal process. SECTION 21.3 TENANT COOPERATION. In the event the Tenant does not exercise the Purchase Option as provided in the preceding paragraph, Tenant shall cooperate with Landlord in assuring the smooth transition of Premises operations, licensing to Landlord, and unconditional assignment of all other certificates and licenses necessary to the operation of the Premises which can lawfully be assigned by Tenant to Landlord. Tenant, at Landlord's request and at Landlord's sole cost and expense shall also assist Landlord in its application for any and all other licenses and approvals necessary for Landlord to operate the Premises as a personal care home with assisted living services. Tenant appoints Landlord as Tenant's attorney-in-fact to execute and deliver any instruments, documents or certificates necessary to transfer any licenses or permits to Landlord or Landlord's designee to operate the Premises as a personal care home providing assisted living services. SECTION 21.4 CONVEYANCE. If the Purchase Option is exercised by Tenant in accordance with the terms hereof, the Real Property and Improvements shall be conveyed by a good and sufficient _________________ Deed (with covenants against Grantor's acts) (the "Deed") and the Personal Property shall be conveyed in a good and sufficient limited warranty Bill of Sale (with covenants against grantor's acts) (the "Bill of Sale") each running to Tenant or to such grantee as Tenant may designate by notice to Landlord at least seven (7) days before the Time of Closing. SECTION 21.5 PAYMENT OF PURCHASE PRICE. The Purchase Price less the Deposit shall be paid by Tenant at the Time of Closing by certified, cashier's, treasurer's or bank check(s) or wire transfer pursuant to instructions received from Landlord at least twenty-four (24) hours prior to the Time of Closing. Tenant shall be responsible for all conveyance, recording or transfer stamps, fees or taxes. SECTION 21.6 PLACE AND TIME OF CLOSING. If this Purchase Option is exercised, the closing shall occur and the Closing Documents specified below shall be delivered (the "Closing") at the office of Landlord at 12:00 o'clock noon (E.S.T.) on the relevant Purchase Option Date (such time, as the same may be extended by mutual written agreement of Landlord and Tenant, being hereinafter referred to as the "Time of Closing"). It is agreed that time is of the essence of this Purchase Option. SECTION 21.7 CONDITION OF PREMISES. The Premises is to be purchased 'AS IS' and 'WHERE IS' as of the Time of Closing. SECTION 21.8 QUALITY OF TITLE. If Landlord shall be unable to give title or to make conveyance, as stipulated in this Section, then, at Landlord's option, (i) Landlord -42- 43 may cure such failure at its expense or (ii) elect to have the Purchase Price reduced by the effect on the Appraised Value of the Premises in the manner established in this Section. SECTION 21.9 MERGER BY DEED. The acceptance of the Deed and Bill of Sale by Tenant or the grantee designated by Tenant, as the case may be, shall be deemed to be a full performance and discharge of every agreement and obligation to be performed by Landlord contained or expressed in this Lease. SECTION 21.10 USE OF PURCHASE PRICE TO CLEAR TITLE. To enable Landlord to make conveyance as provided in this SECTION 21, Landlord may, at the Time of Closing, use the Purchase Price or any portion thereof to clear the title of any lien, provided that all instruments so procured are recorded contemporaneously with the closing or reasonable arrangements are made for a recording subsequent to the Time of Closing in accordance with customary conveyancing practices. SECTION 21.11 TENANT'S DEFAULT. If Tenant delivers Tenant's Purchase Option Notice and closing does not occur due to a default by Tenant, Tenant shall thereafter have no further right to purchase the Premises pursuant to this SECTION 21 and Landlord shall retain the Deposit although this Lease shall otherwise continue in full force and effect. SECTION 21.12 PRORATION OF BASE RENT. If the Purchase Option is exercised by Tenant in accordance with the terms hereof, and the Closing shall occur prior to the last day of any month of the Lease Term, then at the Closing, the Base Rent paid by Tenant for such month shall be adjusted between Landlord and Tenant as of the Time of Closing with the Tenant being entitled to a credit from Landlord to be shown on the settlement statement in an amount equal to the Base Rent attributable to any period from and after 12:00 midnight of the day preceding the date of Closing. SECTION 21.13 CLOSING DOCUMENTS. If the Purchase Option is exercised by Tenant in accordance with the terms hereof, at the Closing, Landlord shall deliver, or cause to be delivered, to Tenant the following documents, in executed and where appropriate, acknowledged form: (1) the Deed; (2) the Bill of Sale; (3) a Notice of Termination of the Lease in form reasonably acceptable to Tenant; (4) Affidavit(s) customarily required by title insurance companies in the Commonwealth of Pennsylvania for the issuing of title insurance protecting against parties in possession who obtained their rights from Landlord and mechanics liens with respect to any -43- 44 mechanics who may have performed work or supplied materials to the Premises at the direction of and on behalf of Landlord; (5) Affidavit, certifying that Landlord is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended; and as that term is defined in the Foreign Investment and Real Property Tax Act of 1980, as amended, and providing Landlord's U.S. Taxpayer Identification Number; and (6) Releases for any Facility Mortgage and any other encumbrances which Tenant is not required to acquire title to as provided herein. SECTION 22. SECURITY. (a) In order to secure the payment and performance of all of the obligations hereunder, Tenant agrees to provide or cause there to be provided the following security (the "Security"): i) a first lien and exclusive security interest in the Tenant's Equipment and receivables, as more particularly provided for in the Security Agreement and Assignment of Lease, Rents and Receivables each of even date herewith by Tenant to Landlord; ii) a first lien and exclusive pledge and assignment of, and security interest in, all Permits and Contracts, as more particularly provided for in the Assignment of Contracts, Plans, Permits and Approvals of even date herewith by Tenant to Landlord; iii) an assignment and subordination of the Management Agreement ("the Management Agreement") dated the date hereof between Tenant and Manager, pursuant to the Assignment of Contracts, Plans, Permits and Approvals and the Management Agreement Subordination Agreement each of even date herewith by Tenant to Landlord; iv) the Letter of Credit (as defined below); v) the Mandatory Sweep Account (as defined below); vi) the Developer's Fee and the other deposits and escrows described herein; and vi) the Guaranty. SECTION 23. LETTER OF CREDIT. For purposes of the Lease the term "Letter of Credit" is defined as the cash on deposit at Ocwen Federal Bank FSB plus interest earned thereon or the irrevocable standby letter of credit payable to Landlord for the benefit of Tenant (or any combination of the two) in the amount of $_______ (the "Letter of Credit Maximum Amount") for a period equal to two (2) years initially which, unless Stabilization shall -44- 45 have occurred prior to the initial expiration of such Letter of Credit, shall be renewed until Stabilization or successive periods of 12 months whichever is later (provided, however, after the Commencement Date any such renewal Letter of Credit shall be required in the amount of the then unused balance and provided further Landlord may draw the full amount available under a Letter of Credit if same is not replaced as required hereunder within 10 days prior to expiration of any expiring Letter of Credit). The Letter of Credit shall be in form and substance, and from an issuer satisfactory to Landlord, deposited with Landlord to secure all obligations hereunder and under the Development Agreement, the payment of working capital and Pre-Stabilization Rent payments upon sight draft by Landlord; provided, that no Event of Default exists hereunder. Working capital in the MAXIMUM amount of $_______ may be made available by Landlord for any expense to operate the Facility (other than Base Rent and Additional Rent) and up to $200,000 may be used to fund pre-marketing and operational start-up costs (the "Start-Up Costs") from the Letter of Credit during the Pre-Stabilization Period to be disbursed by Landlord to Tenant in Landlord's reasonable discretion. To the extent additional working capital is necessary, Tenant shall provide written notice to Landlord requesting that additional funds be made available from the Letter of Credit; provided that all such requests in the aggregate do not exceed $______. Landlord shall review any such request and shall have the right to require evidence or documentation from Tenant with respect to such working capital expenses. Landlord shall have the right to accept or reject any such request in its reasonable discretion. To the extent Landlord rejects any request or such request exceeds the $______ limit or Tenant has already exceeded the $______ limit, then Tenant will be required to fund the working capital that is needed. To the extent the Letter of Credit is reduced below an amount equal to the Letter of Credit Maximum Amount less the Start-Up Costs at any time prior to the Commencement Date, Tenant shall be required to deposit the shortfall in the form of cash to be held under the Assignment and Pledge of Deposit Account agreement or a replacement Letter of Credit in the amount of such shortfall on the same terms and conditions as and issued by the same issuer as the Letter of Credit with Landlord on or before the Commencement Date. The balance, if any, of Letter of Credit shall be returned to Tenant upon achievement of Stabilization. In the event that at any time during the Lease Term (i) the cash flow from the Premises for any month is insufficient to pay scheduled Base Rent or Additional Rent, and (ii) scheduled Base Rent or Additional Rent then due and payable is not otherwise paid by Tenant directly or through a debit of the Mandatory Sweep Account under Section 24(a) or (b) then, provided that no Event of Default shall have occurred, Landlord upon receipt of a written direction from Tenant at least five (5) days prior to the payment date, shall disburse to itself from funds then available under the Letter of Credit an amount sufficient to pay the Base Rent or Additional Rent then due and payable. SECTION 24. CASH SWEEP; OPERATING DEFICIT LOANS; DEVELOPER'S FEE (a) PRE-STABILIZATION PERIOD. All Excess Cash Flow (as defined below) from the Premises (after the payment of monthly Base Rent and any Additional Rent due) will be deposited into an interest bearing escrow account established at Ocwen Federal Bank FSB within five (5) days of the end of each month (the "Mandatory Sweep Account") pursuant to an -45- 46 Assignment and Pledge of Deposit Account Agreement between Tenant and Landlord of even date. Except as provided below, Tenant shall have no right to withdraw from the Mandatory Sweep Account prior to Stabilization. Provided there is no Event of Default, upon achievement of Stabilization any balance, if any, in the Mandatory Sweep Account shall be paid to the Tenant. Prior to the occurrence of an Event of Default, the Tenant will calculate the Excess Cash Flow (after the payment of monthly Base Rent and Additional Rent due) for the Premises and deposit the same into the Mandatory Sweep Account. Following an Event of Default, the Tenant will consent to and participate in a lockbox agreement with Landlord for referral of all Premises revenues to a lockbox. On the date hereof, the Tenant and the Landlord will execute a lockbox agreement to be held by Landlord during the term of the Lease for its enforcement should an Event of Default occur. In the event that at any time during the Lease Term (i) the cash flow from the Premises for any month is insufficient to pay scheduled Base Rent or Additional Rent and (ii) scheduled Base Rent or Additional Rent then due and payable is not otherwise paid by Tenant, then, provided that no Event of Default shall have occurred, Landlord, upon receipt of a written direction from Tenant at least five (5) days prior to the payment date, shall disburse to itself from funds then in the Mandatory Sweep Account an amount sufficient to pay the scheduled Base Rent or Additional Rent then due and payable. (b) STABILIZATION PERIOD (1) In the event that the average Lease Payment Coverage Ratio falls below 1.30 to 1.00 for any six calendar month period after Stabilization, all Excess Cash Flow from the Premises (after the payment of monthly Base Rent and Additional Rent due) will be deposited into the Mandatory Sweep Account within five (5) days of the end of each month. Except as provided below, Tenant shall have no right to withdraw from the Mandatory Sweep Account during any period after Stabilization during which the Excess Cash Flow is being deposited in such Mandatory Sweep Account. In the event that at any time during the Lease Term (i) the cash flow from the Premises for any month is insufficient to pay scheduled Base Rent or Additional Rent and (ii) scheduled Base Rent or Additional Rent then due and payable is not otherwise paid by Tenant, then, provided that no Event of Default shall have occurred, Landlord, upon receipt of a written direction from Tenant at least five (5) days prior to the payment date, shall disburse to itself from funds then in the Mandatory Sweep Account an amount sufficient to pay the scheduled Base Rent or Additional Rent then due and payable. (2) Prior to an Event of Default, the Tenant will receive and calculate the Excess Cash Flow for the Premises. Following an Event of Default, the Tenant will consent, to and participate in a lockbox agreement with Landlord for referral of all Premises revenues to a lockbox. On the date hereof, the Tenant and the Landlord will execute a lockbox agreement to be held by Landlord during the term of the Lease for its enforcement should an Event of Default occur. On each anniversary of the Lease after Stabilization and at maturity, so long as the Mandatory Sweep Account is not then in effect as provided in Section 24(b)(1) hereof and no Event of Default shall have occurred, any balance in the Mandatory Sweep Account shall be paid to the Tenant. -46- 47 (3) The Lease Payment Coverage Ratio (the "Lease Payment Coverage Ratio") is defined as Operating Revenues less the Operating Expenses (all as defined in EXHIBIT 24(b)) for the Premises (excluding depreciation and income taxes and including a maximum management fee of 5.0% of the Operating Revenues, and scheduled reserves for the Premises, all in accordance with generally accepted accounting principles) over scheduled monthly Base Rent. If the average Lease Payment Coverage Ratio increases to or above 1.30 to 1.00 for any consecutive 6 calendar month period, commencing 6 months immediately following the commencement of the mandatory sweep, then the Excess Cash Flow will become available to the Tenant. Excess Cash Flow shall be defined as Operating Revenues LESS the Operating Expenses for the Premises (excluding depreciation and income taxes and including a maximum management fee of 5.0% of the Operating Revenues, and scheduled reserves for the Premises, all in accordance with generally accepted accounting principles). (c) OPERATING DEFICIT LOANS. Tenant and Balanced Care Corporation have entered into an Shortfall Funding Agreement, dated the date hereof (the "Shortfall Funding Agreement"), whereby Balanced Care Corporation shall provide unlimited operating deficit loans ("Operating Deficit Loans") to Tenant to fund any payments of Base Rent or Additional Rent or working capital requirements of Tenant during the Lease Term. The Operating Deficit Loans shall be made after the Letter of Credit and the Excess Cash Flow in the Mandatory Sweep Account have been depleted. The Shortfall Funding Agreement provides that upon notice from Landlord or Tenant to Balanced Care Corporation of (i) insufficient funds to pay scheduled Base Rent or Additional Rent, and (ii) the depletion of the Letter of Credit and Mandatory Sweep Account, Balanced Care Corporation shall make an Operating Deficit Loan to Tenant within three (3) days of receipt of such notice, the proceeds of which shall be disbursed directly to Landlord to pay such Base Rent or Additional Rent. Balanced Care Corporation shall have a leasehold mortgage on the Tenant's interest in the Lease to secure the Operating Deficit Loans (the "Leasehold Mortgage" and together with the Shortfall Funding Agreement, the Option Agreement and any other documents or instruments which have been executed and delivered in connection with the Operating Deficit Loans from Tenant to Balanced Care Corporation shall collectively be referred to hereinafter as "Operating Deficit Loan Documents"). Tenant hereby agrees that (i) Tenant shall not amend or modify the Operating Deficit Loan Documents without the prior written consent of the Landlord and (ii) Tenant shall not make any payments on account of the Operating Deficit Loans until all payments required to be paid under this Lease by Tenant have been paid in full and except as provided in the Subordination and Standstill Agreement, dated the date hereof, by and among Tenant, Landlord and Balanced Care Corporation. (d) DEVELOPER'S FEE. Tenant acknowledges that any unpaid portion of the Developer's Fee as defined in the Development Agreement shall secure Tenant's obligations hereunder and may be utilized by Landlord to remedy any Event of Default. Upon Final Payment (as defined in the Development Agreement) by Landlord, the unpaid balance of the Developer's Fee shall be paid. The utilization of the Developer's Fee by Landlord to pay Base Rent or Additional Rent shall be at Landlord's sole discretion. -47- 48 SECTION 25. DEFAULT. The occurrence of any of the events, acts or circumstances described in this SECTION 25 shall constitute an Event of Default under this Lease. SECTION 25.1 EVENTS OF DEFAULT. Failure by Tenant to pay in full (i) any Base Rent payable under this Lease within ten (10) days after the same is due or (ii) any Additional Rent within ten (10) days after notice thereof from Landlord. SECTION 25.1.1 Failure by Tenant to comply, perform or observe any covenant contained in SECTIONS 11 AND 15. SECTION 25.1.2 Failure by Tenant to observe, perform or comply with any of the terms, covenant, agreements or conditions contained in this Lease (other than as set forth in SECTION 25.1.1) and the continuance of such failure for thirty (30) days after Landlord has given Tenant written notice of such failure; provided, however, that as to any failure which cannot with diligence be cured within thirty (30) days, Tenant shall be entitled to an additional thirty (30) days to cure such failure provided Tenant commences and diligently prosecutes such cure at all times. SECTION 25.1.3 The making by Tenant, Balanced Care Corporation, any of the Guarantors or Manager of an assignment for the benefit of its creditors or the commencement of proceedings in a court of competent jurisdiction for the reorganization, liquidation or involuntary dissolution of such party or for the adjudication of such party as a bankrupt or insolvent or for the appointment of a receiver of the property of such party which, with respect to any involuntary proceedings, are not dismissed and any receiver, trustee or liquidator appointed therein is not discharged, within ninety (90) days after the institution thereof. SECTION 25.1.4 The abandonment of the Premises by Tenant other than as a result of total condemnation. SECTION 25.1.5 The failure to open the Facility for business within thirty (30) days after the Commencement Date unless such failure is due to a Major Casualty or Taking; SECTION 25.1.6 A default by Tenant or any of the Guarantors under any of the Transaction Documents beyond any applicable notice or grace period, including, but not limited to the Development Agreement, the Guaranty or the Management Agreement. SECTION 25.1.7 Intentionally Omitted. SECTION 25.1.8 Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of the Tenant, or the Guarantors pursuant to or in connection with this Lease or otherwise (including, without limitation, representations and warranties contained herein or in any Transaction Documents) or as an inducement to Landlord to extend any credit to or to enter into this or any other agreement with Tenant or the Guarantors proves to have been false in any material respect at the time when the facts therein set forth were stated or -48- 49 certified, or proves to have omitted any substantial contingent or unliquidated liability or claim against Tenant or any of the Guarantors, or on the date of execution of this Lease 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 Landlord in writing at or prior to the time of such execution; or SECTION 25.1.9 Facility (or the Tenant or the Manager with respect to such Facility) should be assessed final non-appealable fines or penalties with respect to the operation or maintenance of the Facility or the provision of services to the residents of the Facility in excess of $25,000 in the aggregate in any calendar year by any state or any licensing agency (or, to the extent hereafter applicable, any reimbursement agency) having jurisdiction over Tenant, any Manager or such Facility; or SECTION 25.1.10 A final judgment in the amount in excess of $10,000 shall be rendered by a court of law or equity against Tenant or any of the Guarantors and the same shall remain undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Tenant or any of Guarantors, as the case may be, has established reserves adequate for payment in the event Tenant or any of Guarantors is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Landlord; or SECTION 25.1.11 The occurrence of any materially adverse change in the financial condition of Tenant, any of the Guarantors or Balanced Care Corporation which, in Landlord's reasonable determination, constitutes an impairment of Tenant's, any of the Guarantors' or Balanced Care Corporation's ability to perform its obligations under the Lease, the Guaranty or the Operating Deficit Loan Documents, respectively. SECTION 25.1.12 The involuntary, imposed or required revocation, suspension, termination, probation, restriction, limitation or refusal to renew, or pending, revocation, suspension, termination, probation, restriction, limitation, of, or refusal to renew, any permit which materially affects the ability of the Tenant or any Manager to operate the Facility as a personal care home providing assisted living services in the absence of the submittal by Tenant or the Manager of any corrective or remedial plan or appeal complying with all applicable law, the effect of which is to stay any such revocation, suspension, termination, probation, restriction, time limitation or refusal to renew any Permit, or the issuance or pending issuance of any Permit for a period of less than twelve (12) months as a consequence of any sanctions imposed by any governmental authority; or the assessment or pending assessment, of any civil or criminal penalties by any governmental authority, any third party payor or any accreditation organization or person; or SECTION 25.1.13 If the Department of Health and Human Services, Office of Inspector General, any of its subsidiaries, affiliates, or any state agency brings a claim, demand or cause of -49- 50 action against the Tenant, any of the Guarantors or the Manager for violation of the Medicare/Medicaid Anti-Fraud and Abuse laws which would constitute grounds for suspension or exclusion of the Tenant, any of the Guarantors or the Manager from participation in the Medicare/Medicaid programs; or SECTION 25.1.14 Notice of decertification is received by the Tenant or any Manager, or the denial, termination, restriction, suspension, probation of non-renewal of the Tenant's or Manager's participation in the Medicare or Medicaid programs or any limitation thereof, including imposition of alternative enforcement remedies such as appointment of temporary management, based on conditions creating an immediate and serious threat to the residents' health and safety, regardless of the filing or status of any appeal by Tenant or Manager; or SECTION 25.1.15 Notice of certification of the Tenant's non-compliance with conditions of participation, or of the denial, termination, restriction, suspension, probation or non-renewal of the Tenant's or any Manager's participation in the Medicare or Medicaid programs or any limitation thereof, including notice of the imposition of alternative enforcement remedies on the basis of non-life threatening conditions; and (i) failure of Tenant or any Manager to deliver or cause to be delivered to the Landlord within ninety (90) days of receipt of such notice by Tenant or any Manager, a written notice from the appropriate governmental authority indicating such decertification, termination, restriction, suspension, probation or non-renewal of participation or other adverse action has been fully and unconditionally rescinded; and/or (ii) failure of the Tenant or any Manager to comply with any and all applicable requirements of federal and state laws and regulations to qualify for continuation of payment and participation in the Medicare or Medicaid programs after receipt of the notice of certification of non-compliance, regardless of Tenant's or any Manager's filing of any appeal or the status of any appeal. SECTION 25.1.16 Any violation by Tenant, any of the Guarantors, Manager, or Balanced Care Corporation of that certain Non-Compete Agreement by and among Landlord and such parties of even date. SECTION 25.1.17 (i) The Manager assigns, pledges or transfers in whole or in parts its responsibilities under the Management Agreement, transfers any interest in the Manager without Landlord's prior written consent to be granted or withheld in Landlord's sole discretion, or (ii) the Management Agreement is amended, terminated, supplemented or otherwise altered without Landlord's prior written consent to be granted or withheld Landlord's sole discretion. SECTION 25.1.18 An event of default or default beyond the expiration of the applicable cure period shall occur under any other document or agreement between Tenant or any Affiliate (as defined in the Development Agreement) of Tenant and Landlord or any Affiliate (as defined in the Development Agreement) of Landlord. SECTION 25.1.19 A default or event of default beyond the expiration of the applicable cure period shall occur under the Operating Deficit Loan Documents. -50- 51 SECTION 25.1.20 Any default or breach of any obligation or agreement under the Management Agreement Subordination Agreement or the Affiliated Party Subordination Agreement, each dated the date hereof. SECTION 26. LANDLORD'S REMEDIES: DAMAGES ON DEFAULT. SECTION 26.1 In case of the occurrence of any Event of Default hereinbefore provided, the Landlord shall have the immediate right of reentry, and may remove all persons and property from the Premises by summary proceedings, lawful force, or otherwise. In addition, in the event of the occurrence of any Event of Default (whether or not Landlord shall elect to reenter or to take possession pursuant to legal proceedings or pursuant to any notice provided for by applicable laws), Landlord shall have the right, at its option, to terminate this Lease (including the Purchase Option) on not less than two (2) days' notice to Tenant and upon the giving of said notice, this Lease and the term hereof shall cease and expire on the date set forth in said notice as if said date were the expiration date originally set forth herein and or it may from time to time, whether or not this Lease be terminated, make such alterations and repairs as may be reasonably necessary in order to relet the Premises or any part(s) thereof for such term or terms (which may extend beyond the term of this Lease) and at such rental(s) and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting, all rentals received by the Landlord from such reletting shall be applied, first, to the payment of any indebtedness (other than Rents due hereunder) of Tenant to Landlord, second, to the payment of any costs and expenses of such reletting, including, without limitation, brokerage fees (at no greater than customary rates in the area in which the Premises is located) and reasonable attorneys' fees, and of the cost of such alterations and repairs, third, to the payment of Rents due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rents and other payments required to be made by Tenant hereunder as the same may become due and payable hereunder, with the right reserved to Landlord to bring such action(s) or proceeding(s) for the recovery of any deficits remaining unpaid without obliged to await the end of the term for a final determination of Tenant's account; and the commencement or maintenance of any one or more actions shall not bar Landlord from bringing other or subsequent actions for further accruals pursuant to the provisions of this Section. If such rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly subject to Landlord's right of action(s) or proceeding(s) as aforesaid. No such reentry or taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant, or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, in addition to any other remedies it may have, as damages for loss of the bargain and not as a penalty, including the cost of recovering the Premises, reasonable attorneys' fees, and including the worth, at the time of such termination, of the excess, if any, of -51- 52 the amount of rental and charges equivalent to the rental and charges reserved in this Lease for the remainder of the then term of this Lease, over the aggregate rental value of the Premises for the remainder of such term, all of which shall be immediately due the payable from Tenant to Landlord. If any applicable laws shall validly limit the amount of the damages provided or in the immediately preceding sentence to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such laws. In the event the Tenant does not comply with its obligations under this Lease, Landlord shall also have the right to appropriate injunctive relief. The rights and remedies, whether herein or anywhere else in this Lease provided, shall be cumulative, and the exercise of any one right or remedy shall not preclude the exercise of, or act as a waiver of, any other right or remedy of Landlord hereunder, or which may be existing at law, or in equity, or by statute, or otherwise. In addition to the foregoing, Tenant, and its successor and assigns, shall at all times indemnify Landlord for, defend Landlord against, and save Landlord harmless from, any liability, loss, cost, injury, damage, or other expense or risk whatsoever, directly or indirectly, arising out of, resulting from, or otherwise in connection with (i) the failure for any reason on the part of Tenant to perform, observe, or comply with any of the covenant, conditions, and obligations under this Lease to be performed, observed, or complied with by Tenant, and/or (ii) the failure for any reason of any representation, warrant, or covenant given by Tenant in connection with the execution of this Lease by Landlord to be materially true, complete, and accurate, including, without limitation, any representation, warranty, or covenant given or made by Tenant under the Development Agreement, all of which representations, warranties, and covenants are hereby incorporated by reference herein this Lease. This indemnity shall survive termination of this Lease.SECTION 26.1 Subject to the provision of Section 25.1.18 above, in case of the occurrence of any Event of Default hereinbefore provided, the Landlord shall have the immediate right of reentry, and may remove all persons and property from the Premises by summary proceedings, lawful force, or otherwise. In addition, in the event of the occurrence of any Event of Default (whether or not Landlord shall elect to reenter or to take possession pursuant to legal proceedings or pursuant to any notice provided for by applicable laws), Landlord shall have the right, at its option, to terminate this Lease (including the Purchase Option) on not less than two (2) days' notice to Tenant and upon the giving of said notice, this Lease and the term hereof shall cease and expire on the date set forth in said notice as if said date were the expiration date originally set forth herein and or it may from time to time, whether or not this Lease be terminated, make such alterations and repairs as may be reasonably necessary in order to relet the Premises or any part(s) thereof for such term or terms (which may extend beyond the term of this Lease) and at such rental(s) and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting, all rentals received by the Landlord advisable, upon each such reletting, all rentals received by the Landlord from such reletting shall be applied, first, to the payment of any indebtedness (other than Rents due hereunder) of Tenant to Landlord, second, to the payment of any costs and expenses of such reletting, including, without limitation, brokerage fees (at no greater than customary rates in the area in which the Premises is located) and reasonable attorneys' fees, and of the cost of such alterations and repairs, third, to the payment of Rents due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rents and other payments required to be made by Tenant hereunder as the same may become due and payable hereunder, with the right reserved to Landlord to bring such action(s) or -52- 53 proceeding(s) for the recovery of any deficits remaining unpaid without obliged to await the end of the term for a final determination of Tenant's account; and the commencement or maintenance of any one or more actions shall not bar Landlord from bringing other or subsequent actions for further accruals pursuant to the provisions of this Section. If such rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly subject to Landlord's right of action(s) or proceeding(s) as aforesaid. No such reentry or taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant, or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, in addition to any other remedies it may have, as damages for loss of the bargain and not as a penalty, including the cost of recovering the Premises, reasonable attorneys' fees, and including the worth, at the time of such termination, of the excess, if any, of the amount of rental and charges equivalent to the rental and charges reserved in this Lease for the remainder of the then term of this Lease, over the aggregate rental value of the Premises for the remainder of such term, all of which shall be immediately due the payable from Tenant to Landlord. If any applicable laws shall validly limit the amount of the damages provided or in the immediately preceding sentence to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such laws. In the event the Tenant does not comply with its obligations under this Lease, Landlord shall also have the right to appropriate injunctive relief. The rights and remedies, whether herein or anywhere else in this Lease provided, shall be cumulative, and the exercise of any one right or remedy shall not preclude the exercise of, or act as a waiver of, any other right or remedy of Landlord hereunder, or which may be existing at law, or in equity, or by statute, or otherwise. In addition to the foregoing, Tenant, and its successor and assigns, shall at all times indemnify Landlord for, defend Landlord against, and save Landlord harmless from, any liability, loss, cost, injury, damage, or other expense or risk whatsoever, directly or indirectly, arising out of, resulting from, or otherwise in connection with (i) the failure for any reason on the part of Tenant to perform, observe, or comply with any of the covenant, conditions, and obligations under this Lease to be performed, observed, or complied with by Tenant, and/or (ii) the failure for any reason of any representation, warrant, or covenant given by Tenant in connection with the execution of this Lease by Landlord to be materially true, complete, and accurate, including, without limitation, any representation, warranty, or covenant given or made by Tenant under the Development Agreement, all of which representations, warranties, and covenants are hereby incorporated by reference herein this Lease. This indemnity shall survive termination of this Lease. SECTION 26.2 RIGHT TO SELF HELP. If Tenant shall fail to fully comply with any of its liabilities or obligations under this Lease (including, without limitation those related to repairs, taxes, insurance and permits) Landlord shall have the right, but shall not be obligated, to enter upon the Premises and to perform such obligation notwithstanding the fact that no specific provision for such substituted performance by Landlord -53- 54 is made in this Lease with respect to such Event of Default. If an Event of Default under Section 25.1.12 hereof shall occur, then Landlord shall have the right to submit on behalf of Tenant to any licensing authority a corrective or remedial plan in order to stay a license revocation or similar proceeding and the right to submit any documentation, certificate or instrument on behalf of Tenant necessary to transfer any license or Operating Approvals to Landlord or its designee and Tenant shall cooperate with Landlord so as to permit the smooth operation of the Facility and Tenant hereby appoints Landlord its attorney-in-fact for the purposes of this Section 26 only. In performing such obligation, Landlord may make any payment of money or perform any other act. The aggregate of (i) all sums so paid by Landlord, (ii) interest on such sums at the "Lease Rate" (as defined herein) on the day on which demand for payment is made by Landlord as hereinafter provided plus four percent (4%) per annum, and (iii) all necessary incidental costs and expenses in connection with the performance of any such act by Landlord, shall be deemed to be Rent under this Lease and shall be payable to Landlord immediately upon demand. Landlord may exercise the foregoing rights without waiving any other of its rights or releasing Tenant from any of its obligations under this Lease. SECTION 26.3 FURTHER REMEDIES. Except as otherwise provided in this Lease, Landlord shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise, and nothing in this Lease shall require Landlord to elect any remedy for an Event of Default by Tenant hereunder, and all rights herein provided shall be cumulative with one another and with any other rights and remedies which Landlord may have at law or in equity in the case of such an Event of Default. Landlord's remedies under this Section 26 shall survive the early termination of this Lease. SECTION 27. MISCELLANEOUS SECTION 27.1 CAPTIONS. The captions in this Lease are for convenience of reference only. In no way do those captions define, limit or describe the scope or intent of this Lease. SECTION 27.2 INTERPRETATION. Words showing number shall be taken to include both the singular and the plural forms. Words showing gender shall be taken to include masculine, feminine and neuter. SECTION 27.3 SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfers set forth herein, this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective successors and assigns. The definition of "Landlord" and "Tenant" herein refer to the Landlord and Tenant at the time in question. Any assignment by Landlord shall relieve Landlord of all obligations hereunder; Tenant agreeing to look solely to Landlord's successor as "Landlord" hereunder from and after such assignment. SECTION 27.4. GOVERNING LAW. This Lease shall be governed, construed, and enforced in accordance with the laws of the ____________________________. -54- 55 SECTION 27.5 ENTIRE AGREEMENT. This Lease and (i) any agreement that has been entered into with regard to the funds to be escrowed or deposited with Landlord as provided herein or (ii) any agreement that has been entered into to secure Tenant's obligations hereunder represent the entirety of the agreement among the parties hereto and shall be deemed to supersede any prior discussions or agreements among the parties hereto. This Lease may not be amended or modified except by written instrument signed by the parties hereto. SECTION 27.6 WAIVER. The failure of either party to insist upon strict performance of any of the covenants, agreements, terms and conditions of this Lease in any one or more instances shall not be construed as a waiver or relinquishment of any such covenant, agreement, terms, or condition and the same shall remain in full force and effect. SECTION 27.7 ATTORNEY'S FEE. In the event either party brings an action to enforce any of the terms hereof or in connection herewith, the prevailing party in such action shall be entitled to and the losing party agrees to pay the reasonable attorneys' fees and expenses, including attorneys' fees and expenses of appellate proceedings, of the prevailing party. SECTION 27.8 MEMORANDUM. On the date hereof, (i) Landlord and Tenant shall execute a Notice of Lease in a form attached as EXHIBIT 27.8A and Tenant shall have the right to record the same in the __________ County Land Records, (ii) Tenant shall execute on behalf of Landlord an Assignment of Leases, Rents and Receivables in the form attached as EXHIBIT 27.8B and Landlord shall have the right to record the same in such Land Records and (iii) Tenant shall execute on behalf of Landlord Assignments of Leases, Rents and Receivables, as required by Landlord, in the form attached as EXHIBIT 27.8C and Landlord shall have the right to record the same in the applicable Land Records. Any leasehold mortgagee of Tenant shall not record any leasehold mortgage until after the said Notice of Lease and Assignment of Leases, Rents and Receivables has been recorded. Tenant hereby appoints Landlord as Tenant's attorney-in-fact to execute and deliver any instrument or document necessary to terminate such Notice of Lease on the land records of _____________ County, Pennsylvania; provided that Landlord shall only exercise such power of attorney upon the occurrence of a Default under the Development Agreement or if any of the conditions contained in Exhibit 2.1 hereof cannot be satisfied in the reasonable judgment of Landlord and such power of attorney shall terminate upon the occurrence of the Commencement Date hereunder. Tenant hereby agrees to deliver to Landlord on the date hereof a fully executed copy of a Termination of Memorandum of Lease to be held by Landlord's in house legal department in escrow; provided, however, that Landlord shall have an automatic right to break the escrow and record the same with the ____________ County Land Records without any notice to Tenant upon the occurrence of a Default under the Development Agreement or if any of the conditions contained in Exhibit 2.1 hereof cannot be satisfied in the reasonable judgment of Landlord. Upon occurrence of the Commencement Date hereunder and provided Landlord has not recorded the Termination of Memorandum of Lease, Landlord agrees to deliver such Termination of Memorandum of Lease to Tenant. -55- 56 SECTION 27.9 UNENFORCEABLE PROVISION. Each term and provision of this Lease shall be enforced to the fullest extent permitted by law. Should any term or provision of this Lease, or the application thereof, prove illegal or unenforceable, the remainder of this Lease shall still be valid and enforced. SECTION 27.10 BROKER. Except as provided herein, Landlord and Tenant each represent to the other that there are no claims for brokerage or other commissions or finder's or other similar fees in connection with the transactions contemplated by this Lease insofar as such claims shall be based on arrangements or agreements made by or on behalf of the party so representing. SECTION 27.11 AMENDMENTS. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the parties hereto and approved in writing by Landlord's Mortgagee if required under the terms of the Facility Mortgage. SECTION 27.12 COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. SECTION 27.13 APPLYING PROVISIONS. No provision of this Lease shall be construed against or interpreted to the disadvantage of either Landlord or Tenant by any court or other governmental or judicial authority by reason of such party's having or being deemed to have structured, written, drafted or dictated such provisions. SECTION 17.14 TIME IS OF THE ESSENCE. Time is of the essence of this Lease. SECTION 27.15 RELATIONSHIP OF PARTIES. Nothing in this Lease shall be construed to render or constitute Landlord in any way or for any purpose a partner, joint venturer or associate in any relationship with Tenant other than that as Landlord and Tenant, nor shall this Lease be construed to authorize either party to act as agent for the other party except as expressly provided to the contrary in this Lease. SECTION 27.16. HOLDING OVER. If Tenant occupies the Premises after the Lease expiration date without having entered into a new lease of the Premises with Landlord (or otherwise obtaining Landlord's written consent to remain), Tenant shall be a tenant-at-sufferance only subject to all of the terms and provisions of this Lease except that, after a holdover of ten (10) days after Lease expiration, the Base Rent shall be two hundred percent (200%) of the Base Rent during the last Lease Year. Such a holding over, even if with the consent of Landlord, shall not constitute an extension or renewal of this Lease. SECTION 27.17 NO TENANT TERMINATION OR OFFSET. -56- 57 SECTION 27.17.1 NO TERMINATION. Except as may be otherwise specifically and expressly provided in this Lease, Tenant, to the extent not prohibited by applicable law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the consent of Landlord to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of Rent, or set-off against the Rent, nor shall the respective obligations of Landlord and Tenant be otherwise affected by reason of (a) any casualty or any taking of the Premises, (b) the lawful or unlawful prohibition of, or restriction upon, Tenant's use of the Premises or the interference with such use by any person (other than Landlord, except to the extent permitted hereunder) or by reason of eviction by paramount title; (c) any claim that Tenant has or might have against Landlord, under this Lease, any other Transaction Document or any related party agreement, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Landlord or any assignee or transferee of Landlord or (f) for any other cause whether similar or dissimilar to any of the foregoing. SECTION 27.18 No surrender to Landlord of this Lease or of the Premises, or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Landlord and consented to in writing by any and all Facility Mortgagees and superior lessors, and no act or omission by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, consented to as aforesaid, shall constitute an acceptance of any such surrender. SECTION 27.19 WAIVER. Tenant to the fullest extent not prohibited by applicable law, hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (a) modify, surrender or terminate this Lease or quit or surrender the Premises or (b) entitle Tenant to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Tenant hereunder, except as otherwise specifically and expressly provided in this Lease. SECTION 27.20 INDEPENDENT COVENANTS. The obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or (except in those instances where the obligation to pay expressly survives the termination of this Lease) by termination of this Lease other than by reason of an Event of Default. SECTION 27.21 WAIVER OF JURY TRIAL. THE TENANT AND LANDLORD HEREBY WAIVE ANY RIGHT THAT ANY OF THEM MAY HAVE TO A TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS LEASE OR THE TRANSACTION DOCUMENTS, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LANDLORD AND/OR TENANT WITH RESPECT TO THE TRANSACTION DOCUMENTS OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE -57- 58 FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE TENANT AND LANDLORD AGREE THAT THE OTHER PARTY MAY FILE A COPY OF THIS LEASE WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT OF TENANT AND LANDLORD IRREVOCABLY TO WAIVE ITS RESPECTIVE RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF TENANT AND LANDLORD TO MAKE THIS LEASE, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN TENANT AND LANDLORD SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. SECTION 27.22 NO ARBITRATION. Landlord and Tenant hereby agree that no claims or disputes between Landlord and Tenant arising out or relating to the Lease or a breach thereof shall be decided by any arbitration proceeding including, without limitation, any proceeding under the Federal Arbitration Action (9 U.S.C. Sections 1-14), or any applicable state arbitration statute. SECTION 27.23 CONSENT TO JURISDICTION. Landlord and Tenant hereby agree that the United States District Court for the District of Pennsylvania or, to the extent required by applicable law, any Pennsylvania State Court shall have exclusive jurisdiction to hear and determine any claims or disputes between Landlord and Tenant pertaining directly or indirectly to this Lease or the Transaction Documents. Section 27.24. CROSS DEFAULT AND CROSS COLLATERALIZATION. The Tenant acknowledges and agrees that this transaction shall be cross-collateralized and cross-defaulted to any transaction between Tenant or any Affiliate of Tenant and Landlord or any Affiliate of Landlord and Landlord would not have consummated this transaction without such assurance and understanding by Tenant. Tenant also acknowledges and agrees that Landlord has relied upon such assurance and understanding in consummating this transaction. Tenant agrees to execute and deliver any and all such documentation, in form and substance satisfactory to Landlord in Landlord's sole discretion, as Landlord may require with respect to any such cross-collateralization and cross-default after the date hereof. THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK -58- 59 IN WITNESS WHEREOF, the parties hereby execute this Lease Agreement on the day and year first written above. WITNESS: LANDLORD: ________________________ ______________________ Name: By: ____________________________ Name: _______________________________ Title: ____________________________ WITNESS: TENANT: ________________________ _____________________________________ Name: By: Senior Care Operators, LLC, Manager By: ____________________________ Name: _______________________________ Title: ____________________________ -59- EX-10.44 41 BALANCED CARE CORPORATION 1 Exhibit 10.44 SCHEDULE TO FORM OF OCWEN LEASE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Dated As Of Landlord Fee Title Acquired From Facility - ----------------------------------------------------------------------------------------------------------------------- Medina, OH December 31, 1997 Medina ALF, Inc. C. R. Medina II 80 units Shippensburg, PA March 31, 1998 Shippensburg ALF, William A. Swope and 60 units Inc. Pauline L. Swope Centerville, OH March 31, 1998 Centerville ALF, Edna Lucas, Frances 106 units Inc. Pauline Griffith, Erma Gebhart, Chester Hugh Lucas and Clarence Dale Lucas Lease Rate Umbrella Excess Component Of Letter Of Credit Maximum Working Liability Insurance Letter Of Maximum Amount Capital Amount Credit Amount - ----------------------------------------------------------------------------------------------------------------------- Medina, OH 9.125% $5,000,000 $505,000 $750,000 $150,000 Shippensburg, PA 8.875% $10,000,000 $387,000 $625,000 $130,000 Centerville, OH 8.875% $10,000,000 $824,000 $1,250,000 $300,000 Amount Permitted To Aggregate Limit Of Governing Law Be Used For Start Up Requests For Costs Additional Working Capital - --------------------------------------------------------------------------------------------------- Medina, OH $200,000 $50,000 State of Ohio Shippensburg, PA $200,000 $30,000 Commonwealth of Pennsylvania Centerville, OH $300,000 $50,000 State of Ohio
EX-10.45 42 BALANCED CARE CORPORATION 1 Exhibit 10.45 FORM OF DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT (this "Agreement"), is made and entered into as of the ____ day of ___________, by and between ______________________ a Florida corporation, its successor or assigns ("Owner"), with offices at 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401, BCC Development and Management Co., a Delaware corporation ("BCC"), with a mailing address of 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055, and ________________________ _________________, a Delaware limited liability company ("_______" and together with BCC collectively referred to hereinafter as the "Developers"), with a mailing address at c/o Hakman Capital Corp., 1350 Old Bayshore Highway, Suite 300, Burlingame, CA 94010. WHEREAS, Owner has acquired title to approximately ____ acres of land located on ______________________________________________; WHEREAS, Owner intends to construct, develop and lease a _________ personal care home with assisted living services and related amenities on the Land (as defined herein); WHEREAS, Owner desires to retain the services of Developers to provide full and complete design, development and construction services for the Project (as defined below); and WHEREAS, Developers desire to provide such design, development and construction services to Owner in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: SECTION 1. PARTY STATUS. This Agreement is not intended to create, and shall not be construed as creating, between Owner and Developers, the relationship of principal and agent, joint venturers, co-partners or any other such relationship, the existence of which is hereby expressly denied. No employee, agent, contractor or subcontractor engaged by Developers shall be, or shall be deemed to be, an employee or agent of Owner. Developers alone shall be responsible for the work and actions of Developers' employees, agents, contractors and subcontractors. In the event Owner should, at the request of Developers, furnish assistance to Developers for any purpose, or employees, agents or representatives to work under the direction and supervision of Developers, all such employees, agents or representatives of Owner shall be deemed to be the agents of Developers and Developers alone shall be responsible for their work and actions while so engaged. SECTION 2. DEFINITIONS. For the purposes of this Agreement, the following terms shall have the meanings ascribed to them below: 2 AFFILIATE. Shall mean with respect to an individual, any relative of such individual; and with respect to any Person, any other Person: (i) directly or indirectly controlling, controlled by or under direct or indirect common control with such Person, or (ii) that directly or indirectly owns any of the membership interests, voting securities or capital stock of such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise, or if such Person owns or has the power to vote five percent (5%) or more of outstanding voting securities or interests in such other Person. Notwithstanding the foregoing, "Affiliate" shall not include any equity owners of Retirement Care Operators, LLC, a Delaware limited liability company and the indirect parent of SCOSL. ARCHITECT. Shall mean __________________________________ or any other Person approved by Owner. ARCHITECT AGREEMENT. Shall mean the Standard Form of Agreement dated ________________ between Developers and Architect. ASSISTED LIVING PERMITS. Shall mean collectively any permit or license needed to provide and operate a personal care home providing assisted living services under applicable Pennsylvania law (the "License"). BASE YIELD RATE. Shall mean the rate equal to ______. BUDGET. Shall mean the budget for the Project prepared by Developers and approved by Owner and attached hereto as EXHIBIT F, as the same may be amended in accordance with the terms of this Agreement. CONSULTING ENGINEER. Shall mean the on-site representative retained by Owner. CONTRACT DOCUMENTS. Shall mean this Agreement, the Design Services Contracts, Major Subcontracts, all other subcontracts related to the Work, the General Construction Contract, the Plans and Specifications, any construction management contract and all other documents related thereto. CONTRACT SUM. Shall mean the amount of Hard Costs and Soft Costs as set forth in the Budget. CONTRACTORS AND/OR SUBCONTRACTORS. Shall mean the General Contractor, Major Subcontractors, other subcontractors and/or sub-subcontractors, as the context may require. -2- 3 DEFAULT. Shall mean a default as set forth in Articles 30.1 and 36 of the General Conditions, attached hereto as EXHIBIT B. DESIGN PROFESSIONALS. Shall mean individually or collectively, as the context may require, the architects, engineers, other professional consultants and planners, if any, with whom Developers contracts at any time to provide planning, design, architectural, engineering or other similar services related to the Project, including the Architect. DESIGN SERVICES CONTRACTS. Shall mean individually or collectively, as the context may require, all contracts and agreements entered into between Developers and each Design Professional pertaining to the planning, design, development, engineering and construction of the Project, including the Architect Agreement. DEVELOPERS. Shall have the meaning set forth in the beginning paragraphs of this Agreement. EFFECTIVE DATE. Shall mean the date of this Agreement. EXHIBITS. Shall mean EXHIBITS A through K attached hereto. EXTENDED COMPLETION DATE. Shall mean that date which is eighteen (18) months after the Effective Date, as fully described in Article 30.1(d) of EXHIBIT B hereto. FACILITY. Shall mean a personal care home with assisted living services, as more particularly described and provided for in EXHIBITS A through D. FINAL COMPLETION. Shall mean final lien-free completion of the Project as set forth in Article 32.9 of the General Conditions on EXHIBIT B hereto. FINAL COMPLETION DATE. Shall mean thirteen (13) months after the Effective Date, subject to possible extension as provided in Articles 17.3 and 30.1(d) of the General Conditions on EXHIBIT B hereto. GENERAL CONSTRUCTION CONTRACT. Shall mean the construction contract between Developers and the General Contractor and any construction manager agreement between Developers and any Affiliate thereof relating to the General Construction Contract, which shall be subject to Owner's approval and any future amendments thereto subject to Owner's approval. GENERAL CONTRACTOR. Shall mean _____________________________. -3- 4 GOVERNMENTAL AUTHORITY. Shall mean the United States, the state, the county, the city or any other political subdivision in which the Project is located, and any other political subdivision, agency or instrumentality exercising jurisdiction over Developers, Guarantor, the Project, the Land or if the context requires, any Design Professionals, and Contractors and Subcontractors. GOVERNMENTAL REQUIREMENTS. Shall mean all laws, statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, writs, injunctions, judgments or decrees (including without limitation, all applicable building, health code, zoning, subdivision and other land use and health-care licensing statutes, ordinances, by-laws, codes, rules and regulations) whether now or hereafter enacted, promulgated or issued by any Governmental Authority, applicable at any time and from time to time to Owner, Developers, the Project, or if the context requires, any Design Professional, the General Contractor or any Contractors and Subcontractors, or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation of the Project as a personal care home providing assisted living services, or the operation of any programs or services in connection with the Project, including, without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to the Project, (ii) in any way affect (adversely or otherwise) the use and enjoyment of the Project, or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from the Project. Without limiting the foregoing, the term Governmental Requirements includes all Permits and Assisted Living Permits issued, required, or entered into by any Governmental Authority with respect to the Project. GUARANTOR. Shall mean Balanced Care Corporation and any other guarantor, accommodation party, endorser or surety which subsequently becomes obligated directly to Owner for all or any part of Developers' obligations to Owner hereunder or otherwise, but does not include the General Contractor nor the surety under any payment and performance bonds. HARD COST. Shall mean those costs identified as "Hard Costs" in the Budget attached hereto as EXHIBIT F. HAZARDOUS MATERIALS. Shall mean any chemical, substance, waste, material, gas or emission which is deemed hazardous, toxic, a pollutant, or a contaminant under any statute, ordinance, by-law, rule, regulation, executive order or other administrative order, decree, injunction or other judicial order of or by any Governmental Authority, now or hereafter in effect, relating to pollution or protection of human health or the environment. By way of illustration and not limitation, "Hazardous Materials" includes asbestos, radioactive materials, and "oil", "hazardous materials", "hazardous waste", "hazardous substance" and "toxic material" as defined in the Comprehensive Environmental -4- 5 Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET M., as amended, the Resource Conservation and Recovery Act of 1976, 42 U.S. C. Section 2601 et seq., as amended, the regulations promulgated thereunder, and the provisions of the Pennsylvania Statutes and Pennsylvania Consolidated Statutes and the regulations promulgated thereunder. IMPROVEMENTS. Shall mean all of the improvements previously made or to be made, in, on, under, over or appurtenant to the Land in connection with the Project, including but not limited to all buildings, parking areas, driveways, roadways, walkways, landscaped areas and improvements constructed with respect to the agreements set forth on Exhibit L attached hereto (the "Off Site Construction and Maintenance Agreements"). INDEMNITEES. Shall mean Owner, Consulting Engineer and, as applicable, each of their respective directors, officers, employees, agents, servants and assignees permitted herein. INSPECTION FEE. Shall mean the monthly fee payable to Owner as set forth in the Budget in the amount of $2,000. INVESTMENT YIELD. Shall mean the amount calculated by multiplying the outstanding amount advanced under the Budget during the period of time from the Effective Date to the Lease Commencement Date by the Base Yield Rate. The Investment Yield shall be calculated on a three hundred sixty (360) day year applied to actual days. JOBSITE OR WORKSITE. Shall mean the place(s) where the Work is to be performed, or materials and equipment to be stored. LAND Shall mean that certain parcel of land located in the Shippensburg Township, Cumberland County, Pennsylvania, consisting of approximately 4.13 acres, which is more particularly described in EXHIBIT A hereto and by this referral made a part hereof. LETTER OF CREDIT. Shall mean the cash on deposit at Ocwen Federal Bank FSB plus interest earned thereon or the irrevocable standby letter of credit payable to Owner for the benefit of Developers in form and issued by an institution satisfactory to Owner in the amount of ________ for a period not less than 24 months. LEASE. Shall mean that certain Lease Agreement dated on or about the date hereof, between Owner, as Landlord, and SCOSL as Tenant attached as EXHIBIT H. -5- 6 LEASE COMMENCEMENT DATE. Shall mean the date on which the term of the Lease commences and the tenant thereunder becomes obligated to make rent payments to Owner. MAJOR SUBCONTRACT. Shall mean each contract between General Contractor and a Major Subcontractor. MAJOR SUBCONTRACTOR. Shall mean each subcontractor whose aggregate contract for the construction of the Project exceeds Twenty-Five Thousand Dollars ($25,000), or whose contract involves a function Owner believes to be essential to the Project, including without limitation all subcontractors performing site work and all subcontractors performing work with regard to HVAC, masonry, plumbing systems or equipment, electrical systems or equipment, framing, roofing, windows, cabinets and fire sprinkler systems, regardless of the amounts payable to such subcontractors. OWNER. Shall have the meaning set forth in the beginning paragraph of this Agreement. PAYMENT. Shall mean the progress payments of the Contract Sum as set forth in the General Conditions on EXHIBIT B hereto. PERMITS. Shall mean any and all permits, approvals, certifications, licenses or authorizations required by any Governmental Authority in order to develop, construct and operate the Project and perform the Work. PERSON. Shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or government (whether territorial, national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). PERSONAL PROPERTY. Shall mean all of Owner's or Developers' right, title and interest in and to all now owned and hereafter acquired: (i) tangible and intangible personal property located on the Land or in the Improvements or obtained or held in connection with the Land, the Improvements or the Project, regardless of where such personalty is located, including, but not by way of limitation, all goods, consumer goods, equipment, inventory, accounts, contract rights, documents, chattel paper, general intangibles, instruments and money, which is attached to, installed on or placed or used on, in connection with or is acquired for such attachment, installation, placement or use, or which arises out of the development, improvement, financing, leasing, operation or use of, the Land, the Improvements, the Project, fixtures or other goods located on the Land or Improvements, together with all additions, accessions, accessories, amendments and -6- 7 modifications thereto, extensions, renewals, enlargements and proceeds thereof, substitutions therefor, and income and proceeds therefrom; (ii) materials, supplies, equipment, apparatus and other items now or hereafter attached to, installed on or in the Land or the Improvements, or which in some fashion are deemed to be fixtures to the Land or the Improvements under the laws of the Commonwealth of Pennsylvania, including the Uniform Commercial Code as adopted in Pennsylvania; and (iii) without limiting the foregoing, all of Owner's or Developers' right, title and interest in and to all furniture, fixtures, furnishings and specialized equipment and systems necessary or customary (now or in the future) to operate the Project for its intended use in accordance with all applicable Governmental Requirements and the terms of this Agreement, including but not limited to all equipment required for the operation of kitchens, laundries and resident and health care facilities, and all beds, mattresses, linens, bedding, towels, chairs, desks, computers, copiers, tables, sofas, wheelchairs, walkers, canes, vans and other transportation equipment, televisions, radios, intercoms, telephones and office equipment. Without limiting the foregoing, Personal Property includes all of Owner's or Developers' right, title and interest in and to the name "______________________________" and to the name "Balanced Care, Shippensburg" pursuant to that certain License Agreement dated as of the date hereof by and among the parties hereto. PLANS AND SPECIFICATIONS or DRAWINGS AND SPECIFICATIONS. Shall mean all final plans, drawings and specifications for construction of the Project that have been or are to be prepared by or under the supervision of the Architect and other Design Professionals, as further described on EXHIBIT D. PROJECT. Shall mean the development, construction and operation on the Land of a sixty (60) unit personal care home with assisted living services to be known as "Outlook Pointe Shippensburg" or "Balanced Care, Shippensburg", with the equipment, furniture, furnishings and fixtures, together with all additions thereto or replacements thereof and with the related amenities as more particularly described in the Plans and Specifications. RETAINAGE. Shall mean ten percent (10%) of the total Hard Costs until Final Completion has been achieved. SOFT COST. Shall mean those costs identified as "Soft Costs" in the Budget attached hereto as EXHIBIT F. SUBSTANTIAL COMPLETION. Shall occur as set forth in Subparagraph 33.1.3 of the General Conditions on EXHIBIT B hereto. SUBSTANTIAL COMPLETION DATE. Shall mean twelve (12) months from the Effective Date, subject to possible extension as provided in Articles 17.3 and 30.1(d) of the General Conditions on EXHIBIT B hereto. -7- 8 SURVEY. Means a survey prepared at Developers' expense in accordance with the survey requirements delivered by Owner to Developers and approved by Owner, and any subsequent survey of the Land and Improvements delivered to Owner in accordance with this Agreement and thereafter approved by Owner. TITLE COMPANY. Shall mean First American Title Insurance Company or such other title insurance company as may be acceptable to Owner. TITLE INSURANCE POLICY. Shall mean an ALTA Owner's Policy of Title Insurance in the amount of the total Hard Costs, Soft Costs and Owner's cost of acquiring the Land, including related transaction costs, issued by the Title Company, insuring Owner that Owner owns the Land and Improvements in fee simple subject to only those encumbrances and exceptions that Owner approves. WORK. Shall mean all materials, equipment, components, services, and labor and other items of any nature covered by this Contract and to be provided or performed by Developers and its Contractors, Subcontractors, Design Proposals, Consultants, employees, agents or representatives including but not limited to any construction, repair or maintenance obligations incurred by Owner pursuant to the Off Site Construction and Maintenance Agreements, all of which shall be the sole responsibility of Developers. The Work is described as EXHIBIT D. Other defined terms shall be deemed to have the meaning ascribed to them herein and in the General Conditions attached hereto and made a part hereof as EXHIBIT B. SECTION 3. CONTRACT ATTACHMENTS. This Agreement shall include the following Exhibits, all of which are attached hereto and incorporated herein: EXHIBIT A: Legal Description of the Land. EXHIBIT B: General Conditions. EXHIBIT C: Intentionally Omitted. EXHIBIT D: Design Documents. EXHIBIT E: Construction Schedule. EXHIBIT F: Budget. EXHIBIT G: Construction Completion Guarantee. -8- 9 EXHIBIT H: Lease Agreement. EXHIBIT I: Governmental Approvals. EXHIBIT J: Approvals. EXHIBIT K: Contracts. EXHIBIT L: Off Site Construction and Maintenance Agreements This Agreement, including the above listed Exhibits constitute the entire agreement between Owner and Developers and supersede all prior negotiations. statements, representations, agreements, letters of intent, awards, or proposals, either written or oral. This Agreement may be modified only by a written instrument signed by all parties. In the event this Agreement and/or its Exhibits contain any inconsistency, such inconsistencies shall be resolved by giving precedence in the following order: This Agreement, exclusive of Exhibits EXHIBIT B, General Conditions EXHIBIT D, Design Documents Other Exhibits and Contract Documents provided, however, that to the extent any of the Exhibits expand upon the rights and obligations of the parties set forth herein, such provisions shall not be deemed to be inconsistent with this Agreement. SECTION 4. WORK. A. DEVELOPMENT SERVICES. The Work will be as set forth in EXHIBIT B and in accordance with EXHIBIT D. Design services for the Project shall be performed by qualified Design Professionals and paid by Developers, but subject to the prior written approval of Owner, which approval shall not be unreasonably withheld or delayed, of both the professional involved and of the terms and conditions and form and content of each such design services contract to be entered into in each and every case. The professional obligations of such persons shall be undertaken and performed in the interest of Developers. Construction services shall be performed by qualified/licensed/insured construction Contractors and suppliers, selected and paid by Developers and acting in the interest of Developers but, as to the General Contractor and Major -9- 10 Subcontractors, subject to the prior written approval of Owner, which approval shall not be unreasonably withheld or delayed, of both the Contractor involved and the terms and conditions and form and content of each such construction contract to be entered into in each and every case. Nothing in this SECTION 4 shall create any professional obligation or contractual relationship between any such Persons and Owner. Notwithstanding the foregoing, Developers agree that it will not employ or otherwise retain the services of any Person or entity if Owner, in the exercise of its reasonable discretion, objects thereto. The parties agree that no Work and no other construction, site work or other work of any kind relating to the Project shall occur until the irrevocable standby letter of credit referenced in Section 27 hereto is delivered to Owner as set forth herein. B. DESIGN PHASE SERVICES. 1. Developers shall retain the services of all Design Professionals necessary to prepare for approval by Owner the Plans and Specifications and other documents to fix and ascribe the size and character of the Improvements as to architectural, structural, mechanical and electrical systems, materials and such other elements as may be appropriate. 2. The Plans and Specifications include, but are not be limited to, technical drawings, schedules, plans, diagrams and specifications, setting forth in detail the requirements for construction of the Improvements including documents required by all Governmental Authorities necessary to approve plans prior to and throughout the Work, which documents shall reflect designs which comply with all applicable Governmental Regulations. 3. Developers shall obtain all zoning and other government approvals necessary for the Project, including, without limitation, the timely filing of all documents, revisions and other information requested or required by all applicable Governmental Authorities and necessary for the issuance of building permits to permit commencement of construction of the Improvements and completion of the Improvements in accordance with this Agreement, and all Permits necessary to operate the Project for its intended use on or prior to the Effective Date (other than permits which by their nature are not obtainable until completion of construction including the Assisted Living Permits and any Certificates of Occupancy) and provide evidence of same to owner for Owner's review and approval in its sole discretion. SECTION 5. COST OF THE WORK AND ITEMS IN THE BUDGET OTHER THAN THE CONTRACT SUM. A. COST OF WORK. Owner agrees to pay Developers for the complete, satisfactory and timely performance of the Work in strict accordance with the requirements set forth in this Agreement. Disbursement of the Contract Sum shall either be paid to Developers or to Owner as -10- 11 set forth in the Budget. Owner shall only be required to pay the Contract Sum in accordance with the line item amounts contained in the Budget and the terms and conditions hereof. Any line item amount in excess of the line item amount contained in the Budget and all other funds required for the completion of the Project in accordance with the terms hereof shall be provided by Developers and Developers may reallocate cost items within the General Construction Contract or any contract with a Major Contractor or major supplier without the prior written consent of Owner so long as such reallocation does not increase the price of the General Construction Contract and the other Contract Documents. Upon notice of any such reallocation, Owner agrees to pay the Contract Sum in accordance with such amended reallocation of cost items. Developers can make change orders up to $10,000 per change order, but not more than $70,000 in the aggregate, without the prior written consent of Owner. Owner agrees that, upon Final Completion, to the extent amounts in excess of any line item have been funded by Developers, and provided that the Work has been performed in accordance with the Budget and no Default shall exist hereunder, Owner shall refund the net amount of any Developers contributions over the Budget to Developers. B. DIRECT PAYMENTS FOR THE WORK. Owner, after giving Developers notice, may make Payments on account of labor, materials and/or equipment for the Work directly to any or all of the Subcontractors, Sub-Subcontractors or persons entitled to the same in lieu of paying Developers therefor or make joint payment to any such person and Developers. Any amounts so paid shall be credited against the Contract Sum. No such payment shall create any relationship between the recipient thereof and Owner, nor any duty on the part of Owner. Developers shall cooperate with Owner to facilitate any such direct payments and shall provide such evidence as Owner may request for purposes of determining any amount to be so paid. C. PAYMENT FOR BUDGET ITEMS NOT INCLUDED IN THE CONTRACT SUM. For items listed as "Paid at Closing," the parties acknowledge that such sums have been previously advanced by Owner on Developers' behalf to the appropriate party designated in the settlement statement executed by Owner and Developers simultaneous with the execution of this Agreement. For items listed as "Other," such sums shall, to the extent not fully advanced and "Paid at Closing," be disbursed as follows: (1) "Construction Monitoring" shall be advanced in the amount of the Inspection Fee monthly pursuant to Article 25.6 of Exhibit B, General Conditions; (ii) "Investment Yield" shall be advanced monthly to Owner without the need for request of or notice to Developers but Owner shall provide Developers with evidence of Owner's calculation of such disbursement and Developers shall have the right to object to any mathematical errors and any such excess amount shall be immediately returned to the Budget and the subsequent calculation of Investment Yield shall reflect the correct amount of prior disbursements; and (iii) "Marketing and Operating Start Up" and "Personal Property" shall be advanced prior to Stabilization (as defined in the Lease Agreement) upon monthly requisition of Developers to Owner, upon 15 days written notice to Owner, confirming in reasonable detail that such request relates to Personal Property or pre-opening publicity or other start-up expenses incurred pursuant to the Budget or otherwise approved by Owner in its reasonable discretion. -11- 12 D. CONSTRUCTION CONTINGENCY. Notwithstanding any other provision in this Agreement to the contrary, no disbursements or reallocations shall be made of the Construction Contingency line item in the Budget without the prior consent of the Owner in its sole discretion. E. REALLOCATION OF SELECTED LINE ITEMS IN THE BUDGET. Developers shall have the right to reallocate between line items in the Budget subject to the consent of the Owner, which may be withheld in Owner's sole discretion, and so long as the reallocation does not increase the Contract Sum or reduce the Construction Contingency. SECTION 6. PAYMENT AND PERFORMANCE BOND. Before beginning work under the terms of this Agreement, Developers shall demonstrate to Owner's satisfaction that it has obtained a 100% payment and 100% performance bonds equal to the amount of the General Construction Contract from a surety company licensed to do business in the Commonwealth of Pennsylvania and in a form and content acceptable to Owner in its sole discretion. Developers shall keep such payment and performance bonds in effect throughout the term of this Agreement, and shall cause any subcontractor designated by Owner to obtain and maintain the same, and Developers and any subcontractors shall be responsible for the cost of obtaining and maintaining same throughout the term of this Agreement. SECTION 7. CHANGES IN THE WORK. Owner may not make changes in the Scope of Work. SECTION 8. INSURANCE. Developers warrants that it has, and will maintain in full force and effect during the term of this Agreement, and will cause those persons or entities retained by Developers hereunder, as applicable, to maintain for the benefit of Owner the following insurance coverages upon Developers' operations under this Agreement: A. WORKERS COMPENSATION INSURANCE AND EMPLOYERS LIABILITY INSURANCE. Workers Compensation coverage shall apply to all employees who perform the Work pursuant to this Agreement, shall include bodily injury, occupational illness or disease coverage and shall otherwise be in accordance with the statutory requirements of Pennsylvania. Employers Liability Insurance must be maintained with a minimum limit of $500,000 coverage. B. COMMERCIAL GENERAL LIABILITY INSURANCE. This coverage shall apply to all operations of Developers pursuant to this Agreement with minimum limits per project of not less than $5,000,000 per occurrence and in the aggregate and with coverage to include, but not be limited to, bodily injury (including death), property damage to the premises of all Indemnitees, products and completed operations until two (2) years after Final Completion, underground, explosion, collapse, blanket contractual, independent Contractors, broad form property damage, cross-liability and severability of interests, personal and advertising injury. This policy shall be endorsed for coverage to be on a per project basis and to name all Indemnities as additional insureds. -12- 13 C. AUTOMOBILE LIABILITY INSURANCE. This coverage shall apply to all operations of Developers pursuant to this Agreement involving the use of motor vehicles including those owned, non-owned and hired with minimum limits per project of not less than One Million Dollars ($1,000,000) combined single limit for bodily injury and property damage liability and include all Indemnitees as additional insureds. D. UMBRELLA EXCESS LIABILITY INSURANCE. This coverage shall apply to Commercial General Liability Insurance, Automobile Liability Insurance and Employers Liability Coverage with minimum limits of ___________ Dollars ($_____________) each occurrence and in the aggregate. E. BUILDERS ALL-RISK INSURANCE. This coverage shall be in an amount equivalent to the Contract Sum and shall apply to losses on an All-Risk basis including flood (except that flood coverage shall be in the statutorily required amount) and shall include risk of loss to materials and equipment intended for incorporation into the Work while: (i) in transit to the Jobsite, (ii) in storage at the Jobsite, or (iii) in storage at off-site locations. This policy shall name all Indemnitees, Developers, all Contractors and Subcontractors as additional insureds on such policy. Notwithstanding the foregoing, Owner reserves the option of obtaining such coverage and receiving an equitable adjustment to the Contract Sum. F. EXCESS FLOOD. Owner may elect to require Developers to provide flood coverage in excess of the limit provided in SECTION 8(E) above. G. ERRORS AND OMISSIONS: INSURANCE FOR OWNERS, OFFICERS AND DIRECTORS. This coverage shall be in an amount of not less than $5,000,000, and shall be continued in full force and effect during the entire term of this Agreement, and for a period of six (6) months thereafter. H. COMPREHENSIVE PUBLIC LIABILITY INSURANCE. As construction of the Improvements are completed, Developers shall obtain for the benefit of Owner, comprehensive public liability insurance in the amount of $1,000,000 per incident and $3,000,000 in the aggregate against fire, windstorm and extended coverage in an amount not less than the full replacement costs of the Improvements or the amount of the Bonds, whichever is greater, any and all insurance coverages required under or pursuant to any Pennsylvania laws, rules, regulations, documents or instruments applicable to the Project. I. ARCHITECTS/ENGINEERS PROFESSIONAL LIABILITY INSURANCE. Developers will cause all Design Professionals and other professionals retained by Developers to obtain Errors and Omissions insurance in the minimum amount of $5,000,000 per claim, which coverage shall be for the benefit of Owner and shall be continued in effect for two (2) years after the date of Final Completion. -13- 14 J. REQUIREMENT OF CONTRACTORS AND SUBCONTRACTORS. All Contractors and Subcontractors shall be required to provide insurance policies in amounts, by carriers, and in forms satisfactory to Owner. Minimum requirements for all Contractors and Subcontractors shall be: (i) Workers Compensation Insurance in accordance with the provisions of this SECTION 8; (ii) Commercial General Liability Insurance as described above with minimum limits per project of One Million Dollars ($1,000,000) per occurrence, except that Developers may require greater limits on a case by case basis in its discretion; and (iii) Automobile Liability Insurance as described above with minimum limits of One Million Dollars ($1,000,000) per occurrence. Developers shall require each Subcontractor to provide an appropriate original Certificate of Insurance to Owner prior to performing any of the Scope of Work at the Jobsite or otherwise, and to issue renewal Certificates to Developers at least thirty (30) days prior to expiration of said insurance. K. DEDUCTIBLES. If any policy required to be purchased pursuant to this Agreement is subject to a deductible, self-insured retention or similar self-insurance mechanism limiting or reducing coverage, the deductible, self-insured retention or similar self-insurance mechanism shall be the sole responsibility of Developers. L. EVIDENCE OF COVERAGE. All policies required of Developers pursuant to this Agreement shall be acceptable to Owner and maintained with insurance carriers that are rated by A.M. Best Company to be A-/Financial XII or better. Developers shall provide to Owner, and all Contractors and Subcontractors shall likewise provide to Developers, Certificates of Insurance from each of their respective insurers which are satisfactory in form to Owner. Each Certificate shall evidence all requirements set forth in this Agreement, including the amounts of coverage, policy endorsements identifying all Indemnitees as additional insureds, providing thirty (30) days notice to Indemnitees with respect to termination or modification of such coverage, and coverage renewals as necessary to comply therewith, be first payable to Owner, its successors and assigns. Neither Developers nor any of its Design Professionals, Contractors or Subcontractors shall be entitled to receive payment for any Work performed, or to commence operations on the Jobsite or elsewhere until such time as they provide acceptable evidence of compliance with the requirements of this SECTION 8. Any extra costs or delays caused by or arising out of any failures to comply with this SECTION 8, including the failure to furnish acceptable Certificates of Insurance prior to the Effective Date, shall be solely for the account and responsibility of Developers and its Design Professionals, Contractors and Subcontractors. All policies shall be written in an amount sufficient to prevent Developers from becoming a coinsurer in any loss under any policy. M. COOPERATION BY THE PARTIES. Owner and Developers shall fully cooperate with each other in connection with the collection of any insurance monies that may be due in the event of a loss. Owner and Developers shall promptly execute and deliver such proofs of loss and other instruments which may be required for the purpose of obtaining recovery of any such insurance monies. Additionally, Developers shall furnish Owner copies of all accident reports sent to Developers' insurance carriers covering accidents occurring at the Project or in the performance -14- 15 of the Work under this Agreement. Developers shall immediately notify Owner of accidents, incidents and injuries immediately upon occurrence and shall provide the foregoing reports as soon as available. N. SUBROGATION. Developers waives subrogation against Owner, Consulting Engineer and all other Indemnitees with respect to Comprehensive General Liability and Automobile Liability Insurance, and such other insurance as Owner may require. Such insurance obtained and carried by Developers shall contain subrogation waivers with respect to claims against Owner, Consulting Engineer and all Indemnitees. O. DURATION. All Comprehensive General Liability, Automobile Liability, Workers Compensation and Employers Liability insurance required by this Agreement shall be kept in force without interruption until Final Completion of the Work. The Builders All-Risk Insurance shall remain in force until Developers has achieved Substantial Completion. It is agreed, however, that Developers and its Contractors and Subcontractors shall maintain completed operations insurance for a period of two (2) years after Final Completion of the Work. SECTION 9. INDEMNIFICATION. Developers will indemnify Indemnitees in accordance with the terms and provisions set forth in the General Conditions, EXHIBIT B. SECTION 10. CASUALTY, TAKING. In the event of a casualty or taking to the Project or the Land occurring prior to Final Completion Date, the procedures set forth in Sections 12 and 13 of the Lease (the terms of which are incorporated by reference) shall apply herein (as if effective hereunder) to the extent such procedures are applicable provided, however, (a) Owner shall have no obligation to disburse insurance or taking proceeds if Final Completion cannot be completed in Owner's sole judgment prior to the Final Completion Date or the Extended Completion Date (as defined below) but only if the provisions of paragraph 30.1(d) of the General Conditions set forth on EXHIBIT B have been exercised prior to such casualty or taking or (b) Owner shall have no obligation to rebuild or restore in the case of Major Casualty (as defined in the Lease) in which case Owner may retain all proceeds and awards and this Agreement shall terminate. SECTION 11. Owner may terminate this Agreement in accordance with the terms and provisions set forth in the General Conditions on Exhibit B hereto. SECTION 12. APPLICATION FOR PAYMENTS. Developers' applications for payment shall be submitted to Owner for approval in accordance with the terms and conditions set forth in the General Conditions on EXHIBIT B hereto. SECTION 13. PAYMENT. Payment of all or a portion of the Contract Sum shall be governed by the terms and provisions of the General Conditions on EXHIBIT B hereto. -15- 16 SECTION 14. ASSIGNMENT OF CONTRACTS. Notwithstanding anything contained in this Agreement to the contrary: A. Each contract with any Design Professional, Contractor or Subcontractor shall expressly acknowledge that Owner is an intended third-party beneficiary thereunder, and that in the event of any default by Developers hereunder or under any other contract or agreement between Developers and Owner, Owner shall have the right to enforce such contracts with any such Design Professional, Contractor or Subcontractor directly; and B. Prior to the date that any such Design Professional, Contractor or Major Subcontractor is allowed to perform any work on the Jobsite: 1. Developers shall have executed such collateral assignment or assignments in favor of Owner of the contract with such Design Professional, Contractor or Major Subcontractor in such form and content as may be required by Owner; and 2. Developers shall cause such Design Professional, General Contractor or Major Subcontractor to execute a consent or consents to such collateral assignment or assignments, which consent shall expressly acknowledge that Owner shall not have any liability or obligation of any kind whatsoever to any such Design Professional, General Contractor or Major Subcontractor unless and until Owner shall have exercised its rights under the collateral assignment or assignments and hereunder to remove Developers and assume direct control of the Project, and shall otherwise be in form and content reasonably acceptable to Owner. SECTION 15. COMPLETION DATE. A. COMPLETION. Developers warrants that it is familiar with the Project, the site conditions, the architectural plans, specifications and all requirements of the Work. Based on its familiarity with the Project, Developers represents and warrants that it can complete the Work in accordance with this Agreement. B. SUBSTANTIAL COMPLETION OF THE PROJECT. Developers agrees that it will cause the Substantial Completion of the Project and of all of the Improvements and the Work to be performed hereunder on or before the Substantial Completion Date, except for Force Majeure events as set forth in Article 17.0 of EXHIBIT B. If Developers fails to achieve Substantial Completion by the Substantial Completion Date, the Developers shall be in Default under this Agreement unless the Developers extends the Substantial Completion Date in strict accordance with Articles 30.1(d) or 17.3 of EXHIBIT B hereto. C. FINAL COMPLETION. Final Completion of the Work on the Project shall occur on or before the Final Completion Date, except for Force Majeure Events as set forth in Article 17.0 of -16- 17 EXHIBIT B hereto. If the Developers fails to achieve Final Completion by the Final Completion Date, the Developers shall be in Default under this Agreement unless the Developers extends the Final Completion Date in strict accordance with Articles 30.1(d) or 17.3 of EXHIBIT B hereto. D. TIME IS OF THE ESSENCE. Time is of the essence with regard to the timely completion of the Work as it relates to the entire Project. SECTION 16. CONTRACTORS, SUBCONTRACTORS AND SUB-SUBCONTRACTORS A. Developers agrees that it will contract with all Design Professionals, Contractors and/or Subcontractors as are necessary to complete the Work hereunder, and further agrees to timely pay all such Design Professionals, Contractors and Subcontractors. Any Design Professionals, Contractors and Subcontractors of Developers shall be the exclusive responsibility of Developers. However, before any Design Professional, the General Contractor or Major Subcontractor begins work under the terms of this Agreement, Developers shall warrant and produce all relevant documentation to demonstrate that such Design Professional, General Contractor or Major Subcontractor has all insurance required under the provisions of SECTIONS 8 AND 9 and that such policies conform to all requirements of form and substance pursuant to SECTIONS 8 AND 9. All Design Professionals, General Contractors and Major Subcontractors must execute documents satisfactory to Owner to fully indemnify Owner, Consulting Engineer, and all Indemnitees as required of Developers pursuant to SECTIONS 8 AND 9. Only if all requirements contained in this SECTION 16 have been met, and only if the specific Design Professional, General Contractor or Major Subcontractor has been approved by Owner, may any Design Professional, General Contractor and Major Subcontractors perform any work on the Jobsite. B. Developers shall advise Owner in writing of any Design Professional, General Contractor or Major Subcontractor that is an Affiliate of Developers or any Guarantor, or with which it shares any business relationship or financial interest, and of the nature and extent of such relationship or interest. SECTION 17. PRIVITY OF CONTRACT ASSIGNMENT. Owner shall have no contractual obligation to the Design Professional or Contractors and Subcontractors and shall communicate with such Design Professional or Contractors and Subcontractors only through Developers. However, Owner, or Consulting Engineer, may contact any Design Professional or Contractor and Subcontractors directly if Developers is in Default hereunder. SECTION 18. HAZARDOUS MATERIALS. Developers hereby represents, warrants and covenants to and with Owner that: A. Developers, on its own behalf, and not in reliance on any study, report, audit or assessment performed by or on behalf of Owner, has conducted or caused to be conducted all -17- 18 reasonably prudent due diligence concerning the physical conditions of the Land, the soil, and subsoil conditions thereof, and has independently determined that: 1. The Project can be constructed in accordance with the Plans and Specifications on or before the Substantial Completion Date and Final Completion Date, and for the Contract Sum; and 2. The Land is free of all waste, debris, contamination, and Hazardous Materials, and the Land is not now used nor in the past has been used for the storage or dumping of any Hazardous Materials; provided, however, if any such Hazardous Materials are or are discovered on the Land, Developers shall not be deemed in default hereunder because of the existence of such Hazardous Materials so long as Developers and/or any of the other Indemnitors under that certain Environmental Indemnity Agreement dated the date hereof which has been delivered to Owner are remediating such Hazardous Material as required pursuant to such Environmental Indemnity Agreement (the "Environmental Indemnity Agreement"). B. Developers shall not allow the presence, manufacture, storage, use, release, discharge, transportation on the Land or the Project, or the incorporation into the Project, Scope of Work or Improvements of any Hazardous Materials in any manner which is in violation of any Applicable Environmental Laws (as defined in the Environmental Indemnity Agreement). In the event of the existence of Hazardous Materials discovered on the Jobsite in any manner which is in violation of any Applicable Environmental Laws (as defined in the Environmental Indemnity Agreement), Developers shall, at Developers' sole cost and expense, undertake the abatement and disposal of such material. In the event Developers encounters pre-existing on-site materials or construction reasonably believed to be Hazardous Materials or health threatening, then Developers shall immediately notify Owner and stop work until an environmental laboratory certified program by the applicable state or federal agency and an environmental engineering consulting firm, both retained directly by Owner but paid for by Developers, verifies that the materials or construction complained of has been removed or rendered harmless, which removal and the cost of such consultants and remediation shall all be solely borne by Developers. SECTION 19. LAWS. This Agreement shall be governed, construed, and enforced in accordance with the laws of the Commonwealth of Pennsylvania. Developers shall comply with all laws, statutes, ordinances, rules and Governmental Requirements of all applicable Governmental Authorities, and Developers shall indemnify and hold Owner harmless from any fines, penalties, costs, or liability arising from the failure of Developers or Developers' Design Professionals, and Contractors and Subcontractors to comply therewith. SECTION 20. PARTIAL INVALIDITY. In the event that any portion of this Agreement is held to be void or unenforceable, the balance of the Contract will not be affected thereby and the parties -18- 19 agree to negotiate in good faith to reach an equitable agreement which shall effect the intent of the parties set forth in this Agreement. SECTION 21. EFFECTIVE DATE. This Agreement shall take full force and effect on the Effective Date and all attachments and documents shall be referenced as of that date for purposes of determining their meaning and effect. The Contract Sum is established on the basis of the Plans and Specifications and the other Contract Documents identified herein. Changes after the Effective Date of this Agreement shall be made only as provided by this Agreement. SECTION 22. NO ARBITRATION. Owner and Developers hereby agree that no claims or disputes between Owner and Developers arising out of or relating to the Contract Documents or a breach thereof shall be decided by any arbitration proceeding including, without limitation, any proceeding under the Federal Arbitration Act (9 U.S.C. Sections 1-14), or any applicable state arbitration statute, except that in the event that Owner is subject to an arbitration proceeding related to the Project, Developers consents to being joined in the arbitration proceeding if Developers' presence is required or requested by Owner for complete relief to be accorded in the arbitration proceeding. SECTION 23. REPRESENTATIONS AND WARRANTIES. In addition to all other representations, covenants, warranties, or guaranties expressly or implicitly set forth in this Agreement, Developers makes the following representations and warranties to Owner on the Effective Date and at the time any Payment or disbursement of a Budget item is made, and with respect to each such Payment or disbursement: A. ORGANIZATION, POWER, ETC. BCC (i) is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware, (ii) has the requisite corporate power and authority to own its properties and assets and to carry on its business as now conducted, (iii) has the requisite corporate power to execute, deliver and perform its obligations under this Agreement and each agreement or instrument contemplated thereby to which it is or will be a party, and (iv) is qualified to do business in every jurisdiction where such qualification is necessary except where the failure so to qualify would not have a materially adverse effect on its business, properties, operations, prospects or condition, financial or otherwise, or would not impair its ability to perform its obligations under or in connection with this Agreement. SCOSL (i) is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, (ii) has the requisite limited liability company power and authority to own its properties and assets and to carry on its business as now conducted, (iii) has the requisite limited liability company power to execute, deliver and perform its obligations under this Agreement and each agreement or instrument contemplated thereby to which it is or will be a party, and (iv) is qualified to do business in every jurisdiction where such qualification is necessary except where the failure so to qualify would not have a materially adverse effect on its business, properties, operations, prospects or condition, financial or otherwise, or would not impair its ability to perform its obligations under or in connection with this Agreement -19- 20 B. AUTHORIZATION, ETC. The actions to be taken hereunder and the execution, delivery and performance of this Agreement have been duly authorized by all requisite action on the part of Developers and will not (i) contravene any provision of law, any order of any court or other agency of government, which contravention could reasonably be expected to have a material adverse effect upon the prospects, profits, or financial or operating condition of Developers or Developers' ability to perform its obligations under this Agreement, or (ii) contravene any of the organizational documents governing Developers or any indenture, agreement, or other instrument binding upon Developers, which contravention could reasonably be expected to have a material adverse effect upon the prospects, profits, or financial or operating condition of Developers or Developers' ability to perform its obligations under this Agreement, or (iii) be in conflict with, result in the breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement, document or other instrument binding upon any of the Developers, which default or breach could reasonably be expected to have a material adverse effect upon the prospects, profits, or financial or operating condition of any of the Developers or any Developers' ability to perform its obligations under this Agreement, or (iv) result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the property or assets of Developers or Owner, other than as expressly permitted herein. C. GOVERNMENTAL APPROVAL. Except as provided in EXHIBIT I, no action or consent of, or registration or filing with, any Governmental Authority or court is required under existing law in connection with the execution, delivery, and performance by Developers of this Agreement, except as provided on EXHIBIT K attached hereto. D. PLANS APPROVED. Except as provided in EXHIBIT J, the Plans and Specifications have been approved by all Governmental Authorities having jurisdiction, and all necessary building and all other construction related Permits and all other Governmental Requirements and private authorizations and approvals with respect to the Plans and Specifications and construction of the Improvements have been obtained. E. LITIGATION. There are no actions, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency pending against Developers or any one of them or Guarantor or affecting the Project, and, to Developers' knowledge, there are no actions, suits or proceedings threatened against or affecting Developers or any one of them or Guarantor or any property or rights of Developers or Guarantor, including the Project. F. AGREEMENTS. Neither Developers nor Guarantor is a party to, or bound by, any contract or instrument materially and adversely affecting the business, property, assets, operations or condition, financial or otherwise, of Developers or any one of them or Guarantor. G. TAXES. Developers and Guarantor have filed all United States income tax returns and all state income tax returns that are required to be filed, and have paid, or made adequate -20- 21 provisions for the payment of, all taxes that have or may become due pursuant to said returns or pursuant to any assessment received by Developers or Guarantor, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. H. COMPLIANCE WITH LAW. Developers and Guarantor are in compliance, in all material respects, with all applicable statutes, rules, regulations, orders and restrictions of any governmental authority having jurisdiction over the conduct of their businesses or the ownership of their properties. The construction to be performed on the Land in accordance with the Plans and Specifications and the use and continued use of the Project for its intended use in accordance with the Permits and Assisted Living Permits will not violate any environmental, ecological, subdivision, zoning, use, or other Governmental Requirement or any agreement applicable to the Land or the Project. I. FINANCIAL STATEMENTS. Each financial statement of Developers and Guarantor delivered hereafter to Owner will be prepared in conformity with GAAP, applied on a basis consistent with that of previous statements and completely and accurately disclose the financial condition of each of Developers and Guarantor (including all contingent liabilities) as of the date thereof and for the period covered thereby, and there has been no material adverse change in any of the Developers' or Guarantor's financial condition subsequent to the date of the most recent financial statement of each of Developers and Guarantor delivered to Owner. SECTION 24. ENTIRE AGREEMENT. This Agreement and all Exhibits and security instruments hereto represent the full and complete understanding of the parties; any prior representations or promises are merged herein. Any changes in this Agreement, Exhibits hereto, or security instruments must be made in writing, and signed by the parties. The parties look solely to each other with respect to performance of this Agreement and the Work hereunder. This Agreement and each and every provision hereof is for the exclusive benefit of Owner and Developers and not the benefit of any third party, except to the extent such benefits have been expressly extended pursuant to this Agreement. The provisions of this Agreement which, by their nature, are intended to survive the termination, cancellation, completion or expiration of the Contract, including, but not limited to, any express limitations of or releases from liability, shall continue as valid and enforceable obligation of the parties, notwithstanding any such termination, cancellation, completion or expiration. SECTION 25. ASSIGNMENT. -21- 22 Developers shall not assign its interest in this Agreement or the other Contract Document without the prior written consent of Owner. The consent of Owner with regard to any such assignment may be granted by Owner in Owner's sole and absolute discretion, and may be conditioned by Owner on the requirement that Developers execute and deliver to Owner such document and instruments regarding such assignment and containing such terms and provisions as Owner may require. In any event, no such assignment or delegation, whether consented to by Owner or not, shall relieve or discharge Developers from any of their duties, responsibilities or obligations hereunder. Any purported assignment by Developers without such consent shall be null and void. Owner may, upon notice and without consent of Developers, assign this Agreement to any party, whereupon Owner will be relieved of all liabilities hereunder. SECTION 26. NOTICES. No notice or other communication shall be deemed given unless sent in any of the manners, and to the persons, specified in this SECTION 26. All notices and other communications hereunder shall be in writing and shall be deemed given (i) upon receipt if delivered personally (unless subject to clause (ii)) or if mailed by registered or certified mail, (ii) at noon on the date after dispatch if sent by overnight courier or (iii) upon the completion of transmission on or before 4:30 p.m. local time of the recipient, if received on a business day (which is confirmed by telephone or by a statement generated by the transmitting machine) if transmitted by telecopy or other means of facsimile which provides immediate or near immediate transmission to compatible equipment in the possession of the recipient, or on the next business day following receipt if received after 4:30 p.m. local time of the recipient on any business day, in any case to the parties at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as will be specified by like notice): If to Owner: 1675 Palm Beach Lakes Boulevard, Suite 900 West Palm Beach, Florida 33401 Attention: Secretary Telecopy Number: (561) 681-8177 Confirmation Number: (561) 681-8517 cc: Vice President Multifamily Finance Telecopy Number: (561) 681-8174 Confirmation Number: (561) 681-8719 With a Copy to: Christopher J. Donovan McDermott, Will & Emery 75 State Street, Suite 1700 Boston, Massachusetts 02109 Telephone Number (617) 345-5000 Telecopy Number (617) 345-5077 If to Developers: Robin L. Barber, Esq. -22- 23 BCC Development and Management Co. 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Telecopy Number: (717) 796-6160 Confirmation Number: (717) 796-6100 With a copy to: Steven J. Adelkoff, Esq. Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, PA 15222-2312 Telecopy Number: (412) 356-6501 Confirmation Number: (412) 355-6500 SECTION 27. GUARANTEES AND SECURITY. In order to better secure all of the obligations hereunder and under the Lease, simultaneously with the execution hereof, and as a condition precedent hereto, Developers shall cause the execution and delivery to Owner by Balanced Care Corporation of a Construction Completion Guaranty in the form attached hereto as EXHIBIT G, which is hereby incorporated herein by this reference. The obligations hereunder shall also be secured and collateralized by the issuance to Owner on behalf of Developers of the Letter of Credit. As of the date hereof, the Letter of Credit shall mean the $_______ cash on deposit at Ocwen Federal Bank FSB plus interest earned thereon. No later than April 30, 1998, Developers shall deliver to Owner an irrevocable standby letter of credit payable to Owner for the benefit of Developers in form and issued by an institution satisfactory to Owner, in Owner's sole discretion, in the amount of $_______ for a period not less than 24 months, which irrevocable standby letter of credit shall thereafter be referred to as the Letter of Credit. Upon delivery of the irrevocable standby letter of credit as set forth above in form satisfactory to Owner in Owner's sole discretion, Owner shall return the $_______ cash as referenced above to Developers. Developers and Owner agree that up to $200,000 may be used to fund pre-marketing and operational start up costs (the "Start-Up Cost Amount") from the Letter of Credit to be disbursed by Owner to Developers in Owner's reasonable discretion and upon receipt of evidence or documentation by Owner of such Start-Up Cost Amount. If at any time Owner draws on the Letter of Credit such that the amount thereunder is reduced below $_______ (the "Deficiency"), Developers shall be required to deposit the Deficiency with Owner in the form of cash pursuant to the Assignment and Pledge of Deposit Account Agreement or a letter of credit of the same form, substance and issuer as the Letter of Credit which sums or instruments shall be held as security for Developers' obligations hereunder as follows: (i) if a draw is made which reduces the available amount under the Letter of Credit to $_______ (the "Minimum Balance") or less, Developers shall restore the Letter of Credit to the Minimum Balance within ten (10) days of such Deficiency and fully restore the Letter of Credit to $_______ less any Start-Up Cost Amounts prior to the Lease Commencement Date or (ii) if a draw is made which reduces the available amount under the Letter of Credit to an amount above the Minimum Balance, Developer will restore the Letter of Credit to the full amount of $_______ less any Start-Up Cost -23- 24 Amounts prior to the Lease Commencement Date. The parties hereby agree that if Developers are required to provide funds in excess of the line item amounts contained in the Budget as provided in Section 5 of the Agreement and the same is not paid when due hereunder, then Owner agrees to accept payment of the same from Guarantor during the applicable cure period as set forth in Article 36 of the General Conditions; provided no Default exists hereunder. The parties further agree that any related party debt incurred or created by the foregoing shall be subordinate to any obligations of Developers to Owner, including any obligations of SCOSL to Owner under the Lease and shall not be repaid until the Lease has terminated and all obligations of Owner thereunder have been paid in full. If such payment is not made by Guarantor or Developers during such applicable cure period, then Owner shall make a draw under the Letter of Credit upon the expiration of the applicable cure period. The aforementioned obligations shall be further secured by a collateral assignment of any and all unpaid portions of Developers' Fee (as defined below), as specified in the Budget, which collateral assignment shall also be in form and content acceptable to Owner, and a first priority security interest in the Personal Property. Developers agrees to execute all necessary documents requested by Owner in order to perfect Owner's security interest in the collateral hereunder. All rights under the above security documents and instruments shall be exercisable upon a Default hereunder and all remedies of Owner hereunder shall be cumulative, non-exclusive and exercisable in such order as Owner shall determine. SECTION 28. CONDITIONS PRECEDENT. The execution and delivery of this Agreement shall be conditioned upon the following: a) Execution and delivery to Owner of a Special Warranty Deed with respect to the Land, in form and substance reasonably satisfactory to Owner; b) Delivery to the Owner of an Owner's Title Insurance Policy, in form and substance reasonably satisfactory to Owner with such endorsements as Owner may require; and c) Such other documents and instruments as Owner may require with respect to the purchase of the Land from Developers, all in form and substance reasonably satisfactory to Owner. SECTION 29. MUTUAL WAIVER OF JURY TRIAL. DEVELOPERS AND OWNER HEREBY WAIVE ANY RIGHT THAT ANY OF THEM MAY HAVE TO A TRIAL BY JURY OF ANY AND ALL CLAIMS, COUNTERCLAIMS, SETOFFS, DEMANDS, ACTION OR CAUSES OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT OR AGREEMENTS BETWEEN DEVELOPERS AND OWNER AT ANY TIME, INCLUDING, ANY SUCH AGREEMENTS, WHETHER WRITTEN OR ORAL, MADE OR ALLEGED TO HAVE BEEN MADE AT ANY TIME PRIOR TO THE DATE HEREOF, AND ALL AGREEMENTS MADE HEREAFTER OR OTHERWISE, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR -24- 25 RELATED TO OR INCIDENTAL TO ANY DEALINGS OF OWNER AND/OR DEVELOPERS WITH RESPECT TO ANY AGREEMENT OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. DEVELOPERS AND OWNER AGREE THAT THE OTHER PARTY MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT OF DEVELOPERS AND OWNER IRREVOCABLY TO WAIVE ITS RESPECTIVE RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF DEVELOPERS AND OWNER TO MAKE THIS AGREEMENT, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN DEVELOPERS AND OWNER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. DEVELOPERS AND OWNER ACKNOWLEDGE THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH, OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF DEVELOPERS' AND OWNER'S CHOICE. SECTION 30. DEVELOPERS FEE. In compensation for the services of Developers, Owner will pay to Developers a development fee (the "Developers' Fee") in the amount of $_______. Developers' Fee shall be due and payable as follows: (i) $_______ shall be due and payable on the date of the delivery to Owner of the irrevocable standby letter of credit in the amount of $_______ as set forth in Section 27 hereto (the "Letter of Credit Effective Date"), (ii) $______ shall be paid in equally monthly installments over the twelve months immediately following the Letter of Credit Effective Date provided no Default occurs hereunder, and (iii) $______ shall be due and payable on the date Final Payment is made by Owner. In the event of a Default hereunder, Owner may apply the remaining balance of the Developers' Fee to any obligation existing or hereafter arising of Developers to Owner under this Agreement and shall have no further obligation to pay any outstanding balance remaining of the Developers' Fee. SECTION 31. MISCELLANEOUS. A. COUNTERPARTS. This Agreement may be signed in one or more counterparts or duplicate signature pages with the same force and effect as if all required signatures were contained in a single original instrument. Any one or more such counterparts or duplicate signature pages may be removed from any one or more original copies of this Agreement and annexed to other counterparts or duplicate signature pages to form a completely executed original instrument. -25- 26 B. CAPTIONS. The captions contained in this Agreement were inserted for the convenience of reference only. They do not in any manner define, limit or describe the provisions of this Agreement or the intentions of the parties. C. GENDER/SINGULAR/PLURAL. Whenever masculine, feminine, neuter, singular, plural, conjunctive or disjunctive terms are used in this Agreement, they shall be construed to read in whatever form is appropriate to make this Agreement applicable to all the parties and all circumstances, except where the context of this Agreement clearly dictates otherwise. SECTION 32. JURISDICTION. Owner and Developers hereby agree that the United States District Court for the District of ____________ or, to the extent required by applicable law, any ____________ State Court shall have exclusive jurisdiction to hear and determine any claims or disputes between Owner and Developers pertaining directly or indirectly to this Agreement. SECTION 33. DISBURSEMENT AGENT. Owner reserves the right to designate and utilize a disbursement agent for the purpose of monitoring and disbursing advances hereunder. The reasonable fees and costs of the disbursement agent shall be treated as a Soft Cost under the Budget. SECTION 34. NO THIRD-PARTY BENEFICIARY. No provisions of this Agreement shall in any way inure to the benefit of any third Person so as to constitute such Person a third party beneficiary of this Agreement or of any one or more of the terms and conditions of this Agreement. SECTION 35. JOINT AND SEVERAL OBLIGATIONS. The obligations and agreements of the Developers hereunder shall be joint and several. SECTION 36. CROSS DEFAULT AND CROSS COLLATERALIZATION. The Developers acknowledge and agree that this transaction shall be cross-collateralized and cross-defaulted to any transaction between SCOSL, Senior Care Operators, LLC or Oakhaven Senior Living, Inc. or any Affiliate of SCOSL, Senior Care Operators, LLC or Oakhaven Senior Living, Inc. and Owner (collectively, the "Related Transactions") or any Affiliate of Owner; provided, however, that if BCC or an Affiliate of BCC becomes a tenant on any project whereby the same is owned by Owner, then such project will be cross-collateralized and cross-defaulted to any other project which BCC or any affiliate of BCC is the tenant and the Owner is the owner of the project. Developers also acknowledge and agree that Owner would not have consummated this transaction without such assurance and understanding and Owner has relied upon such assurance and understanding in entering into this transaction. Developers agree to execute and deliver any and all such documentation, in form and substance satisfactory to Owner in Owner's sole discretion, as Owner may require with respect to any such cross-collateralization and cross-default after the date hereof. -26- 27 THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK -27- 28 IN WITNESS WHEREOF, the parties hereto have executed this Development Agreement, on the day and year first written above. OWNER: ______________________ WITNESS: ______________________ By:____________________________________________ Name: Name: ______________________________________ Title: ______________________________________ DEVELOPERS: BCC Development and Management Co. WITNESS: _______________________ By:____________________________________________ Name: Name: ______________________________________ Title: ______________________________________ _______________________________________ By: Senior Care Operators, LLC, Manager _______________________ By:____________________________________________ Name: Name: ______________________________________ Title: _____________________________________ -28- 29 EXHIBIT B TO DEVELOPMENT AGREEMENT (CONTRACT) GENERAL CONDITIONS OF CONSTRUCTION TABLE OF CONTENTS
Article Page 1.0 DEFINITIONS................................................. 1 2.0 GENERAL RESPONSIBILITY..................................... 1 3.0 INTENT .................................................... 2 4.0 OWNERSHIP.................................................. 2 5.0 DESIGN RESPONSIBILITY AND APPROVAL......................... 3 6.0 EXAMINATION OF JOBSITE..................................... 3 7.0 DRAWINGS, SPECIFICATIONS, OTHER DATA....................... 3 8.0 DOCUMENTS AT JOBSITE....................................... 4 9.0 BRAND NAME OR EQUAL........................................ 4 10.0 SUPERVISION BY DEVELOPERS.................................. 4 11.0 EMPLOY COMPETENT WORKERS................................... 5 12.0 MATERIALS.................................................. 5 13.0 WARRANTY OBLIGATIONS....................................... 5 14.0 INDEMNIFICATION BY DEVELOPERS.............................. 7 15.0 SCHEDULES AND REPORTS...................................... 9 16.0 INTENTIONALLY OMITTED...................................... 9 17.0 FORCE MAJEURE.............................................. 10
30 18.0 [INTENTIONALLY OMITTED].................................... 10 19.0 EXPEDITING PROCUREMENT......................................10 20.0 CHANGES.................................................... 11 21.0 PROTECTION OF WORK: REGULATIONS............................ 12 22.0 PARTIAL OCCUPANCY AND USE.................................. 13 23.0 COOPERATION WITH OTHERS.................................... 13 24.0 INTENTIONALLY OMITTED...................................... 13 25.0 INSPECTION................................................. 13 26.0 TESTS...................................................... 14 27.0 CLEANUP.................................................... 14 28.0 CONTRACTING, SUBCONTRACTING AND PUBLICITY.................. 14 29.0 LIENS...................................................... 15 30.0 TERMINATION FOR CAUSE...................................... 15 31.0 INTENTIONALLY OMITTED...................................... 16 32.0 PROGRESS PAYMENTS AND FINAL PAYMENT........................ 16 33.0 TIME....................................................... 29 34.0 RECORDS AND ACCOUNTS....................................... 29 35.0 CLAIMS AND DISPUTES........................................ 30 36.0 DEFAULT/REMEDIES UPON DEFAULT.............................. 30 37.0 CLEAN AIR AND WATER........................................ 32
31 1.0 DEFINITIONS ----------- 1.1 All definitions from this Agreement shall be applied to these General Conditions as they are defined in this Agreement. 2.0 GENERAL RESPONSIBILITY ---------------------- 2.1 Developers shall perform the Work or services with diligence, in a good, safe and workmanlike manner and in accordance with good design, fabrication and construction practices and in accordance with the drawings, specifications, procedures and other requirements of the Agreement. Developers shall furnish all supervision, labor, supplies, tools, construction equipment, facilities, storage, permanent equipment and materials and all other things and services necessary or desirable to perform the Work. 2.2 Developers shall have the complete professional managerial and technical responsibility and liability for the validity, accuracy and reliability of the Work performed. The Work shall strictly conform to all applicable codes, standards, statutes, rules, regulations and Governmental Requirements. 2.3 Developers shall be responsible for the institution of security measures for the prevention of theft, pilferage and waste at the Jobsite. Owner shall have the right to review and approve said security measures, which approval shall not be unreasonably withheld or delayed. Developers shall provide adequate storage or cover for materials, equipment, tools and all other items furnished by Developers, by Contractors and Subcontractors, by Design Professionals or by Owner. 2.4 Developers shall be responsible for the safety of (i) its employees and the employees of its Contractors and Subcontractors, if any, while present at the Jobsite, Developers' home and branch offices, and other locations where Work is performed, and (ii) all other persons entering locations where Work is being performed. 2.5 Developers shall be responsible for the correctness of the positions, levels and dimensions of the Work. Notwithstanding that the Developers may have been assisted by Owner, Design Professionals or any Contractors and Subcontractors in setting out the same, if at any time during the performance of the Work, any error shall appear or arise therein, the Developers shall immediately advise Owner and correct such error. 2.6 Developers shall be solely responsible for the payment of, and shall require its Design Professionals, and Contractors and Subcontractors to pay, all applicable taxes, including all sales and use taxes, and insurance premiums required hereunder. 2.7 Developers shall be solely responsible for the payment of, and shall require its Design Professionals, Contractors and Subcontractors to pay, all contributions to Social Security, or any other similar benefits which are measured by or based upon the wages, salaries or 1 32 other remunerations paid to persons employed by Developers and its Design Professionals, Contractors and Subcontractors in performance of the Work. 2.8 The cost of all wages, salaries, tools, supplies, parts, machinery, construction, operation and maintenance equipment and expenses of whatever nature or description arising out of this Agreement are to be borne by Developers. The expenses to be borne by Developers shall include, but shall not necessarily be limited to, labor benefits, holiday, restday, overtime, vacation and severance pay, sickness, health, accident and disability payments of whatever nature, food lodging, medical facilities, repair, maintenance or replacement of tools, supplies, equipment or machinery, and transportation of Developers' personnel and equipment. 3.0 INTENT ------ 3.1 Developers shall perform or cause to be performed all Work specified in or reasonably implied or inferred by this Agreement and the Contract Documents in accordance with the specifications, provisions, terms and conditions hereof. Details which are not mentioned in the Drawings and Specifications shall be performed by the Developers at no additional cost to Owner, if such details are reasonably necessary to fulfill the intent of this Agreement. 4.0 OWNERSHIP --------- 4.1 PROJECT DOCUMENTS. All drawings, specifications, designs, appropriate data and any other engineering and/or manufacturing information, and other descriptive matter of any nature, whether or not furnished by Owner to Developers, for the direct or indirect performance of the Work, including, but not limited, to the Drawings and Specifications (collectively, the "Project Documents"), may be used only in connection with the prosecution of the Work, and shall be the property of Owner. Owner may require the return of all such documents and reproductions thereof, and if so required, Developers shall return same upon the completion of the Work. Owner hereby agrees that Owner or any Affiliate of Owner will not use the Project Documents to build or construct the exact same assisted living facility at any other location. 4.2 WORK AND MATERIALS. The Work in progress and all of the Owner-furnished items and all of Developers-furnished design documents, material, equipment, plant facilities, fabricated items, supplies, drawings, data, and contract rights intended for the Work shall be the property of the Owner. Notwithstanding Owner's title thereto, Developers shall at the same time be responsible for the care, custody, control and safekeeping and preservation of all Owner-furnished or Developers-furnished documents, labor, materials, equipment, supplies and other things. In addition, Developers shall promptly repair or replace any such items which are damaged or lost, and shall complete the Work and deliver the Work in accordance with all provisions and requirements hereof at the time specified. Except as otherwise provided, Developers shall bear, without right of reimbursement, except proceeds from a Builders Risk Insurance Policy, the full risk of loss or damage to the Work and materials, equipment, supplies and other things. 5. DESIGN RESPONSIBILITY AND APPROVAL ---------------------------------- 2 33 The scope of Work provides that Developers has engineering, design, or detailing responsibility, which responsibility shall be accomplished in accordance with the Drawings and Specifications, and all Federal, state, local and nationally recognized codes applicable to the Work, including but not limited to Governmental Requirements (the "Scope of Work"). Owner's review or approval of drawings or other submittals, shall not relieve or discharge the Developers, either expressly or by implication, from any responsibility under this Agreement. 6.0 EXAMINATION OF JOBSITE ---------------------- 6.1 Developers represent and warrant that they have examined the Contract Documents and familiarized themselves with the Jobsite and the Improvements to be constructed thereon, and the laws, rules and regulations relating to such construction and the Work. 6.2 Developers represent and warrant that they have examined the Jobsite, and, they have satisfied themselves as to the nature and location of the Work, the general and local conditions, particularly those bearing upon transportation, handling, and storage of materials, availability of labor, water, power, roads, weather, and ground conditions at the Jobsite and all other matters which can in any way affect the Work or the cost thereof. 6.3 The Developers further acknowledge that they shall be solely responsible for understanding the location of subsurface lines, cables, pipes and water as well as the conditions and characteristics of all subsoils based upon a careful review, as a prudent and experienced Developers, of reports as provided by professionals affiliated with the Project, and that they have made all reasonable interpretations of such reports, in combination with a review of the Job Site conditions, to complete the Work as per the Contract Documents. 7.0 DRAWINGS, SPECIFICATIONS, OTHER DATA ------------------------------------ 7.1 Developers represent and warrant that they have examined and reviewed all Contract Documents, and that the Developers are thoroughly familiar with the intent, extent and scope of work to be performed. Should any defects, errors, omissions, or inconsistencies appear in the Contract Documents, or should any item be omitted which is necessary to the proper performance or completion of the Work, Developers, before proceeding with the Work, shall call Owner's attention to same for proper determination in writing as set forth in this Agreement. The Developers shall not proceed until a determination is received. 7.2 Execution of this Agreement by the Developers is a representation by the Developers that the Contract Documents are sufficient to have enabled the Developers to determine the cost of the Work described therein and that the Contract Documents are sufficient to enable Developers to construct the Work described therein, and otherwise to fulfill all of their obligations hereunder, including, but not limited to, Developers' obligation to construct the Work for an amount not in excess of the Contract Sum on or before the Substantial Completion Date and Final Completion Date for the Work. 3 34 8.0 DOCUMENTS AT JOBSITE -------------------- 8.1 WORKING DOCUMENTS. The Developers shall maintain a system of control to ensure that the Developers personnel are at all times working with the current drawings, specifications, shop drawings and other necessary data. 8.2 RECORD DOCUMENTS. The Developers shall maintain at the Jobsite one separate record copy of all Contract Documents, addenda, shop drawings, and other modifications thereto, all in good order and marked to record actual as-built conditions. The actual as-built conditions shall be noted by redline marking of blueline copies of drawings and by neat notations in the margins of specifications and other documents. The completed set of record documents, accurately annotated to reflect actual as-built conditions, shall be submitted to Owner by Developers upon completion of the Work and prior to Developers' request for Final Payment. 9.0 BRAND NAME OR EQUAL ------------------- 9.1 Wherever in the Drawings and Specifications a particular brand or make of materials or equipment is specified or shown, any other brand or make which, in the reasonable opinion of Owner, is equal to that specified or shown, may be substituted. Developers must obtain Owner's written approval prior to making any substitution, which approval shall not be unreasonably withheld or delayed. 10.0 SUPERVISION BY DEVELOPERS ------------------------- 10.1 Developers shall retain at the Jobsite sufficient supervisory personnel to timely meets its obligations under this Agreement, which personnel shall include at all times a competent Project director satisfactory to Owner. Owner approves Scott Hollinger as an acceptable Project director. This Project director shall represent Developers at all times and shall have full and complete authority in writing (in the form of a corporate resolution or other acceptable document) to act on behalf of and to bind Developers in all matters pertaining to this Agreement. All instructions, directions, notices and writings given to Developers' Project director shall be as binding as if given to Developers. Developers' Project director or key personnel shall not be changed, except with the prior written consent of Owner, which consent shall not be unreasonably withheld or delayed. Developers' senior management shall give the Work such personal supervision as may be necessary. If reasonably required by Owner in the event of the inadequate performance of Developers hereunder, Developers will provide additional management supervision, all at no additional expense or cost to Owner. 10.2 The Developers shall be solely responsible for supervision of the Work, shall give the Work the constant attention necessary to ensure the expeditious and orderly progress thereof, and Developers and Owner shall reasonably cooperate with each other in every way possible with respect to the Work. 4 35 10.3 Developers shall allow only its authorized employees, Design Professionals, and Contractors and Subcontractors on the Jobsite. Any employee of Developers designated by Owner shall be removed from the Jobsite immediately upon Owner's request based on reasonable cause, and shall be promptly replaced by Developers at no extra expense to Owner and Developers shall hold Owner harmless on account of such action. 11.0 EMPLOY COMPETENT WORKERS ------------------------ 11.1 The Developers shall employ only competent workers, Design Professionals, Contractors and Subcontractors on the Jobsite and in connection with the Work and shall not employ workers or means which may be reasonably likely to cause strikes, work stoppages or any disturbances by workers employed by Developers, Contractors and Subcontractors or Owner. 11.2 In the event of any actual or threatened labor disputes or delays, Developers shall immediately give Owner notice thereof, and shall take such actions as reasonably possible to avoid delays to the Work. The Developers shall comply with all local, state and national laws, ordinances, and regulations regarding the employment of labor on the Jobsite and shall indemnify and hold Owner and Consulting Engineer harmless against any liability for its failure to so comply. 12.0 MATERIALS --------- 12.1 PERMANENTLY INCORPORATED MATERIALS. Unless otherwise specified, all materials and equipment permanently incorporated in the Work shall be new, and shall be installed and prepared for use in accordance with the manufacturers instructions. The Developers shall, if requested by Owner, provide technical information regarding materials or equipment. 12.2 OWNER-FURNISHED MATERIALS AND EQUIPMENT. If any materials or equipment are to be furnished by Owner for the Work, they will be so specified in this Agreement. It shall be the Developers' responsibility to receive, inspect, handle and store, protect and maintain, if necessary, all items of Owner furnished material or equipment until completion and acceptance of the Work in accordance with this Agreement. Owner-furnished items damaged or lost while in the Developers' custody shall be repaired or replaced by the Developers without additional cost to Owner. 13.0 WARRANTY OBLIGATIONS -------------------- 13.1 All guarantees and undertakings by Developers in favor of Owner shall apply to all materials, equipment or services as applicable, provided by either the Developers, its Design Professionals, its Contractors and Subcontractors or vendors of any tier or anyone directly or indirectly employed by any of them, to the same extent as if provided by Developers on a direct basis. Developers' guarantee/warranty obligations shall be as follows: a. Developers guarantees that its construction workmanship shall be first class in quality, free from faults and defects, and in conformance with good construction practices 5 36 applicable to a first-class personal care home providing assisted living services. Developers further guarantees (i) that Developers shall at all times furnish efficient, business-like administration and supervise, direct, coordinate and perform the Work relating to construction using the best practices of the industry and (ii) that such Work shall be in full compliance with the requirements of this Agreement, and in compliance with all applicable laws, codes and regulations. b. Developers further guarantees that all materials, equipment and supplies incorporated into the Work shall be new, first class in grade and quality in accordance with the Plans and Specifications, and shall be fit for its intended purpose. Developers agrees to pass on and assign to Owner, all manufacturers warranties and to prosecute the enforcement thereof in cooperation with Owner. c. Developers warrants that (i) Developers, its Design Professionals, and its Contractors and Subcontractors are experienced, qualified and, where required by law, licensed to perform their respective portions of the Work; (ii) the design of the Work will be in accordance with all agreed upon Project requirements, and all applicable Governmental Requirements; and (iii) Developers will be responsible for all errors and omissions in the documents evidencing the design of the Project, including the Drawings and Specifications. Owner's review and approval of drawings or other submittals shall not relieve or discharge the Developers either expressly or by implication from any responsibility under this provision. d. Upon receipt of written notice of defect(s) by Owner at any time during the Warranty Period (as defined below), Developers shall, at no cost to Owner, promptly furnish and provide all labor, equipment, materials and other services at the Jobsite and elsewhere as may be necessary to correct such defect(s) and cause the Work to fully conform with the foregoing guarantees and warranties. If the Developers is required to repair or replace any equipment, material or component of the Work after the date of Final Completion, then the Developers' warranty with respect to such equipment, material or component of Work shall extend for a period of one (1) year from the date of completion of such repair or replacement. e. In the event Developers fails to correct any warranty defect, or fails to promptly commence correction to Owner's reasonable satisfaction, within seven (7) calendar days of receipt of Owner's written notice, Owner shall have the right without any further notice to correct or arrange for the correction of such defects at the Developers' sole risk and expense. Developers shall bear all costs of correcting such defective Work, including but not limited to compensation for and the cost of all necessary materials and services. Owner shall be entitled to offset all costs incurred for any such corrective work against any funds which are otherwise due or which may become payable to the Developers. If no monies are then due to Developers hereunder, Developers shall be responsible to pay all costs incurred by Owner in connection with correcting the Work. f. Owner may, in its sole discretion, elect to accept a part of the Work which is not in accordance with the requirements of this Agreement or the Drawings and Specifications. In such case, the Contract Sum shall be reduced as appropriate and equitable. 6 37 Owner's acceptance of any nonconforming Work shall not waive or otherwise affect Owner's right to demand that Developers correct any other defects or areas of nonconforming Work. g. Nothing contained in this Article dealing with warranties shall be construed as limiting any expressed or implied rights or remedies of Owner provided under this Agreement. h. Developers' guarantees and warranties set forth in this Article shall extend for One (1) Year following the date of Final Completion (the "Warranty Period"): i. Developers' warranty obligations as stated herein shall survive any termination of this Agreement. Developers acknowledges that its obligations under the Contract Documents, including, but not limited, to the warranty provisions hereof are independent of and not in any way conditioned by the rights, remedies or obligations of the parties under the Lease. 14.0 INDEMNIFICATION BY DEVELOPERS ----------------------------- 14.1 To the full extent permitted by law, Developers hereby agrees to indemnify and hold all Indemnitees harmless from and against any and all claims, liabilities, losses, damages, costs or expenses, including reasonable attorneys fees whether or not an action is actually commenced, whether incurred before, during or trial, upon any appellate level, in any arbitration, mediation or administrative proceeding or in any proceeding in bankruptcy or insolvency, to the extent caused by, resulting from or arising out of the negligent acts, errors, omissions, willful misconduct or the breach of contract by Developers, their Contractors and Subcontractors, Design Professionals or vendors of any tier, or any one directly or indirectly employed by any of them, or anyone for whose acts any of them may be legally responsible. Such indemnity obligations shall include, but not be limited to the following: a. All claims, liabilities, losses, damages, costs or expenses relating to (i) bodily injury to, illness or death of any persons (including the employees of the Indemnitees), including but not limited to: any such injury resulting from (a) the use of scaffolding, hoists, cranes, pile drivers or any other equipment used on the Work; or (b) from the failure to properly provide and maintain the protective measures required by applicable laws or this Agreement; and (ii) all damages to or loss of any existing property, including the property of the Indemnitees which shall include, but not be limited to, equipment, tools, facilities and structures, underground utilities and conditions, landscaping, and signage and which shall include lost revenues resulting from such loss or damage to the property of any of the Indemnitees. b. All liability, loss and expense including reasonable attorneys fees and costs in all proceedings and at levels specified in Paragraph 14.1 arising, in whole or in part, by reason of claims by Governmental Authorities or others (including Developers' Contractors and Subcontractors, Design Professionals, and Consulting Engineer) of any actual or asserted 7 38 Developers' failure to comply with any law, ordinance, regulation, rule or order of any governmental body, including those relating to the remediation, transportation and disposal of Hazardous Materials, including without limitation actual or asserted failure of Developers to pay taxes, duties, or fees, or to comply with employee safety regulations or with the Jobsite safety rules. c. All claims, demands, causes of action, loss, expense and liability on account of actual or alleged contamination, pollution, or public or private nuisance, arising directly or indirectly out of the acts or omissions of Developers or its Design Professionals, Contractors and Subcontractors or suppliers in the performance of the Work. d. All claims, demands, causes of action, loss, expense and liability arising out of a breach by Developers of this Agreement or any warranties, guarantees and representations contained herein, including, without limitation, the performance, construction and design of the Work. e. All claims, demands, causes of action, loss, expense and liability arising out of Developers' failure to pay any of its suppliers, Design Professionals, Contractors and Subcontractors provided Owner properly performs hereunder. f. All claims, liabilities, losses, damages, costs and expenses relating to damage to or loss of the Work during the course of construction however such loss or damage shall occur, including, but not limited to, all costs for repair or replacement of any work, material, equipment or supplies (whether in transit or in storage either on-Jobsite or off-Jobsite) which are lost, stolen, damaged or destroyed prior to either (i) the date of Final Completion or (ii) Owner's physical possession of the completed Project net of insurance proceeds paid to Owner. g. All claims, demands, causes of action, loss, expense and liability relating to the physical loss of or damage to or theft of any tools, equipment and vehicles used during the course of the Work whether owned or leased by Developers, its Design Professionals or Contractors and Subcontractors or vendors of any tier or anyone directly or indirectly employed or hired by any of them. h. All claims, demands, causes of action, loss, expense and liability, including without limitations, any fines, penalties, interest, or punitive damages, directly or indirectly relating or pertaining to or arising or resulting from the leasing of the Project or any of its units. i. Developers agrees to and does hereby assume on behalf of the Indemnitees the defense and control of all claims, demands and lawsuits brought against the Indemnitees which arise out of the Developers' indemnity obligations. Promptly after the assertion by any party of any claim against any Indemnitee that, in the judgment of such Indemnitee, is a claim for which such Indemnitee would be entitled to indemnification pursuant to this Agreement, such Indemnitee shall deliver to Developers a written notice describing in reasonable detail such claim and Developers shall assume the defense of the Indemnitee against such claim (including the 8 39 employment of counsel, who shall be reasonably satisfactory to such Indemnitee, and the payment of expenses), unless such claim relates to a defense which Owner considers relevant to Owner's business as a whole (limited to the ownership, leasing or operating the Project) in which case Owner may defend the claim at the expense of Developers. Any Indemnitee shall have the right to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of Developers unless (i) Developers shall have failed, within a reasonable time after having been notified by the Indemnitee of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim, or such claim relates to a defense which Owner considers relevant to Owner's business as a whole (limited to the ownership, leasing or operating the Project), (ii) the employment of such counsel has been specifically authorized in writing by Developers, or (iii) the named parties to any such action (including any impleaded parties) include both such Indemnitee and Developers and such Indemnitee shall have been advised in writing by such counsel that there may be one or more legal defenses available to the Indemnitee or Developers which are not available to, or the assertion of which would be adverse to the interests of, the other party. Developers shall not be liable to indemnify any Indemnitee for any settlement of any such action or claim effected without the consent of Developers, which shall not be unreasonably withheld, but if settled with the written consent of Developers, or if there be a final judgment for the plaintiff in any such action, Developers shall indemnify and hold harmless each Indemnitee from and against any loss or liability by reason of such settlement or judgment. The provisions of this Section shall survive the termination or expiration or earlier termination of this Agreement. j. The Developers' indemnity obligations set forth in this ARTICLE 14 shall apply irrespective of whether or not Developers, or its Design Professionals, Contractors and Subcontractor or vendors of any tier obtains or fails to obtain insurance coverages as required in these General Conditions and in this Agreement and shall survive any termination of this Agreement. 15.0 SCHEDULES AND REPORTS --------------------- 15.1 The Developers shall prepare detailed construction schedules, and such other reports as Owner may reasonably require. The aforesaid schedules shall be prepared and submitted within ten (10) days of the execution of this Agreement and shall be revised on a monthly basis, unless otherwise specified, to reflect actual conditions at the Jobsite. In addition, the Developers shall prepare such material test reports and other reports required by the Drawings and Specifications. All schedules and reports shall be submitted to the parties and addresses designated by Owner. 16.0 INTENTIONALLY OMITTED --------------------- 17.0 FORCE MAJEURE ------------- 17.1 Force Majeure means an occurrence described herein which affects the respective duties and obligations of the parties hereunder and which duties and obligations shall be 9 40 suspended while and so long as performance thereof is prevented or impeded. A Force Majeure occurrence means, among other things, civil disturbances, riots, fire, weather which is both severe and unusual, governmental action, war acts, or acts of God, which occurrence is beyond the reasonable control of the party from whom the performance was due (but does not include the failure to obtain Permits or Assisted Living Permits or comply with Governmental Requirements); provided, however, that such party uses its best efforts and acts in good faith to avoid or overcome the impediment. 17.2 Any delays in or failure of performance by either party arising from a Force Majeure shall not constitute default hereunder or give rise to any claim for damages if caused by and to the extent caused by Force Majeure occurrences. The foregoing shall not be considered a waiver of either party's obligations hereunder including the obligation of the Developers to fund excess costs as provided in SECTION 5.A of the Agreement, nor shall it apply to the payment of monies due for services already performed or materials purchased nor for those activities to be continued during the Force Majeure occurrence. Any excess costs arising due to Force Majeure will be defined as Excess Project Costs for the purposes of Section 21.2 of the Lease. 17.3 In the event of such Force Majeure occurrences, an equitable adjustment shall be made in the Substantial Completion Date or Final Completion Date, as the case may be, but in no event shall the Substantial Completion Date be extended for a period of more that sixty (60) days in the aggregate nor shall the Final Completion Date be extended for more than sixty (60) days in the aggregate. 18.0 INTENTIONALLY OMITTED 19.0 EXPEDITING PROCUREMENT ---------------------- 19.1 Upon request, Developers shall furnish Owner copies of all of Developers' purchase orders and contracts or subcontracts for materials, equipment, or services. In each instance where Developers is unable to furnish third-party materials, equipment, or work at a rate which will permit Developers to meet the schedule and/or any of the completion dates, and if Developers is then or thereby becomes in Default under this Agreement, Developers shall immediately give Owner written notice of such circumstances. Owner, or its authorized representative, shall have the option to expedite the purchase and delivery of such items to the extent the Consulting Engineer reasonably certifies that such action is necessary to complete the Work by the Substantial Completion Date. Developers' purchase orders shall contain a clause informing its suppliers of this option. Should Owner be required to purchase any items which should have been furnished by Developers, Owner shall deduct from the Contract Sum any such items plus any reasonable transportation expenses and administrative costs in connection therewith. 19.2 Expediting by Owner of Developers' suppliers, Contractors and Subcontractors shall not relieve Developers of its duty to expedite its own purchase orders, and that of its Contractors and Subcontractors nor shall it relieve Developers from any other obligations. 10 41 20.0 CHANGES ------- 20.1 Developers, but not the Owner, may request that changes be made in the Work; provided, however, that the Developers can make change orders for up to $10,000 per change order, but not more than $70,000 in the aggregate, without the prior written consent of Owner. Such request from Developers to Owner shall specify the change in plans, specifications, procedures, time, sequence, or other requirements of this Agreement, and specify whether such change will delay the completion of the Work beyond the Substantial Completion Date. Developers agrees that to the extent there are any deficiencies in the Plans and Specifications in order to meet the requirements for a Certificate of Occupancy and operation of the Project as a personal care home providing assisted living services, the Developers shall be responsible for all costs associated with any necessary changes to the Plans and Specifications and the Work. 20.2 No adjustment in price or time of performance shall be made for changes in arrangement, aesthetics, substitution of equivalent materials or equipment or other changes, unless such changes materially increase or reduce Developers' cost of performing the Work or extend the time that Developers' equipment and forces are required to be engaged in performing the Work. 20.3 INTENTIONALLY OMITTED 20.4 The method of determining the equitable adjustment shall be specified, and, if possible, the price fixed at the time of the issuance of written direction for the change. Unless a lump sum or other method of pricing is established by agreement, Owner may direct determination of the equitable adjustment in price, whether an increase or decrease, by any of the following methods: (a) agreed or established fixed unit prices, or (b) cost. 20.5 If the cost method is directed by Owner, the adjustment will be based on the cost of the change in the Work using the formula established in this Agreement, or if not established herein, by other agreement. 20.6 In the absence of agreement, Developers shall be paid all actual, direct additional costs incurred, without allocation of general and administrative expense. The costs from any Contractors or Subcontractors must be reasonable and are subject to the approval of Owner. 20.7 In case of deletion or reduction of the Work by such change, Developers shall not be entitled to anticipated contribution to home office overhead and profit from any portion of the Work not performed. 20.8 Developers shall maintain and furnish and shall cause its Contractors and Subcontractors to maintain and furnish Owner accurate and detailed records segregating the cost of the change in the Work. The records shall include, at a minimum, the names and classifications of workers employed, the description and nature of the work performed, the hours worked, the materials and plant equipment incorporated into the Work and the machinery, equipment and other things utilized, if any. 11 42 20.9 Should Developers receive, accept, and act upon any change not given in accordance with the terms of this Article, Developers does so at its own risk and all claims by Developers for payment by Owner for such work shall not be valid unless otherwise agreed to by Owner in writing. 12 43 21.0 PROTECTION OF WORK; REGULATIONS ------------------------------- 21.1 In the performance of this Agreement, the Developers shall, at all times, exercise every reasonable precaution to protect, preserve, and prevent from accident, damage, and injury arising out of the Work, all persons and property, including the Work and any existing structures. Developers shall have complete responsibility for the Work and the protection thereof, and for preventing injuries to person and damage to the Work and property and utilities of or about the Work. The Developers shall, in addition, comply with all regulations of any applicable federal or state Occupational Safety and Health Act (OSHA), rules or regulations, and any special safety and health regulations as may reasonably be issued by Owner. 21.2 Developers shall design, furnish, and erect or cause to be designed, furnished and erected, such barricades, fences, and railings; give such warnings; display such lights, signals, and signs; exercise such precautions against fire; adopt and enforce such rules and regulations, and take such other precautions as may be reasonably necessary, desirable or proper. 21.3 Developers shall promptly report in writing to Owner all accidents howsoever arising out of or in connection with the performance of this Agreement, whether on or adjacent to the Jobsite, which result in death, injury, or property damage, giving full details and statements of witnesses. In addition, if death or serious injury or serious damage is caused, the accident shall be reported immediately to Owner. 21.4 If any claim is made by any third person against the Developers or its suppliers, Contractors or Subcontractors on account of any accident at the Project or arising out of or in connection with the performance of this Agreement, the Developers shall promptly report the fact in writing to Owner, giving full details of the claim. 21.5 It shall be the exclusive responsibility of Developers to cause its Contractors and Subcontractors to comply in full with the requirements of this Article. 22.0 PARTIAL OCCUPANCY AND USE ------------------------- Owner shall have the right to take possession of any substantially completed portion of the Work so long as Owner has accepted such portion of the Work as satisfying Substantial Completion and any such possession shall not hinder timely completion of the Work. Such partial occupancy and use shall not imply final acceptance by Owner of such portion nor shall it relieve Developers of the obligation to complete all of the Work strictly in accordance with the requirements of this Agreement. 23.0 COOPERATION WITH OTHERS ----------------------- 23.1 Developers and Owner shall fully cooperate with the Design Professionals, Consulting Engineer and all Contractors and Subcontractors on the Jobsite and Developers shall 13 44 carefully coordinate its own work with such other work. Developers shall not permit any act which will interfere with the performance of work by any other parties on the Jobsite. 24.0 INTENTIONALLY OMITTED --------------------- 25.0 INSPECTION ---------- 25.1 All materials, equipment, and work shall be subject to inspection at all times by Owner or any agents appointed by Owner including but not limited to the Consulting Engineer. 25.2 No Work shall be covered until inspected and released in accordance with established inspection procedures of relevant Governmental Authorities. All Work covered prior to inspection shall be uncovered and exposed by Developers for inspection on request of Owner; provided that the cost of such inspection, uncovering and (if applicable) remediation shall be borne by Developers if the results of such inspection disclose that the Work fails to comply the Plans and Specifications and Governmental Requirements; otherwise Owner shall bear such cost. 25.3 For inspection of materials, equipment, or work away from Jobsite, where specified, it is Developers' responsibility to notify Owner in a reasonable time as to where such materials, equipment, or work are being produced or performed, and when they will be ready for inspection. 25.4 Inspection by Owner or its agents, shall not relieve Developers from its responsibility of furnishing materials, equipment, and work strictly in accordance with the Drawings and Specifications; nor shall it relieve Developers from its responsibilities and guarantees for materials, equipment and workmanship. Neither shall such inspection, interim or final, nor failure to detect defective materials, equipment, or workmanship constitute acceptance of such materials, equipment, or workmanship. Furthermore, payment to Developers by Owner shall not constitute acceptance. 25.5 Owner reserves the right to waive inspection at any time or point without prejudice to its right, at its own cost, to pass on acceptability of materials, equipment and work at a later time. 25.6 Developers acknowledges that the Inspection Fee for Owner's Consulting Engineer is included in the Budget and can be advanced directly by Owner to the Consulting Engineer monthly without notice to Developers. Developers shall be responsible for the fees and expenses of the Consulting Engineer. 26.0 TESTS ----- 26.1 Developers shall provide for such tests as are required by the Drawings and Specifications, or Governmental Requirements applicable to the Work, and provide Owner with reasonable advance notice of such tests. Owner may elect to be present during any tests and shall 14 45 be entitled to copies of all test results. Developers shall provide all necessary materials, labor, apparatus, etc. required to perform all tests. 27.0 CLEANUP ------- 27.1 Developers shall keep the Jobsite and the vicinity of the Work clear of debris and rubbish. Developers shall remove all rubbish and debris from time to time and at the completion of the Work. Developers shall maintain the Jobsite and the vicinity of the Work clean, in good condition, and ready for use. Developers shall promptly clean all debris from the Jobsite. 28.0 CONTRACTING, SUBCONTRACTING AND PUBLICITY ----------------------------------------- 28.1 Developers will provide Owner with a list of all Contractors and Subcontractors providing labor, materials or services to the Project. It is understood and agreed that Developers shall use the form of contract approved by Owner and attached hereto as EXHIBIT K and shall obtain Owner's written approval prior to making any changes therein that would materially change the contract, except for items related to insurance and indemnification, which shall not be changed. Contracting of any nature by Developers shall not relieve Developers of its duties, obligations, responsibilities, guarantees, or liabilities under this Agreement or create any contractual relationship between Contractors and Subcontractors and Owner. 28.2 The Developers and Owner agree that neither will use the name of the other in any advertising or publicity of any kind without the other party's prior approval, except that Owner or Developers may identify Developers, Owner and/or the Project in connection with negotiations for financing relative to the Project and promotional materials of Owner or Developers. Developers and Owner each agree that proprietary or financial information of the other shall be held in confidence and not disclosed to third parties, provided Owner shall be entitled to disclose such materials to rating agencies, government agencies, assignees, mortgagees of the Project, and financial, legal and accounting consultants. 29.0 LIENS ----- INTENTIONALLY DELETED 30.0 TERMINATION FOR CAUSE --------------------- 30.1 Should the Developers (i) fail in any respect to prosecute the Work with promptness and diligence, all in Owner's reasonable judgment, following ten (10) business days written notice from Owner, setting forth in reasonable detail such failure or (ii) become bankrupt or insolvent or go or be put into liquidation or dissolution, either voluntarily, or involuntarily, or petition for an arrangement or reorganization under the Federal Bankruptcy Code, or make a general assignment for the benefit of creditors or otherwise acknowledge insolvency (and, in the case of involuntary bankruptcy action, if such filing or petition is not discharged within 90 days) or should a Default under ARTICLE 36 occur: 15 46 a. Owner may take whatever action it deems reasonably necessary to cure such default and charge the entire cost thereof to the Developers in which event said cost shall be deducted from any monies due or to become due to the Developers under this Agreement. Owner will have no obligation to provide notice of default or allow for any cure period other than as specifically set forth in this Agreement; or b. Owner may, at its election, terminate the Work of the Developers temporarily, partially or completely, and take over the same, including all materials, tools, and equipment to the Jobsite, and complete the Work. If this occurs, the Developers shall not be entitled to receive any further payment until the Work hereunder shall have been wholly finished. If the costs, expenses, losses, damages, reasonable attorneys fees and other charges, together with all payments theretofore made to or for the account of the Developers, shall exceed the sum which would have been payable under this Agreement if the Work had been performed and completed by Developers, the Developers shall pay the amount of the excess to Owner. Developers shall be entitled to payment for Work completed pursuant to this Agreement prior to its default hereunder, provided, however, that if the cost of completion of the Work by Owner is less than the unpaid portion of the Contract Sum, the Owner will not be responsible to pay any monies in excess of any sums advanced to complete the Work; or c. Owner may terminate the Agreement and pursue all available legal and equitable remedies (except provisions which relate to Developers' warranty and indemnity obligations hereunder which shall survive such termination). d. Notwithstanding the above terms of Article 30.1, upon written notice provided to Owner not more than ninety (90) days, but not less than fifteen (15) days, prior to the Substantial Completion Date, Developers may extend the Substantial Completion Date (and thereby the Final Completion Date) by six (6) months (180 days) (the "Extended Completion Date") provided (i) on the first day of the six month extension period and on each of the next five (5) thirty day anniversaries thereafter, Developers shall make those payments of Base Rent (as defined under the Lease) and Additional Rent (as defined under the Lease) to Owner which would be required of Developers (as defined under the Lease) if the Lease were then in effect; (ii) no Default exists on the first day of the six (6) month extension period; and (iii) up to $180,000 of the Letter of Credit in total may be used to fund such lease payments. Upon receipt of any notice of extension from Developers, Owner agrees to promptly calculate and inform Developers of all amounts due under this Section 30.1(d); Developers agrees to pay all amount due hereunder within five (5) days of receipt of such calculation. The parties acknowledge that Owner will incur additional costs and expenses and will lose significant revenues as a result of Developers' failure to timely perform hereunder. Accordingly, the parties agree that this provision is intended to compensate Owner and is not intended as a penalty. If Developers exercises their rights under this Section and makes draws under the Letter of Credit then the provisions of Section 27 of the Agreement shall apply as to the restoration of the Letter of Credit to $625,000 less any Start-Up Cost Amounts. 16 47 Notwithstanding the above, Developers shall have the right to provide such extension notice to Owner at any time where the Consulting Engineer shall certify to Owner that the Work is not capable of Final Completion by the Final Completion Date. 31.0 INTENTIONALLY OMITTED --------------------- 32.0 PROGRESS PAYMENTS AND FINAL PAYMENT ----------------------------------- 32.1 CONTRACT SUM. 32.1.1 The Contract Sum is stated in this Agreement and, including authorized adjustments thereto and the Developers' Fee, is the total amount payable by the Owner to the Developers for the performance of the Work under this Agreement. 32.2 BUDGET. 32.2.1 All applications for Payment of the Contract Sum (the "Application for Payment") by the Developers shall be based on the values allocated to the various portions of the Work as set forth in the Budget. This Budget shall be used only as a basis for the Developers' Applications for Payment. 32.3 APPLICATION FOR PAYMENT. 32.3.1 On or before the 15th day of each month, the Developers shall submit to the Consulting Engineer an itemized Application for Payment for Hard Costs and, if applicable, submit to Owner an itemized Application for Payment for Soft Costs, notarized if required, supported by such data substantiating the Developers' right to payment as the Owner may require, and reflecting the appropriate percentage. The Developers' Application for Payment shall: 32.3.1.1 Reflect the Budget of values for Work. 32.3.1.2 Be numbered sequentially. 32.3.1.3 Be submitted to the attention of Consulting Engineer (as to Hard Costs) and Owner (as to Hard Costs and Soft Costs). 32.3.1.4 Reflect the proper Retainage. 32.3.1.5 Be submitted on a monthly basis by the 15th day of each month. 32.3.1.6 Be accompanied by other supporting documentation as Owner may reasonably require. 17 48 32.3.1.7 Each Application for Payment submitted by Developers shall be accompanied by an executed copy of a lien waiver in form and content satisfactory to Owner executed by each Design Professional, Contractor and Subcontractor, or other potential lien or reflecting payment in full for all services rendered or materials provided or labor performed through the date of the Application for Payment for the previous months. 32.3.2 Payments will only be made on account of materials or equipment not incorporated in the Work but delivered and suitably stored at the Jobsite, if approved in advance in writing by the Owner. Payments may be made for material or equipment stored at some other location. Payment for materials or equipment stored on the Jobsite or at another location shall be conditioned upon submission by the Developers of bills of sale or such other procedures satisfactory to the Owner to establish the Owner's title to such materials or equipment or otherwise protect the Owner's interest, including applicable insurance. 32.3.3 The Developers warrants that title to all Work, materials, services and equipment covered by an Application for Payment will pass to the Owner either by incorporation in the construction or upon the receipt of payment by the Developers, whichever occurs first, free and clear of all liens, claims, security interests or encumbrances, and that no Work, materials, services or equipment covered by an Application for Payment will have been acquired by the Developers, or by any other person performing Work at the site or furnishing materials and equipment for the Project, subject to an agreement under which an interest therein or an encumbrance thereon is retained by the seller or otherwise imposed by the Developers or such other person. 32.4 CERTIFICATE FOR PAYMENT. 32.4.1 On all Applications for Payment of Hard Costs, Consulting Engineer will, within fifteen (15) days after the receipt of the Developers' Application for Payment, either issue a "Certificate for Payment" to the Owner, for such amount as the Consulting Engineer determines is properly due, or notify the Owner in writing (the "Notice of Denial") his reasons for withholding a Certificate of Payment as provided in Subparagraph 32.6.1, in each case providing a copy of such Certificate for Payment or Notice of Denial to Developers. 32.4.2 The issuance of a Certificate for Payment will constitute a representation by the Consulting Engineer to the Owner, based on his observations at the Jobsite and the data comprising the Application for Payment, that the Work has progressed to the point indicated; that, to the best of his knowledge, information and belief, the quality of the Work is in accordance with the Contract Documents subject to an evaluation of the Work for conformance with the Contract Documents upon Substantial Completion, to the results of any subsequent tests required by or performed under the Contract Documents, and to minor deviations from the Contract Documents correctable prior to completion) and that the Developers is entitled to payment in the amount certified. However, by issuing a Certificate for Payment, the Consulting Engineer shall not thereby be deemed to represent that he has made exhaustive or continuous on-site inspections to check the quality or quantity of the Work or that he has reviewed the construction means, methods, 18 49 techniques, sequences or procedures, or that he has made any examination to ascertain how or for what purpose the Developers has used the moneys previously paid on account of the Contract Sum. 32.4.3 No Certificate of Payment shall be necessary for Applications for Payment of Soft Costs, which shall be paid by Owner in the manner and within the time provided below. 32.4.4 Notwithstanding anything contained herein, if at any time, the Consulting Engineer denies issuance of a Certificate of Payment based upon inclusion of particular items, Developers may accept payment of nondisputed items and withdraw its request for Payment only as it relates to disputed items. Developers may resubmit disputed requests for Payments or withdraw requests for Payment. 32.5 PROGRESS PAYMENTS. 32.5.1 After the Consulting Engineer has issued a Certificate for Payment, the Owner shall make payment in the manner and within the time provided below. Owner shall not be required to make any payments hereunder unless Developers simultaneously delivers to Owner a lien release covering the period related to such payment (which release may be conditional upon the receipt of payment), together with lien releases from all persons and entities providing labor services or materials to the Project through the date of the previous payments, together with such affidavits as Owner may require pursuant to the Pennsylvania construction lien laws, and otherwise satisfies the requirements of this Agreement. 32.5.2 The Developers shall promptly pay all Design Professionals, Contractors and Subcontractors, upon receipt of payment from the Owner, out of the amount paid to the Developers on account of such Design Professional's, Contractor's or Subcontractor's work, the amount to which said Design Professional, Contractor or Subcontractor is entitled, reflecting the percentage actually retained, if any, from payments to the Developers on account of such Contractor's or Subcontractor's work. The Developers shall, by an appropriate agreement with each Design Professional, Contractor or Subcontractor, require each Design Professional, Contractor or Subcontractor to make payments to his subcontractors in a similar manner. 32.5.3 No Certificate for a Payment, nor any Payment, nor any partial or entire use or occupancy of the Project by the Owner, shall constitute final acceptance of any Work not in accordance with the Contract Documents. 32.5.4 Based upon Applications for Payment submitted to the Owner by the Developers and Certificates for Payment issued by the Consulting Engineer, if applicable, the Owner shall make progress payments on account of the Contract Sum to the Developers as provided below and elsewhere in the Contract Documents. 32.5.5 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month. 19 50 32.5.6 Provided an Application for Payment is received by the Owner and Consulting Engineer, if applicable, not later than the fifteenth (15th) day of a month, the Owner shall make payment of any undisputed portion to the Developers not later than the fifteenth (15th) day of the following month. If an Application for Payment is received by the Owner after the application date fixed above, payment of any undisputed portion shall be made by the Owner not later than thirty (30) days after the receipt of such Application for Payment. 32.5.7 Each Application for Payment shall be based upon the Budget, as may be reallocated from time to time as provided herein. 32.5.8 Applications for Payment shall indicate the percentage of completion of each portion of the Work as of the end of the period covered by the Application for Payment. 32.5.9 Subject to the provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: 32.5.9.1 Take that portion of the Contract Sum properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the total Contract Sum allocated to that portion of the Work in the Budget, less the appropriate Retainage. Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute may be included as provided in Article 20 of the General Conditions even though the Contract Sum has not yet been adjusted by Change Order. 32.5.9.2 Add that portion of the Contract Sum properly allocable to materials and equipment delivered and suitably stored for subsequent incorporation in the completed construction if approved in advance by the Owner, less the appropriate Retainage. 32.5.9.3 Subtract the aggregate of previous payments made by the Owner; and 32.5.9.4 Subtract amounts, if any, for which the Owner has withheld Payment or the Consulting Engineer has withheld or nullified a Certificate for Payment, as provided in Paragraph 32.6 of the General Conditions. 32.6 PAYMENTS WITHHELD. 32.6.1 The Owner may withhold payment on any Application for Payment of Soft Costs if in Owner's judgment the Payment is not properly due hereunder. The Consulting Engineer may decline to certify payment and may withhold his Certificate of Payment in whole or in part, to the extent reasonably necessary to protect the Owner, if in his opinion he is unable to make representations to the Owner as provided in Subparagraph 32.4.2. If the Consulting Engineer is unable to make representations to the Owner as provided in 20 51 Subparagraph 32.4.2 and to certify payments in the amount of the Application, he will notify the Developers as provided in Subparagraph 32.4. If the Developers and the Consulting Engineer cannot agree on a revised amount, the Consulting Engineer will promptly issue a Certificate for Payment for the amount for which he is able to make such representations to the Owner. The Consulting Engineer may also decline to certify payment or, because of subsequently discovered evidence or subsequent observations, he may nullify the whole or any part of any Certificate for Payment previously issued, to such extent as may be necessary in his opinion to protect the Owner from loss because of: a. defective Work not remedied, b. failure of the Developers to make payments properly to Design Professionals, or to Contractors and Subcontractors or to make payments for labor, materials or equipment, or c. reasonable evidence that the Work cannot be completed for the unpaid balance of the Contract Sum on or before the Final Completion Date. 32.6.2 When the above grounds in Subparagraph 32.6.1 are removed (including payments by Developers pursuant to Section 5 of this Agreement), payment shall be made for amounts withheld because of them, unless Owner has elected to terminate this Agreement pursuant to the rights herein granted in the event of a Default by Developers. 32.7 FAILURE OF PAYMENT. 32.7.1 If the Owner does not pay the Developers within seven (7) days after the date established in the Contract Documents any undisputed amounts certified by the Consulting Engineer, then the Developers may, upon seven (7) additional days written notice to the Owner, stop the Work until payment of the amount owing has been received. In addition, if such failure is caused by Owner, then Owner shall be obligated to increase the Contract Sum for any costs associated with such delay plus an amount equal to the then current Prime Rate as announced in the Wall Street Journal plus 2% on such increase for the period from the end of such initial 7-day period and extend the Substantial Completion Date and Extended Completion Date, if applicable, for each day that Work has been stopped. 32.8 SUBSTANTIAL COMPLETION. 32.8.1 When the Developers considers that Substantial Completion of the Work has occurred, the Developers shall prepare for submission to the Owner a list of items to be completed or corrected (the "Punchlist"). The failure to include any items on such Punchlist does not alter the responsibility of the Developers to complete all Work in accordance with the Contract Documents. The Consulting Engineer will conduct an inspection within twenty days of Developers' submission of the Punchlist, and upon Consulting Engineer's determination that Substantial Completion of the Work has occurred, he will then prepare a Certificate of Substantial Completion which shall establish the date of Substantial Completion, and shall assess costs to complete each Punchlist item (the "Punchlist Costs"). 21 52 32.8.2 Upon Substantial Completion of the Work and upon application by the Developers and certification by the Consulting Engineer, the Owner shall make payment, if any, for such Work or portion thereof, as provided in the Contract Documents, subject to Developers' obligation to provide lien releases and affidavits as required hereunder, provided, however, that Owner may retain the lesser of the applicable portion of Retainage or the amount which is two (2) times the Punchlist Costs with respect to such portion of the Work. 32.9 FINAL COMPLETION. 32.9.1 Upon receipt of written notice from Developers that the Work has reached Final Completion and is ready for final inspection and acceptance and upon receipt of a final Application for Payment, the Consulting Engineer will within twenty days of Owner's receipt of such written notice make such inspection and make a determination whether Final Completion of the Project has occurred. 32.9.2 Neither the Final Payment (as defined below) nor the remaining retained percentage shall become due until the Developers submits to the Consulting Engineer: (1) an affidavit that all payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or his property might in any way be responsible, have been paid or otherwise satisfied; (2) consent of surety, if any, to final payment; (3) all Contract Documents, including a complete set of as-built and record documents; (4) such other data as the Owner reasonably may require establishing payment or satisfaction of all obligations of the Developers in connection with the Work including receipts of final satisfaction and releases and waivers of liens and releases of any and all claims by the Contractors and Subcontractors, conforming in all material respects with the laws of the state where the Project is located and evidencing performance of the Work in accordance with the Contract Documents; (5) a release of the Owner and any of its insurers who have insured the Project or any aspect thereof from and against any claims (except to the extent of any claims theretofore timely filed which are owing but unpaid) and a release of the Owner from and against any claims between the Developers and a separate contractor; (6) any governmental certificates required by the Contract Documents or otherwise to evidence compliance of the Developers and the Work with applicable laws, ordinances, rules, codes and regulations and the Contract Documents; (7) otherwise satisfies the requirements of Subsection 32.10.3; and (8) warranties, guarantees, assignments thereof, and maintenance or other manuals, required by the Drawings and Specifications in the forms approved by the Owner, in favor of the Owner and such other persons as the Owner may direct. The submission of all of the foregoing is an express condition precedent to Contractor's entitlement to Final Payment. If any Design Professional, Contractor or Subcontractor refuses to furnish a release or waiver required by the Owner, the Developers may furnish a bond satisfactory to the Owner to indemnify him against any such lien. If such lien remains unsatisfied after all Payments are made, the Developers shall refund to the Owner all moneys that the latter may be compelled to pay in discharging such lien, including all costs and reasonable attorneys fees. 22 53 32.9.3 Notwithstanding anything contained in these General Conditions, or elsewhere in this Agreement to the contrary, $195,000 of the $300,000 Developers' Fee shall be paid to Developers on the Letter of Credit Effective Date, $45,000 shall be paid in equal monthly installments over the twelve months immediately following the Letter of Credit Effective Date provided no Default occurs hereunder, and none of the $60,000 balance of the Developers' Fee as set forth in the Budget shall be deemed to be earned, due or payable, in whole or in part, until and unless the Developers has performed each and every one of its obligations hereunder in full and in accordance with the terms hereof and the Final Payment has been made by Owner. At such point and after deducting therefrom any and all amounts reasonably necessary to satisfy actual and potential claims, liabilities, damages, expenses and obligations not included in the Budget, any remaining unpaid balance of the said Developers' Fee that is due shall then be paid. 32.10 CONDITIONS TO PAYMENTS. 32.10.1 In addition to the other requirements of this Agreement, the following shall be conditions precedent to the initial Payment (the "Initial Payment") for Work under this Agreement: (a) INSURANCE POLICIES. Owner shall have received counterpart originals of each insurance policy (or satisfactory certificates of insurance) required under this Agreement. All such insurance policies shall be in form and substance, and in amounts, satisfactory to Owner, and shall be endorsed as required by this Agreement. (b) DRAWINGS AND SPECIFICATIONS. The Drawings and Specifications shall have been approved by Owner and authenticated by signatures of Developers, the Design Professional responsible for preparation on the Drawings and Specifications, the General Contractor or, the Consulting Engineer, and all Governmental Authorities having jurisdiction; one copy of the Drawings and Specifications, as so authenticated, shall have been delivered to Owner and the Consulting Engineer; and the Drawings and Specifications shall have been assigned to Owner. (c) PERMITS. All necessary building permits, other Permits and the Assisted Living Permits (other than the License which is not available until completion of the Improvements) and all other governmental and private authorizations and approvals necessary for construction and operation of the Improvements in accordance with the Drawings and Specifications and all Governmental Requirements shall have been obtained and copies thereof delivered to Owner and the Consulting Engineer. (d) PLANNING AND ZONING APPROVALS. Reasonably acceptable evidence as to any required planning and zoning approvals required in connection with the construction of the Project in accordance with the Drawings and Specifications and any Governmental Requirements shall have been issued by the Governmental Authorities having jurisdiction and furnished to Owner and Consulting Engineer. 23 54 (e) ACCESS AND UTILITY AVAILABILITY. Owner shall have received reasonably satisfactory written evidence of the legal access and availability of utilities (including without limitation adequate water, storm water sewer, sanitary sewer, electricity and gas, if required by the Drawings and Specifications) adequate to serve the Project. (f) GENERAL CONTRACTOR. Owner shall have approved the General Contractor, the General Contractor's construction manager for the Project if any, and the General Construction Contract (and related construction documents and any construction manager agreement) if any, and such General Construction Contract shall have been assigned to Owner. Owner approves the General Contractor and Scott Hollinger, the construction manager of the General Contractor. (g) SUBCONTRACTORS. Developers shall have furnished to Owner a list of the names of all Major Subcontractors which have been identified, and Owner, in consultation with the Consulting Engineer, shall have approved all Major Subcontractors and the terms and conditions of their Major Subcontracts. (h) PAYMENT AND PERFORMANCE BONDS. Performance and labor and material payment bonds, in form and substance and from a company reasonably satisfactory to Owner, shall have been issued in respect of the full amount of the General Construction Contract, naming Owner as an obligee. In addition, the form and content of the dual obligee rider naming Owner as an obligee shall have been reviewed and approved by Owner, which approval shall not be unreasonably withheld or delayed. (i) MATERIALS. At the request of Owner or Consulting Engineer, which request shall specify where additional detail with respect to materials, equipment and maintenance of all materials required over and above that which is provided in the Plans and Specifications is needed, Developers shall have furnished Owner such information which shall be satisfactory to Owner and approved by the Consulting Engineer. (j) GOVERNMENTAL REQUIREMENTS. Developers shall have delivered to Owner evidence satisfactory to Owner demonstrating that the Project as designed and constructed in accordance with Governmental Requirements, the Drawings and Specifications, and operated for its intended use by Owner will qualify for and comply with all applicable Permits, Assisted Living Permits, and other Governmental Requirements necessary to operate the Project. (k) LETTER OF CREDIT. The Letter of Credit has been issued and is in full force and effect. (l) NO DEFAULT. There shall be no Default under this Agreement. (m) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Developers in the Lease Agreement and this Agreement shall be true and correct in all material respects on and as of such time with the same effect as though such representations and 24 55 warranties had been made on and as of such time, except to the extent that such representations and warranties expressly relate to an earlier date. (n) NO ADVERSE CHANGE. There shall not have occurred any material and adverse change in any of the Developers' or any Guarantor's financial position since the Effective Date, nor any condition, event, or act that, in any case or in the aggregate, would materially and adversely affect Developers' or any Guarantor's ability to complete the construction of the Project in accordance with the Agreement, the Contract Documents and any Governmental Requirements. (o) CONSTRUCTION PROGRESS. The construction of the Project shall be proceeding in accordance with the Construction Schedule listed on EXHIBIT E attached hereto and made part hereof (the "Construction Schedule"), as may be revised from time to time as approved by Owner in its sole discretion, and the Drawings and Specifications, as determined by Owner and Consulting Engineer. If required by Owner, Owner shall receive a certification from the Consulting Engineer certifying that the construction of the Project to date has been completed in accordance with the Drawings and Specifications and all Governmental Requirements and that the construction is proceeding in accordance with the Construction Schedule. (p) CERTIFICATION OF CONSULTING ENGINEER. The Consulting Engineer shall have certified that they have no reason to believe the construction of the Project cannot or will not be completed in accordance with the Drawings and Specifications and the Substantial Completion Date. If the Consulting Engineer cannot make such a certification, whether by reason of changes in the Drawings and Specifications or for any other reason whatsoever, Consulting Engineer shall specify the nature of the problem and what would constitute an acceptable remedy and an estimate of the time and cost of such remedy and shall make such assessment immediately available to both Owner and Developers (the "Consulting Engineer's Assessment"). If Owner and Developers cannot resolve such matter within five (5) days of receipt of the Consulting Engineer's Assessment, Developers shall, before the Initial Payment is made by Owner, make a deposit with Owner in the amount requested by Owner or, with the consent of Owner, take such action as will justify a certification by the Consulting Engineer as herein required. (q) TITLE BRING TO DATE. The Title Company or an attorney licensed to practice law in the Commonwealth of Pennsylvania who has been approved by Owner in its reasonable discretion shall have issued a certificate confirming that it (he/she) has reviewed the Cumberland County Land Records and that no liens or other encumbrances have been recorded therein against the Land or the title to the Project since the date of the Title Insurance Policy or the latest certificate which shall have been submitted to Owner, as the case may be, except as may have been approved by Owner. (r) SURVEY. If requested by Owner, and at Owner's cost Developers shall provide Owner with a current survey of the Land, which survey must be satisfactory to Owner. Such survey shall show the location of the Improvements on the Land with relation to the boundary lines of the Land and all easements and set-back lines, shall be prepared by a registered engineer who shall guaranty thereon that such location is in compliance with all set-back lines and other 25 56 applicable restrictions, and shall comply with the Owner's survey requirements. An original print of the Survey shall be supplied to the Title Company, and it shall be a condition precedent to making any subsequent Payment that the Title Company shall certify that the same discloses no violations, encroachments, or variations of set-back or other restrictions, except such which Owner may waive in writing. (s) POST CLOSING AGREEMENT. All requirements of the Post Closing Agreement executed on the Effective Date have been satisfied. 32.10.2 In addition to the other requirements of this Agreement, the following shall be conditions precedent to each Payment other than the Initial Payment and the Final Payment: (a) REPRESENTATIONS AND WARRANTIES. As of the date any Payment is made, the representations and warranties made by the Developers in this Agreement shall be true and correct in all material respects on and as of such time with the same effect as though such representations and warranties had been made on and as of such time, except to the extent that such representations and warranties expressly relate to an earlier date. (b) NO DEFAULT. As of the date such Payment is made, no Default, nor any event that, with the passage of time or the giving of notice, or both, would become a Default, shall have occurred and be continuing. (c) NO ADVERSE CHANGE. There shall not have occurred any material and adverse change in Developers' or any Guarantor's financial position since the Effective Date, nor any condition, event, or act that, in any case or in the aggregate, would materially and adversely affect Developers' or any Guarantor's ability to complete the construction of the Project in accordance with the Drawings and Specifications and any Governmental Requirements. (d) CONSTRUCTION PROGRESS. The construction of the Project shall be proceeding in accordance with the Construction Schedule and the Drawings and Specifications, as determined by Owner and Consulting Engineer. As a condition to any Payment, Owner shall receive a certification from the Consulting Engineer certifying that the construction of the Project to date has been completed in accordance with the Drawings and Specifications and all Governmental Requirements and that the construction is proceeding in accordance with the Construction Schedule. (e) CERTIFICATION OF CONSULTING ENGINEER. The Consulting Engineer shall have certified that they have no reason to believe the construction of the Project cannot or will not be completed in accordance with the Drawings and Specifications and the Substantial Completion Date. If the Consulting Engineer cannot make such certification, whether by reason of changes in the Drawings and Specifications or for any other reason whatsoever, Consulting Engineer shall specify the nature of the problem and what would constitute an acceptable remedy and an estimate of the time and cost of such remedy and shall make such assessment immediately available to both Owner and Developers. If Owner and Developers cannot resolve such matter within five (5) days 26 57 of receipt of the Consulting Engineer's Assessment, Developers shall, before the Payment is made by Owner, either (i) make a deposit with Owner in the amount requested by Owner or, with the consent of Owner, take such action as will justify a certification by the Consulting Engineer as herein required or (ii) direct Owner to draw up to 50% of the full availability under the Letter of Credit or the available amount (whichever is less) pursuant to the terms of Section 27 of this Agreement. (f) TITLE BRING TO DATE. The Title Company or an attorney licensed to practice law in the Commonwealth of Pennsylvania who has been approved by Owner in its reasonable discretion shall have issued a certificate confirming that it (he/she) has reviewed the Cumberland County Land Records and that no liens or other encumbrances have been recorded therein against the Land or the title to the Project since the date of the Title Insurance Policy or the latest certificate which shall have been submitted to Owner, as the case may be, except as may have been approved by Owner. (g) SURVEY. If requested by Owner and at Owner's cost (except for the footing and foundation survey provided below) Developers shall provide Owner with a current survey of the Land, which survey must be satisfactory to Owner. All such surveys shall show the location of the Improvements on the Land with relation to the boundary lines of the Land and all easements and set-back lines, shall be prepared by a registered engineer who shall guaranty thereon that such location is in compliance with all set-back lines and other applicable restrictions, and shall comply with the Owner's survey requirements. As soon as the footings and foundations of each building or structure are in place, Developers shall deliver a survey to Owner showing the location thereof. At any time a survey is required from Developers, as aforesaid, an original print thereof shall be supplied to the Title Company, and it shall be a condition precedent to making any subsequent Payment that the Title Company shall certify that the same discloses no violations, encroachments, or variations of set-back or other restrictions, except such which Owner may waive in writing. (h) INSURANCE All insurance required by this Agreement shall be in full force and effect, and Owner shall have been provided with satisfactory evidence of such coverage in accordance with this Agreement. (i) BONDS IN EFFECT. Developers shall not have done and shall not have permitted anything to be done that would affect the coverage of any performance or labor and material payment bonds required by the terms of this Agreement, and Developers shall, upon demand of Owner, furnish a written statement from the bonding company assuring that such coverage continues in full force and effect. (j) PERMITS AND APPROVALS. The building and other Permits, Assisted Living Permits and all other governmental and private approvals and authorizations required or obtained under applicable law pertaining to the construction of the Project in accordance with the Drawings and Specifications and Governmental Requirements shall have been issued and continue in force and effect. 27 58 32.10.3 In addition to the other requirements of this Agreement, the following shall be conditions precedent to the final Payment under this Agreement (the "Final Payment"), including the final installment of the Developer's Fee (except for the Post Final Payment Marketing & Operational Start-up Costs and Personal Property Costs (as defined below), which shall only be paid as provided in 32.12 below): (a) LIEN RELEASES AND WAIVERS. Final lien releases or waivers from the General Contractor, Design Professionals and all Contractors and Subcontractors, suppliers, and any other Person entitled to file a mechanic's lien with respect to the Project shall have been furnished to Owner in form and substance satisfactory to Owner and no mechanics' or materialmen's liens shall have been filed against the Project; provided, however, to the extent sums remain outstanding as a result of Punchlist items identified as provided in Section 32.8 above, such lien releases or waivers may be conditioned upon or subject to payment of such outstanding sums only; (b) CERTIFICATES OF OCCUPANCY. Owner shall have received copies of the final, unconditional, permanent, certificates of occupancy issued by the appropriate Governmental Authorities for each building and for any other portion of the Project for which certificates of occupancy must be issued as a result of Governmental Requirements to enable the Project to open for business and accept residents. (c) PERMITS. All Permits and Assisted Living Permits necessary for the administration, operation, occupancy and use of the Project for its intended use shall be in full force and effect and free from default, condition, limitation, complaint or challenge by any governmental authority having jurisdiction and shall have been issued in the name of SCOSL or Balanced Care at Shippensburg, Inc. (d) SURVEY. If requested by Owner, Owner shall have received an updated as-built survey of the Project, in form and substance satisfactory to Owner. Such survey shall show the location of the Improvements on the Land with relation to the boundary lines of the Land and all easements and set-back lines, shall be prepared by a registered engineer who shall guaranty thereon that such location is in compliance with all set-back lines and other applicable restrictions, and shall comply with the Owner's survey requirements. An original print of the survey shall be supplied to the Title Company, and it shall be a condition precedent to making the Final Payment that the Title Company shall certify that the same discloses no violations, encroachments, or variations of set-back or other restrictions, except such which Owner may waive in writing. (e) TITLE BRING TO DATE. The Title Company or an attorney licensed to practice law in the Commonwealth of Pennsylvania who has been approved by Owner in its reasonable discretion shall have issued a certificate confirming that it (he/she) has reviewed the Cumberland County Land Records and that no liens or other encumbrances have been recorded therein against the Land or the title to the Project since the date of the Title Insurance Policy or the 28 59 latest certificate which shall have been submitted to Owner, as the case may be, except as may have been approved by Owner. (f) INSURANCE. All insurance required to be maintained pursuant to this Agreement, including without limitation "All-Risk" property insurance shall be in full force and effect and copies of such policies or certificates with respect thereto shall have been delivered to Owner. (g) NO DEFAULT. No Default or Event of Default shall have occurred hereunder, under the Contract Documents or the Lease, and be continuing. (h) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Developers in this Agreement shall be true and correct in all material respects on and as of such time with the same effect as though such representations and warranties had been made on and as of such time, except to the extent that such representations and warranties expressly relate to an earlier date. (i) AUDIT. Owner shall have made, directly or through its agents, a physical and/or financial inspection and audit of the Project and/or Developers' books and records pertaining to all amounts disbursed under the Contract Documents to insure compliance with the terms hereof. The audit shall be at Developer's cost and expense. If such audit reveals any material discrepancies or errors, the same shall be the responsibility of the Developers to correct or fix and at Developer's expense. (j) LEASE COMMENCEMENT DATE. The Lease Commencement Date shall have occurred. 32.11 REALLOCATIONS. 32.11.1 From time to time Developers may request that Owner make payments allocated to any of the line items in the Budget for other purposes or other line items in the Budget and Owner, in its sole discretion, may elect to approve or disapprove such requested reallocations. Developers shall not be entitled to require that Owner reallocate funds among such items and Developers shall not be entitled to reallocate items of cost or change the Budget without the prior written consent of Owner. Developers agree that any reallocations provided for in this Section 32.11 may be evidenced by written amendments to this Agreement and upon request of Owner, and as a condition to any such reallocation, Developers will execute such amendments in form and substance satisfactory to Owner and cause such amendments to be recorded. 32.12 PAYMENT OF DEVELOPERS' FEE AND POST FINAL PAYMENT MARKETING & OPERATIONAL START-UP AND PERSONAL PROPERTY COSTS. 32.12.1 To the extent funds remain available with respect to the line items "Marketing & Operational Start-Up" and/or "Personal Property" (whether as part of the line items 29 60 therefore under the original Budget or as a result of reallocation among line items as permitted hereunder) funds for expenditures by Developers related to Marketing & Operational Start-Up and/or Personal Property incurred after the Developers' submission of an application for Final Payment (such expenditures herein called the "Post Final Payment Marketing & Operational Start-Up and Personal Property Costs") shall be advanced to Developers as provided in Section 5(C)(iii) of the Agreement; provided that the conditions contained in 32.10.3 remain true and correct as of the date of any such payment. 33.0 TIME ---- 33.1 DEFINITIONS. 33.1.1 Unless otherwise provided, the Contract Time is the period of time allotted in the Contract Documents for Final Completion of the Work as defined in Subparagraph 33.1.4 including authorized adjustments thereto. 33.1.2 The date of commencement of the construction portion of the Work is the Effective Date. 33.1.3 The date of Substantial Completion of the Work or designated portion thereof is the date upon which the Improvements are ready for their intended use and the Lease Commencement Date occurs pursuant to the terms of the Lease subject only to Punchlist items provided, however, that in no event will any portion of the Improvements be deemed substantially completed until a temporary or conditional Certificate of Occupancy has been issued by the appropriate Governmental Authority for such Improvements. 33.1.4 The date of Final Completion of the Work shall mean the date upon which all Work hereunder has been satisfactorily completed by Developers in accordance with this Agreement and all attachments thereto. 33.1.5 The term "day" as used in the Contract Documents shall mean calendar day unless otherwise specifically designated. 34.0 RECORDS AND ACCOUNTS -------------------- 34.1 Developers shall maintain, in accordance with generally accepted accounting principles consistently applied, accounting, cash receipt, disbursement and personnel books and records reflecting performance of the Work and shall preserve such records for a period of three (3) years after completion and acceptance of the Project as a whole by Owner. Owner shall have the right to inspect and audit any part of the books and records during business hours upon reasonable notice at the offices of the Developers. Copies of documents and records supporting request for payment or compliance with labor related provisions shall be furnished Owner with such request or at such times as Owner reasonably directs. 30 61 34.2 As a condition to Owner's payment of the Final Payment as provided for herein, Developers shall deliver to Owner as-built surveys of the Improvements, manufacturers warranties of materials, equipment and other items incorporated into the Improvements, as well as manuals and other written materials that are in Developers' possession. 35.0 CLAIMS AND DISPUTES ------------------- 35.1 DISPUTE. All questions arising under this Agreement shall be directed by Developers in the first instance to Consulting Engineer promptly after the question arose. Any claim not satisfactorily resolved by Consulting Engineer, and which is presented in writing within the time provided, may be appealed by notice in writing to an Officer of Owner within ten (10) working days after Consulting Engineer's initial decision. 35.2 UNRESOLVED DISPUTES. Pending resolution of any such dispute by settlement or by final judgment, the Developers shall proceed diligently with performance of the Work and maintain the Schedule during any dispute proceedings, unless otherwise instructed by Owner. 36.0 DEFAULT/REMEDIES UPON DEFAULT ----------------------------- 36.1 The occurrence of any of the following, after notice and expiration of all applicable grace periods, if any, shall be deemed a Default under this Agreement: (a) Unless provided for below, Developers' failure to perform any term, condition or covenant of this Agreement for a period of thirty (30) days following receipt of written notice from Owner; (b) Any representation, warranty, or statement made by any of the Developers, the Guarantor, in, under, or pursuant to this Agreement or any affidavit or other instrument executed or delivered with respect to the Agreement or the Project is determined by Owner to be false or misleading in any material respect as of the date hereof or thereof; or (c) If Substantial Completion or Final Completion does not occur on or before the Substantial Completion Date or Final Completion Date, taking into account any permissible extension thereof due to Force Majeure or pursuant to Article 30.1(d) on Developers' exercise of its rights to extend such dates; or (d) Subject to the Developers' rights under Sections 10.0 of the Agreement and Article 17.3 and Article 30.1(d) of the General Conditions as set forth above, if the Project is so materially injured or destroyed by fire or other casualty that the Consulting Engineer is unable to certify to Owner or Owner, in its sole discretion, is otherwise unable to confirm, that the construction of the Project in accordance with the Drawings and Specifications and all Governmental Requirements and any additional construction or repair necessary as a result of the fire or other casualty will be completed prior to the Final Completion Date; or 31 62 (e) If Developers fails to satisfy any conditions to any Payment within thirty (30) days following submission of an application for Payment (except for conditions related to default, insurance, representation and warranties and the Letter of Credit in which case no cure period is provided); or (f) Any change in the ownership interests of Developers or any change in the beneficial ownership of any entity constituting an owner of Developers other than changes permitted under Section 15.8 of the Lease; or (g) If Developers or any of their owners shall institute any proceedings for the dissolution or liquidation of Developers or fail to protect and preserve Developers' independent franchise as a corporation or pay taxes imposed in connection therewith or comply with any and all additional requirements under Governmental Requirements necessary thereto; or (h) If an Event of Default or Default shall occur as defined in the Lease, the Guaranty or any of the other Transaction Documents (as defined in the Lease). (i) Any default or event of default beyond the expiration of any applicable cure period under any agreement between any of the Developers or any Affiliate of the Developers and the Owner or any Affiliate of the Owner in connection with the Related Transactions. (j) A material change in financial condition of the Guarantor. (k) The failure of Developers to pay any excess cost as provided under Section 5 of this Agreement within ten (10) days after written notice from Owner. (l) The failure of the Developers to provide or keep in full force and effect, the Letter of Credit and any insurance required hereunder, including but not limited to the failure of Developers to satisfy the conditions set forth in Section 27 hereto. 36.2 In addition to any rights provided by any other provisions of this Agreement, in the event of a Default, Owner shall have the right to retain any money in its possession due to the Developers under this Agreement so as to reimburse Owner for any damage or costs caused by or attributable to a Default of the Developers with respect to this Agreement, including but not limited to Developers' late completion, breach of warranty, breach of guarantees, negligence or any other contractual breach. Failure to withhold payment shall in no event be construed as a waiver of any right of Owner to assert any claim for breach of any obligation under this Agreement between the parties at a later date. 37.0 CLEAN AIR AND WATER ------------------- 32 63 37.1 The Developers agrees to comply with clean air standards, clean water standards at the facilities at which the Work is being performed, and to complete the Work in compliance with all laws relative to environmental concerns. EX-10.46 43 BALANCED CARE CORPORATION 1 Exhibit 10.46 SCHEDULE TO FORM OF OCWEN DEVELOPMENT AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Date Developers Land Facility Architect Architect Agreement Dated As Of - ----------------------------------------------------------------------------------------------------------------------------- Medina, OH December 31, Senior Care 5.29 acres 80 units SSGS September 27, 1997 Operators of located on North Architectural 1997 Ohio, LLC and BCC Jefferson Street, Associates, Inc. Medina, Ohio Scholl, Sowers, Garner & Saylor Architectural Associates, Inc. Shippensburg, PA March 31, 1998 Senior Care 4.13 acres 60 units Charles D. November 6, Operators of located on Walnut Foster, 1997 Shippensburg, Bottom Road, Architect, P.A. LLC and BCC Shippensburg, Pennsylvania Centerville, OH March 31, 1998 Senior Care 4.8 acres located 106 units Scholl, Sowers, October 29, Operators of at the Garner & Saylor 1997 Centerville, LLC intersection of Architectural and BCC Lyons Road and Associates, Inc. Washington Church Road in Centerville, Ohio Facility Location Base Yield Rate General Contractor Letter Of Credit Name - ----------------------------------------------------------------------------------------------------------------------- Medina, OH 9.125% Adena Corporation $750,000 "Outlook Pointe at Medina" Shippensburg, PA 8.875% Pyramid Construction $625,000 "Outlook Pointe at Services, Inc. Shippensburg" or Balanced Care, Shippensburg Centerville, OH 8.875% Barclay White, Inc. $1,250,000 "Outlook Pointe at Centerville"
2
Facility Location Umbrella Excess Comprehensive Public Deficiency Minimum Developer's Fee Liability Liability Insurance Balance Insurance - ----------------------------------------------------------------------------------------------------------------------- Medina, OH $5,000,000 $1,000,000 per $750,000 $300,000 $400,000 incident and $3,000,000 in the aggregate Shippensburg, PA $10,000,000 $1,000,000 per $625,000 $425,000 $300,000 incident and $3,000,000 in the aggregate Centerville, OH $10,000,000 $3,000,000 per $1,250,000 $950,000 $$450,000 incident and $6,000,000 in the aggregate Facility Location Amount Of Amount Of Amount Of Developer's Jurisdiction Developer's Fee Developer's Fee Fee Payable On Date Payable On Letter Payable In Monthly Of Final Payment Credit Effective Date Installments - ----------------------------------------------------------------------------------------------------------------------- Medina, OH $260,000 $60,000 $80,000 Ohio Shippensburg, PA $195,000 $45,000 $60,000 Pennsylvania Centerville, OH $292,500 $67,500 $90,000 Ohio
EX-10.47 44 BALANCED CARE CORPORATION 1 Exhibit 10.47 FORM OF OPTION AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of March 31, 1998, between Senior Care Operators, LLC, a Delaware limited liability company and Oakhaven Senior Living, Inc., a California corporation (collectively, the "OPTIONOR") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, collectively, Optionor is the owner of 100% of the equity interests (the "EQUITY INTERESTS") of _______________________________ _________________, a Delaware limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate numbers 1 & 2 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company executed and delivered that certain Lease Agreement dated as of March 31, 1998 (the "LEASE") whereby the Company leased from Shippensburg ALF, Inc., a Florida corporation (the "LESSOR") property, together with all improvements built or to be built thereon, located in Cumberland County, Pennsylvania as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and Balanced Care at Shippensburg, Inc., a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of March 31, 1998 (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionor and the Company have entered into that certain Shortfall Funding Agreement dated as of March 31, 1998 (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents of which BCC is a party, only if Optionor executes and delivers an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of the Optionor, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionor hereby grants to BCC an option (the "OPTION") to purchase all of Optionor's right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests shall be paid to Optionor on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionor on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor: (1) on the earlier of one day after the issuance of the certificate of occupancy for the Facility or twelve months following the closing of construction financing under the Development Agreement (the "First Payment Date"), an amount 2 equal to the Current Yield (as hereinafter defined) on the Working Capital Reserve actually funded by Optionor through such date, payable in arrears for the period commencing on such funding date or dates through the First Payment Date, plus an amount equal to the Current Yield on the Working Capital Reserve actually funded by Optionor through such date for the next succeeding 12 month period, payable in advance, (2) on that date which is twelve months after the First Payment Date (the "Second Payment Date"), an amount calculated as 25% of the Current Yield on the Working Capital Reserve actually funded by the Optionor through such date, representing the first quarterly installment of the annual Current Yield for the following 12 month period, payable in advance, and (3) thereafter, on the first day of each three-month period following the Second Payment Date and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), 25% of the Current Yield on the Working Capital Reserve actually funded from time to time by the Optionor, compounded on an annual basis, representing quarterly installments of the annual Current Yield, payable in advance. "Current Yield" as used in this Agreement means an annual return equal to 27.5% of the Working Capital Reserve actually funded from time to time through the date of such calculation. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. (d) The "PURCHASE PRICE" as used herein shall mean (i) an amount equal to the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, plus (ii) an amount calculated as the Current Yield on the Working Capital Reserve actually funded by the Optionor under the Shortfall Agreement, compounded annually through the Closing Date (as defined below), plus (iii) the aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement), minus (iv) any Option Payments. The aggregate amount of all Advances and all other obligations due and payable by the Company or the Optionor through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. To avoid any doubt, BCC shall receive a credit against the Purchase Price for Option Payments paid as Current Yield in advance, to the extent that such advanced Option Payments are attributable to Current Yield accruing after the Closing Date. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), pursuant to the exercise of the Option, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionor (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionor shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionor shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably 2 3 request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents and without in any way implying that such actions are permissible under the Transaction Documents, if and to the extent that the funding of the Working Capital Reserve is advanced in the form of a loan to the Company (such advances, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing. Optionor shall give BCC prior written notice before authorizing the Company to make any Borrowings, detailing the amount thereof. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. 3. COVENANTS OF OPTIONOR/LEGEND/PLEDGE. (a) Optionor shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionor's rights, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute Equity Interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionor shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF MARCH 31, 1998. (c) To secure the obligations of the Optionor hereunder, Optionor hereby grants and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionor shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionor's ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionor shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not, and shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of Optionor or the 3 4 Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company or Optionor (provided, however, this restrictions shall not be construed to prohibit Optionor's Members or shareholders from receiving Option Payments in accordance with the terms and conditions of this Agreement), (iii) engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of Optionor or the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests in the Company or options, warrants or other rights to purchase any equity interests in the Company or any securities convertible or exchangeable for equity interests in the Company, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative or management service for the benefit of either Optionor or the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionor represents and warrants to BCC that (i) Optionor is the sole and exclusive owners of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionor's ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) each Optionor is validly organized and in good standing under the jurisdiction of its formation, this Agreement and the other Transaction Documents to which the Optionors are a party have been duly authorized by all requisite action and this Agreement and the other Transaction Documents to which each Optionor is a party constitutes the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws, (iii) no Person or Entity holds any Equity Interests in the Company, other than the Optionor, (iv) the Equity Interests have been duly issued to Optionor, are fully paid and nonassessable, (v) Optionor has the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vi) Optionor (and each person or Entity that has an ownership in Optionor) has had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionor's investment in the Equity Interests, (vii) Optionor (and each person or Entity that has an ownership interest in Optionor) has the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and has not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionor's investment in the Company and (viii) Optionor (and each person or Entity that has an ownership interest in Optionor) understands that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and Optionor (and each person or Entity that has an 4 5 ownership interest in Optionor) must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 6. ASSIGNMENT. Optionor may not assign, pledge, hypothecate or otherwise transfer its rights, obligations and duties hereunder without the prior written consent of BCC. BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of the Optionor; provided, however, no such transfer or assignment shall relieve BCC of its obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionor hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionor, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionor shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionor shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. BCC shall pay all reasonable counsel fees of Optionor in connection with enforcing any rights or benefits of Optionor hereunder. The rights and remedies of Optionor under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. (c) Notwithstanding the provisions of Section 7(b) and so long as no Event of Default has occurred under any Transaction Document or Lease Document which was caused by either Optionor or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, Optionor shall have the following remedies and rights, which remedies and rights shall be the sole and exclusive remedies and rights of Optionor in the case of such failure: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Company pursuant to the Shortfall Agreement shall automatically be amended to provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Option Payments and an opportunity to cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as Optionors may reasonably request to effect the provisions of Subsections (c)(i), (c)(ii) and (c)(iii) above. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or 5 6 sent by facsimile or telecopy transmission and addressed: (i) If to the Optionor, at: 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 Attention: F. David Carr (ii) If to BCC at 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 9. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. SENIOR CARE OPERATORS, LLC, By: RETIREMENT OPERATORS FUNDING, LLC, Manager By: RETIREMENT OPERATORS MANAGEMENT, INC., Manager By:_________________________ F. David Carr, President OAKHAVEN SENIOR LIVING, INC. By:_________________________ Title:______________________ BALANCED CARE CORPORATION By:_________________________ Title:______________________ S - 1 EX-10.48 45 BALANCED CARE CORPORATION 1 Exhibit 10.48 SCHEDULE TO FORM OF OCWEN OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Company Lessor Management Firm - -------- ------- ------ ---------------- Shippensburg, PA Senior Care Operators Shippensburg ALF, Inc. Balanced Care at Shippensburg, Inc. of Shippensburg, LLC Centerville, OH Senior Care Operators Centerville ALF, Inc. Balanced Care at Centerville, Inc. of Centerville, LLC Medina, OH Senior Care Operators Medina ALF, Inc. Balanced Care at Medina, Inc. of Medina, LLC
EX-10.49 46 BALANCED CARE CORPORATION 1 Exhibit 10.49 FORM OF SHORTFALL FUNDING AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of March 31, 1998, by and among __________________________________________, a Delaware limited liability company (the "LESSEE"), the members of Lessee listed on Schedule A attached hereto (collectively, the "MEMBER") and Balanced Care Corporation, a Delaware corporation ("BCC"). W I T N E S S E T H WHEREAS, the Member constitutes the holder of all equity interests in the Lessee; and WHEREAS, Lessee executed and delivered the Lease dated as of March 31, 1998 (the "LEASE") between Lessee and ______________________, a Florida corporation (the "LESSOR"), whereby Lessee leased from Lessor property, together with all improvements built or to be built thereon, located in ______________________________ as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Lessee and ___________________________________, a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of March 31, 1998 (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator the Facility; and WHEREAS, Lessee will initially deposit with Lessor cash into a collateral account (the "Collateral Account"), then thereafter a standby letter of credit, as provided herein and the Development Agreement, to fund the Working Capital Reserve (to be used to fund Shortfalls) for the benefit of Lessor; and WHEREAS, upon depletion of the Working Capital Reserve, BCC intends to make Advances to the Lessee, on the terms and conditions herein stated, to fund continuing Shortfalls; and WHEREAS, BCC is willing to fund Advances to Lessee covering Shortfalls only on the terms and conditions provided in this Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I FUNDING SHORTFALLS SECTION 1.01 FUNDING; CAPITALIZATION OF LESSEE; WORKING CAPITAL RESERVE. (a) Each Member (jointly and severally if more than one) hereby agrees to contribute as capital to the Lessee the following capital contributions: (i) On the date hereof the Member shall deposit into the Collateral Account the sum of ________, and 2 (ii) on or before April 30, 1998 the Member shall deliver to Lessor (against return of the amounts deposited into the Collateral Account pursuant to Section 1.03(a)(i) above) a standby letter of credit naming Lessor (and such other parties as Lessor may request) as the beneficiary(ies) thereunder (the "LETTER OF CREDIT"), which Letter of Credit must be in form and substance satisfactory to BCC (the deposit into the Collateral Account pursuant to Section 1.03(a)(i) and the issuance and delivery of such Letter of Credit by the Members being a "FUNDING", and the aggregate of all Fundings made, being a maximum amount of $_______), is collectively referred to as the "WORKING CAPITAL RESERVE"). The Letter of Credit shall be in the amount of $_______, representing the full Working Capital Reserve to be funded hereunder, which amount includes the initial Funding of $_______ pursuant to Section 1.03(a)(i) above. Time is of the essence with respect to each contribution described in this Section 1.01(a). (b) The contributions described in Section 1.01(a)(i) shall be made directly into the Collateral Account. Upon delivery the Letter of Credit as provided in Section 1.01(a)(ii), the unused portion of contributions provided Section 1.03(a)(i) shall be returned by Lessor to the Members as provided in the Lease Documents; provided, however, BCC shall have no liability whatsoever (absent the negligent or willful acts or omissions of BCC) for the return of such contributions. (c) In the event that the Member defaults in the timely payment of Fundings into the Working Capital Reserve as provided in Section 1.01(a), BCC shall have the right at any time thereafter, but not the obligation, to require that the Member sell all of the Equity Interests to BCC or its designee in the manner provided for in the Option Agreement; provided, however, the purchase price for the Equity Interests shall be the amount of Fundings actually made by the Member into the Collateral Account, plus an amount calculated on a pro-rata basis as 27.5% per annum of the amount of the Working Capital Reserve from the date of the Funding or Fundings through the date of Closing. In such event, all terms and conditions of the sale applicable to the Option shall be equally applicable to the sale under this Section 1.01(c), and the failure by the Member to close on such sale within 3 days after written notice from BCC (time being of the essence) shall constitute an Event of Default. (d) The Member and the Lessee acknowledge and agree that (i) each Funding constitutes the capital contribution of the Member to the Lessee, (ii) each Funding is not in any way to be construed as Indebtedness of Lessee nor to be construed as evidence of a loan from any Member to the Lessee and (iii) Lessor and the Management Firm may (without notice to Lessee or Member, and whether acting alone or together) withdraw funds from the Working Capital Reserve to fund Shortfalls with respect to the Facility as provided in the Transaction Documents and the Lease Documents. SECTION 1.02 ADVANCES. Upon complete depletion of the Working Capital Reserve, and to the extent thereafter of any Shortfall, BCC hereby agrees to advance from time to time funds to the Lessee upon no less than three (3) days prior written notice, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes issued by the Lessee in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall mature on the 2 3 anniversary of the fifth year after issuance of the first Note issued under this Agreement. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants under the Transaction Documents applicable to Lessee and the Member (including the obligations of each Member under the Option Agreement), together with all interest payable under the Transaction Documents and all other costs and expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC Affiliate (including indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.02, and any Notes issued hereunder, shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement. SECTION 1.03 ASSET PURCHASE OPTION. a) The Lessee and the Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase all of the assets of the Lessee (including the option to take an assignment of the Lease) for the Asset Purchase Price. The Asset Purchase Option may be exercised by BCC by providing written notice to the Lessee at any time during the term of the Lease. The closing of the purchase of the assets of the Lessee shall take place within 30 days after BCC exercises the Asset Purchase Option at such location in Pennsylvania as BCC may designate. At the closing of the asset purchase, the Lessee shall transfer, assign and convey to BCC (or its designee) all assets of Lessee, free and clear of all Liens and restrictions of any kind or nature, except for Liens or restrictions in favor of the Lessor pursuant to the Lease Documents or in favor of BCC pursuant to the Transaction Documents (provided, however, Liens in favor of BCC securing Advances or other Obligations shall be paid in full by Lessee and the Member at the closing of the asset purchase). The Lessee (and the Member if requested by BCC) shall execute and deliver at the closing of the asset purchase an assignment of lease (assigning the Lease to the purchaser), a bill of sale conveying all other assets of the Lessee and such other documents and instruments as BCC may reasonably request, all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE PRICE" as used herein shall mean (i) all amounts actually funded into the Working Capital Reserve, plus (ii) an amount (calculated as a yearly return) equal to 27.5% of the Working Capital Reserve actually funded through Fundings, compounded annually through the closing date, plus (iii) the aggregate amount of all Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date (exclusive of the Management Fee), minus (iv) any payments made to the Member under the Option Agreement. To avoid any doubt, BCC shall receive a credit against the Asset Purchase Price for any payments made to the Member under the Option Agreement paid as Current Yield in advance to the extent that such advance Option Payments are attributable to Current Yield accruing after the closing date. All Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date of the asset purchase shall be payable from the Asset Purchase Price to BCC or the BCC Affiliate, as appropriate. Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.03(a) shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement. (b) Notwithstanding any provision to the contrary contained herein or in any other Transaction Document, BCC agrees that the Asset Purchase Option shall not be exercised unless 3 4 (i) BCC or its designee is prohibited (by operation of law, or any other reason other than the acts or omissions of BCC or any BCC Affiliate) from exercising the Option to acquire the Equity Interests pursuant to the Option Agreement or (ii) the Lessee or any Member is in Default of any covenant, agreement, representation or warranty contained in this Agreement (except for a Default in the payment of interest under the Notes) or the Option Agreement, which Default was not caused by BCC or any BCC Affiliate. SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee hereunder and under the other Transaction Documents, Lessee has executed and delivered the following: (i) the Lease; (ii) Open-End Leasehold Mortgage in the form attached hereto as Exhibit B encumbering the Property in favor of BCC (the "LEASEHOLD MORTGAGE"); and (iii) such other documents, certificates, affidavits and instrument as BCC may reasonably request. In addition to the foregoing documents, each Member has executed and delivered to BCC the Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby each Member has agreed that BCC shall have an option to purchase the equity interest of each Member in Lessee, on the terms and conditions provided therein. SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount of interest due or payable pursuant to any Transaction Document exceed the maximum rate of interest allowed by Law and, in the event any such payment is inadvertently paid by the Lessee or the Member or inadvertently received by BCC or any BCC Affiliate, then such excess sum shall be credited as a payment of principal due to BCC or any BCC Affiliate. It is the express intention of the parties hereto that neither the Lessee nor the Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.06 INTENTION. It is the intention of BCC, each Member and Lessee that (i) the Management Firm operate the Facility pursuant to the Management Agreement and that Lessee act as a passive investor with respect to the Facility, (ii) Lessee include on its financial statements all revenue and losses with respect to the Facility during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other obligations of Lessee and the Members under the Transaction Documents be secured by the Leasehold Mortgage, but subject to the rights of Lessor under the Lease, regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or against Lessee. BCC, each Member and Lessee agree to take no position inconsistent with the intention of the parties as herein stated. 4 5 ARTICLE II CONDITIONS TO ADVANCES SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents and make Advances are subject to the condition precedent that BCC receives the following five days prior to the making of any Advance, in form and substance satisfactory to BCC: (a) the Note(s); (b) the Working Capital Assurance Agreement; (c) the Leasehold Mortgage; (d) the Option Agreement; (e) the Management Agreement; (f) a certificate of the Secretary of State of the State of Delaware stating that the Lessee is duly organized, validly existing and in good standing in such state; (g) a certified copy of the Operating Agreement of the Lessee and the Member, together with certified resolutions or authorizations of the Lessee and the Member granting the power to Lessee and the Member to enter into and perform the Transaction Documents; (h) all other Transaction Documents; and (i) such other affidavits, documents, certificates, statements and instruments as BCC may reasonably request. SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The obligation of BCC to accept delivery of the Transaction Documents and consummate this transaction, and to make any Advance, shall be further subject to the condition precedent that: (a) the following statements shall be true and correct (and the delivery by the Lessee and the Member of the Transaction Documents shall be deemed to constitute a representation and warranty by the Lessee and the Member that such statements are true on such date): (i) The representations and warranties contained in Article III of this Agreement and the other Transaction Documents are true and correct in all material respects on and as of date of the execution and delivery of this Agreement, at the time of each Advance, and as of each date until the Obligations are satisfied in full; and (ii) No event has occurred and is continuing which constitutes a 5 6 Default or an Event of Default under any of the Transaction Documents; and (b) BCC shall have received such other opinions or documents as BCC may request in BCC's sole discretion. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee and each Member represents and warrants as follows: (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited liability company duly formed, validly existing and in good standing under the laws of State of Delaware, has qualified to do business in the State in which the Facility is located, and has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. (b) POWER; AUTHORITY. The execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party are within the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which Lessee is a party have been duly executed and delivered by the duly authorized Manager of the Lessee. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by the Lessee of this Agreement or any other Transaction Document to which it is a party and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under, any contract, agreement or other document or instrument to which the Lessee is a party or by which its properties are bound. (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee is a party are legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) LITIGATION. There is no pending or, to the best of Lessee's knowledge, threatened action, suit or proceeding against or affecting the Lessee before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Lessee is a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any Law applicable to the Lessee. 6 7 (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's leasehold interest in the Lease, the Lessee has good, marketable and legal title to its properties and assets. The Lessee has a good and valid leasehold interest in the Lease. (h) LIENS. None of the properties and assets of the Lessee are subject to any Lien other than Liens in favor of BCC as provided herein, a BCC Affiliate or the Lessor ("PERMITTED LIENS"), and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party will neither result in the creation of any Lien or other charge upon any of the Lessee's properties or assets, nor cause a default under any agreements to which Lessee is a party. (i) SECURITY. Upon the consummation of this transaction, BCC will have a valid and perfected mortgage lien in the Lease. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of the Lessee required by Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid. (k) NO EMPLOYEES. The Lessee has no employees for which it is required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. No event has occurred, which has not been remedied, cured or waived, which constitutes, or with the passage of time or giving of notice or both would constitute, a Default or an Event of Default under any Transaction Document or which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Lessee under any agreement or judgment, decree or order, to which the Lessee is a party or by which the Lessee or any of its properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. All written information, reports and other papers and data furnished to BCC were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give BCC a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the persons involved as at the date thereof and the results of operations for such periods. No document furnished or written statement made to BCC by Lessee or any Member in connection with the execution of this Agreement or any of the other Transaction Documents (or in connection with the organization or capitalization of Lessee by the Members) contains or will contain any untrue statement of a material fact or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any Entity. (o) INVESTMENT COMPANY. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment 7 8 Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. (q) SECURITIES REPRESENTATIONS. Neither Lessee nor any agent, broker, dealer or other person or entity has offered or sold any equity interests in Lessee in violation of the 1933 Act or any state securities laws. (r) CAPITAL CONTRIBUTIONS. All Indebtedness (if any) incurred by any Member or equity owner of any Member to fund the capital contributions to Lessee or any Member (including Indebtedness supporting the Letter of Credit) constitutes full recourse Indebtedness against such Member or equity owners (as appropriate), and such Indebtedness is not limited in collection to any particular asset of the person or Entity incurring such Indebtedness. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC Affiliate shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will and the Member shall cause the Lessee to: (a) COMPLIANCE WITH LAWS; ETC. Comply, in all material respects with all applicable Laws, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. (b) MAINTENANCE OF INSURANCE. Maintain or contract to be maintained, with premiums fully paid, with responsible and reputable insurance companies or associations, such insurance in such amounts and covering such risks as is required to be carried under the Lease, and all such policies evidencing such insurance shall name BCC and Lessor as additional insureds thereunder. Lessee shall also maintain insurance of sufficient types and amounts to comply with all other Laws of any government entity exercising jurisdiction over Lessee. All insurance policies shall provide for notice of nonrenewal and notice of extension to BCC and Lessor, and shall not be terminated, canceled, amended or modified without 30 days prior written notice to BCC and Lessor. Lessee shall provide BCC with evidence of all insurance, including renewals or extensions of such insurance, promptly after receiving such insurance. Insurance policies and proceeds thereof shall at all times during the term of the Lease be subject to the Lessor's rights as provided in the Lease Documents. (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (i) any actions, suits or proceedings instituted against the Lessee; (ii) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (iii) the occurrence of a Default or an Event of Default. 8 9 (d) MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of any of the other Transaction Documents, (i) protect and preserve all of its properties, (ii) maintain in good repair, working order and condition all of its tangible properties, and (iii) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties so that the business carried on in connection therewith may be properly and advantageously conducted at all times, as reasonably may be determined by BCC. (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the Laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a limited liability company, and qualify and remain qualified and authorized to do business in such state. (f) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the business presently carried on by the Lessee. (g) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents. Provided, however, notwithstanding anything to the contrary contained in this Section 4.01, Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01 are required to be performed by the Management Firm under the Management Agreement. SECTION 4.02 NEGATIVE COVENANTS. So long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will not, and no Member will cause the Lessee to, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Make any distribution of cash or other property to the Member or declare or pay any dividend or distribution on any securities of Lessee. (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Facility. 9 10 (d) TRANSFER OF ASSETS. Except as expressly contemplated in the Transaction Documents to BCC or an Entity designated by BCC or as otherwise expressly permitted in the Lease with respect to a sublease of a portion of the Facility, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity. The restrictions of this Subsection shall include a prohibition on any assignment, pledge, hypothocation or other transfer of the Lease or sublease or license of the Facility, except to BCC or a BCC Affiliate in accordance with the terms and conditions of the Lease or except as otherwise expressly permitted in the Lease with respect to a sublease of a portion of the Facility. (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the Transaction Documents or Indebtedness incurred to Lessor as expressly provided in the Lease Documents. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity. (g) LOANS. Extend credit to or make any advance, loan, contribution or payment of money or goods to any person or Entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Lessee in any way. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents. (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to transfer all or any portion of the Member's equity interest in Lessee to a party that does not as of the date hereof hold an equity interest in the Lessee. (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Transaction Document, (ii) waive any default or potential event of default by Lessor under any Transaction Document, (iii) declare a default or event of default under any Transaction Document, (iv) exercise any right to extend the term of the Lease or (v) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Facility, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity. (m) ISSUANCE OF SECURITIES. Except for the equity interests of the Lessee that have been issued to the Member and are outstanding as of the date hereof, issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities 10 11 convertible or exchangeable for equity interests, or commit to do any of the foregoing. ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"), whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due, or the Member shall fail to make payments in connection with Fundings (as provided in Section 1.01 hereof) when due (each a "MONETARY DEFAULT"); or (b) Any representation or warranty made by the Lessee or the Member under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) The Lessee or the Member shall fail to perform or observe any term, covenant or agreement contained in this Agreement, or in any other Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) The Lessee shall generally not pay its debts when due; or (e) The Lessee shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Lessee seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of the Lessee of any of its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for the Lessee or for any substantial part of its property; or the Lessee shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $50,000 shall be rendered against the Lessee and the same shall not be discharged within 30 days after entry; or (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $50,000 in value and such warrant or process shall continue undischarged or unstayed for ten consecutive days; or (h) Any material provision of any Transaction Document to which the Lessee or the Member is a party shall for any reason cease to be valid and binding on the Lessee or the Member, or the Lessee or the Member shall so state in writing; or 11 12 (i) The Leasehold Mortgage shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens; or (j) an Option Agreement Event of Default, a Mortgage Event of Default, a Lease Event of Default, or a Management Agreement Event of Default shall occur and be continuing. ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following provisions shall apply: (a) ACCELERATOR AND TERMINATION: (i) Automatic. Upon the occurrence of a Shortfall Event of Default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other Shortfall Event of Default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (b) BCC'S RIGHT TO ENTER PROPERTY. BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (c) USE OF PREMISES. BCC may, without payment of any rent or any other charge, enter the Property and, without breach of peace, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Lessee's equipment, for the purpose of (i) operating the Facility and (ii) collecting any accounts receivable. 12 13 (d) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in Law or in equity. (e) RIGHT TO FORECLOSE. BCC may foreclose upon the Lease, take immediate possession of the Facility and Property and operate the Property, all in accordance with the terms and conditions of the Leasehold Mortgage. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following a Shortfall Event of Default shall be applied or paid over as follows: (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses for indemnification as provided herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to 13 14 become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by Law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to monetary defaults under this Agreement or any other Transaction Document. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of default under any Transaction Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand. ARTICLE VIII MISCELLANEOUS SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. SECTION 8.02 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Lessee or any Member, at: {name of addressee} c/o Hakman & Company, Incorporated 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 (ii) If to BCC, at 5021 Louise Drive 14 15 Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY (OR THE MEMBER OR THE MEMBER'S PROPERTY) IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations, and the obligation of the Member, under this Agreement and the other Transaction Documents shall be performed by the Lessee and the Member at their sole cost and expense. If the Lessee or the Member shall fail to do any act or thing which it or they have covenanted to do under this Agreement or any of the other Transaction Documents, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee or the Member, and the Lessee and the Member hereby irrevocably authorizes BCC so to act. SECTION 8.05 INDEMNIFICATION. The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (a) any breach by Lessee or any Member of any covenant, agreement, representation or warranty under any Transaction Document, 15 16 (b) any and all uncollected items, including all checks or other negotiable instruments returned to BCC for insufficient funds, and (c) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business or sale thereto, which claim, debt, demand, loss, damage, action, cause of action, liability, cost or expense was not caused by the acts or omissions of BCC or a BCC Affiliate. The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member recognize that, in the event the Lessee or any Member fails to perform, observe or discharge any of its or their obligations or liabilities under this Agreement or any of the other Transaction Documents, any remedy of Law may prove to be inadequate relief to BCC; therefore, the Lessee and each Member agrees that BCC shall be entitled to temporary and permanent equitable relief in any such case without the necessity of proving actual damages. SECTION 8.07 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee, the Member and BCC and their respective personal representatives, heirs, successors and assigns, except that Lessee shall have no right to assign its rights hereunder or any interest herein. SECTION 8.08 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE LESSEE, THE MEMBER AND BCC OF ANY KIND OR NATURE, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. 16 17 (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. SECTION 8.09 CONFLICT WITH LEASE DOCUMENTS This Agreement is subject to the covenants and agreements contained in the Lease and other Lease Documents. In the event of any conflict between the provisions of this Agreement and the Lease Documents, the provisions of the Lease Documents shall control. 17 18 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Shortfall Funding Agreement to be executed by their respective officers or authorized agents as of the date first above written. BALANCED CARE CORPORATION By: __________________________________ Title: _____________________________ _____________________________________, a Delaware limited liability company By: SENIOR CARE OPERATORS, LLC, Manager By: RETIREMENT OPERATORS FUNDING, LLC, Manager By: RETIREMENT OPERATORS MANAGEMENT, INC., Manager By:_____________________ F. David Carr, President OAKHAVEN SENIOR LIVING, INC. SENIOR CARE OPERATORS, LLC, By:___________________________ By: RETIREMENT OPERATORS FUNDING, LLC, Manager Title:_________________________ By: RETIREMENT OPERATORS MANAGEMENT, INC., Manager By:_________________________ F. David Carr, President S - 1 [Shortfall Funding Agreement] 19 OMITTED SCHEDULE LIST OF MEMBERS EX-10.50 47 BALANCED CARE CORPORATION 1 Exhibit 10.50 SCHEDULE TO FORM OF OCWEN SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Collateral Letter of Initial Location Lessee Lessor Account Deposits Credit Funding Management Firm - -------- ------ ------- ---------------- --------- ------- --------------- Shippensburg, PA Senior Care Shippensburg $312,500/$625,000 $625,000 $312,500 Balanced Care at Operators of ALF, Inc. Shippensburg, Inc. Shippensburg, LLC Centerville, OH Senior Care Centerville $625,000/$1,250,000 $1,250,000 $625,000 Balanced Care at Operators of ALF, Inc. Centerville, Inc. Centerville, LLC
EX-10.51 48 BALANCED CARE CORPORATION 1 Exhibit 10.51 SHORTFALL FUNDING AGREEMENT THIS AGREEMENT ("AGREEMENT") is made as of December 31, 1997, by and among Senior Care Operators of Ohio, LLC, a Delaware limited liability company (the "LESSEE"), the members of Lessee listed on Schedule A attached hereto (collectively, the "MEMBER") and Balanced Care Corporation, a Delaware corporation ("BCC"). W I T N E S S E T H WHEREAS, the Member constitutes the holder of all equity interests in the Lessee; and WHEREAS, Lessee executed and delivered the Lease dated as of December 31, 1997 (the "LEASE") between Lessee and Medina ALF, Inc., a Florida corporation (the "LESSOR"), whereby Lessee leased from Lessor property, together with all improvements built or to be built thereon, located in Medina County, Ohio as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Lessee and Balanced Care at Medina, Inc., a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of December 31, 1997 (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator the Facility; and WHEREAS, Lessee will deposit with Lessor a standby letter of credit to fund the Working Capital Reserve (to be used to fund Shortfalls) for the benefit of Lessor; and WHEREAS, upon depletion of the Working Capital Reserve, BCC intends to make Advances to the Lessee, on the terms and conditions herein stated, to fund continuing Shortfalls; and WHEREAS, BCC is willing to fund Advances to Lessee covering Shortfalls only on the terms and conditions provided in this Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I FUNDING SHORTFALLS SECTION 1.01 FUNDING; WORKING CAPITAL RESERVE. Each Member hereby agrees to contribute as capital to the Lessee such amounts as are required from time to time by BCC to fund Shortfalls; provided, however, the contribution of the Members in the aggregate shall not exceed $750,000; and provided, further, such capital contribution shall be made in the form of a standby letter of credit naming Lessor as the beneficiary thereunder (the "LETTER OF CREDIT"), which Letter of Credit must be in form and substance satisfactory to BCC (the issuance and delivery of such Letter of Credit by the Members being a "FUNDING", and the aggregate of all Fundings made is collectively referred to as the "WORKING CAPITAL RESERVE"). Each Member and the Lessee acknowledge and agree that (i) the Letter of Credit constitutes the capital 2 contribution of each Member to the Lessee, (ii) the Letter of Credit is not in any way evidence of a loan from either Member to the Lessee and (iii) Lessor may draw on the Letter of Credit to fund Shortfalls with respect to the Facility or as otherwise provided in the Lease Documents. SECTION 1.02 ADVANCES. Upon complete depletion of the Working Capital Reserve, and to the extent thereafter of any Shortfall, BCC hereby agrees to advance from time to time funds to the Lessee upon no less than three (3) days prior written notice, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes issued by the Lessee in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall be payable upon demand. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants under the Transaction Documents applicable to Lessee and the Member (including the obligations of each Member under the Option Agreement), together with all interest payable under the Transaction Documents and all other costs and expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC Affiliate (including indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". SECTION 1.03 ASSET PURCHASE OPTION. The Lessee and each Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase all of the assets of the Lessee (including the option to take an assignment of the Lease) for the Asset Purchase Price. The Asset Purchase Option may be exercised by BCC by providing written notice to the Lessee at any time during the term of the Lease. The closing of the purchase of the assets of the Lessee shall take place within 30 days after BCC exercises the Asset Purchase Option at such location in Pennsylvania as BCC may designate. At the closing of the asset purchase, the Lessee shall transfer, assign and convey to BCC (or its designee) all assets of Lessee, free and clear of all Liens and restrictions of any kind or nature, except for Liens or restrictions in favor of the Lessor pursuant to the Lease Documents or in favor of BCC pursuant to the Transaction Documents (provided, however, Liens in favor of BCC securing Advances or other Obligations shall be paid in full by Lessee and each Member at the closing of the asset purchase). The Lessee (and each Member if requested by BCC) shall execute and deliver at the closing of the asset purchase an assignment of lease (assigning the Lease to the purchaser), a bill of sale conveying all other assets of the Lessee and such other documents and instruments as BCC may reasonably request, all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE PRICE" as used herein shall mean (i) all amounts funded into the Working Capital Reserve (assuming full funding thereof as of the date hereof, which will equal $750,000), plus (ii) an annual amount equal to 25% of the Working Capital Reserve (assuming full funding thereof as of the date hereof, which will equal $750,000), compounded annually through the closing date, plus (iii) the aggregate amount of all Advances and all other Obligations due and payable by Lessee or the Members to BCC or a BCC Affiliate through the closing date (exclusive of the Management Fee), minus (iv) any payments made to the Members under the Option Agreement. All Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date of the asset purchase shall be payable from the Asset Purchase Price to BCC or the BCC Affiliate, as appropriate. 2 3 SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee hereunder and under the other Transaction Documents, Lessee has executed and delivered the following: (i) the Lease; (ii) Open-End Leasehold Mortgage in the form attached hereto as Exhibit B encumbering the Property in favor of BCC (the "LEASEHOLD MORTGAGE"); and (iii) such other documents, certificates, affidavits and instrument as BCC may reasonably request, including the Working Capital Assurance Agreement between BCC and the Lessor (the "WORKING CAPITAL ASSURANCE AGREEMENT"). In addition to the foregoing documents, each Member has executed and delivered to BCC the Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby each Member has agreed that BCC shall have an option to purchase the equity interest of each Member in Lessee, on the terms and conditions provided therein. SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount of interest due or payable pursuant to any Transaction Document exceed the maximum rate of interest allowed by Law and, in the event any such payment is inadvertently paid by the Lessee or the Member or inadvertently received by BCC or any BCC Affiliate, then such excess sum shall be credited as a payment of principal due to BCC or any BCC Affiliate. It is the express intention of the parties hereto that neither the Lessee nor the Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.06 INTENTION. It is the intention of BCC, each Member and Lessee that (i) the Management Firm operate the Facility pursuant to the Management Agreement and that Lessee act as a passive investor with respect to the Facility, (ii) Lessee include on its financial statements all revenue and losses with respect to the Facility during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other obligations of Lessee and the Members under the Transaction Documents be secured by the Leasehold Mortgage, but subject to the rights of Lessor under the Lease, regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or against Lessee. BCC, each Member and Lessee agree to take no position inconsistent with the intention of the parties as herein stated. ARTICLE II CONDITIONS TO ADVANCES SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents and make Advances are subject to the condition precedent that BCC receives the following five days prior to the making of any Advance, in form and substance satisfactory to BCC: 3 4 (a) the Note(s); (b) the Working Capital Assurance Agreement; (c) the Leasehold Mortgage; (d) the Option Agreements; (e) the Management Agreement; (f) a certificate of the Secretary of State of the State of Delaware stating that the Lessee is duly organized, validly existing and in good standing in such state; (g) a certified copy of the Operating Agreement of the Lessee and the Member, together with certified resolutions or authorizations of the Lessee and the Member granting the power to Lessee and the Member to enter into and perform the Transaction Documents; (h) all other Transaction Documents; and (i) such other affidavits, documents, certificates, statements and instruments as BCC may reasonably request. SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The obligation of BCC to accept delivery of the Transaction Documents and consummate this transaction, and to make any Advance, shall be further subject to the condition precedent that: (a) the following statements shall be true and correct (and the delivery by the Lessee and the Member of the Transaction Documents shall be deemed to constitute a representation and warranty by the Lessee and the Member that such statements are true on such date): (i) The representations and warranties contained in Article III of this Agreement and the other Transaction Documents are true and correct in all material respects on and as of date of the execution and delivery of this Agreement, at the time of each Advance, and as of each date until the Obligations are satisfied in full; and (ii) No event has occurred and is continuing which constitutes a Default or an Event of Default under any of the Transaction Documents; and (b) BCC shall have received such other opinions or documents as BCC may request in BCC's sole discretion. 4 5 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee and each Member represents and warrants as follows: (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited liability company duly formed, validly existing and in good standing under the laws of State of Delaware, has qualified to do business in the State of Ohio, and has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. (b) POWER; AUTHORITY. The execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party are within the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which Lessee is a party have been duly executed and delivered by the duly authorized Manager of the Lessee. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by the Lessee of this Agreement or any other Transaction Document to which it is a party and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under, any contract, agreement or other document or instrument to which the Lessee is a party or by which its properties are bound. (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee is a party are legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) LITIGATION. There is no pending or, to the best of Lessee's knowledge, threatened action, suit or proceeding against or affecting the Lessee before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Lessee is a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any Law applicable to the Lessee. (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's leasehold interest in the Lease, the Lessee has good, marketable and legal title to its properties and assets. The Lessee has a good and valid leasehold interest in the Lease. (h) LIENS. None of the properties and assets of the Lessee are subject to any lien, security interest or other charge or encumbrance other than liens and encumbrances in favor 5 6 of BCC as provided herein, a BCC Affiliate or the Lessor ("PERMITTED LIENS"), and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party will neither result in the creation of any lien, security interest or other change or encumbrance upon any of the Lessee's properties or assets, nor cause a default under any agreements to which Lessee is a party. (i) SECURITY. Upon the consummation of this transaction, BCC will have a valid and perfected mortgage lien in the Lease. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of the Lessee required by Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid. (k) NO EMPLOYEES. The Lessee has no employees for which it is required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. No event has occurred, which has not been remedied, cured or waived, which constitutes, or with the passage of time or giving of notice or both would constitute, a Default or an Event of Default under any Transaction Document or which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Lessee under any agreement or judgment, decree or order, to which the Lessee is a party or by which the Lessee or any of its properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. All written information, reports and other papers and data furnished to BCC were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give BCC a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the persons involved as at the date thereof and the results of operations for such periods. No document furnished or written statement made to BCC by Lessee or any Member in connection with the execution of this Agreement or any of the other Transaction Documents (or in connection with the organization or capitalization of Lessee by the Members) contains or will contain any untrue statement of a material fact or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any Entity. (o) INVESTMENT COMPANY. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. 6 7 (q) SECURITIES REPRESENTATIONS. Neither Lessee nor any agent, broker, dealer or other person or entity has offered or sold any equity interests in Lessee in violation of the 1933 Act or any state securities laws. (r) CAPITAL CONTRIBUTIONS. All Indebtedness (if any) incurred by any Member or equity owner of any Member to fund the capital contributions to Lessee or any Member (including Indebtedness supporting the Letter of Credit) constitutes full recourse Indebtedness against such Member or equity owners (as appropriate), and such Indebtedness is not limited in collection to any particular asset of the person or Entity incurring such Indebtedness. The equity owners of Senior Care Operators, LLC have applied in their respective individual capacities to Pacific Bank for the issuance of the Letter of Credit, the Letter of Credit is being used as the initial capital equity of the Lessee (contributed from such equity owners to the Members and from the Members to the Lessee) and such equity owners will be liable to Pacific Bank in their individual capacities on a full recourse basis for Indebtedness incurred to Pacific Bank in connection with the Letter of Credit. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC Affiliate shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will and the Member shall cause the Lessee to: (a) COMPLIANCE WITH LAWS; ETC. Comply, in all material respects with all applicable Laws, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. (b) MAINTENANCE OF INSURANCE. Maintain or contract to be maintained, with premiums fully paid, with responsible and reputable insurance companies or associations, such insurance in such amounts and covering such risks as is required to be carried under the Lease, and all such policies evidencing such insurance shall name BCC and Lessor as additional insureds thereunder. Lessee shall also maintain insurance of sufficient types and amounts to comply with all other Laws of any government entity exercising jurisdiction over Lessee. All insurance policies shall provide for notice of nonrenewal and notice of extension to BCC and Lessor, and shall not be terminated, canceled, amended or modified without 30 days prior written notice to BCC and Lessor. Lessee shall provide BCC with evidence of all insurance, including renewals or extensions of such insurance, promptly after receiving such insurance. Insurance policies and proceeds thereof shall at all times during the term of the Lease be subject to the Lessor's rights as provided in the Lease Documents. (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (i) any actions, suits or proceedings instituted against the Lessee; (ii) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (iii) the occurrence of a Default or an Event of Default. 7 8 (d) MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of any of the other Transaction Documents, (i) protect and preserve all of its properties, (ii) maintain in good repair, working order and condition all of its tangible properties, and (iii) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties so that the business carried on in connection therewith may be properly and advantageously conducted at all times, as reasonably may be determined by BCC. (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the Laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a limited liability company, and qualify and remain qualified and authorized to do business in such state. (f) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the business presently carried on by the Lessee. (g) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents. Provided, however, notwithstanding anything to the contrary contained in this Section 4.01, Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01 are required to be performed by the Management Firm under the Management Agreement. SECTION 4.02 NEGATIVE COVENANTS. So long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will not, and no Member will cause the Lessee to, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Make any distribution of cash or other property to the Member or declare or pay any dividend or distribution on any securities of Lessee. (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Facility. (d) TRANSFER OF ASSETS. Convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity. The restrictions of this Subsection shall include a prohibition on any assignment, pledge, hypothocation or other transfer of the Lease or sublease or license of the Facility, except 8 9 to BCC or a BCC Affiliate in accordance with the terms and conditions of the Lease. (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the Transaction Documents or Indebtedness incurred to Lessor as expressly provided in the Lease Documents. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity. (g) LOANS. Extend credit to or make any advance, loan, contribution or payment of money or goods to any person or Entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Organization or the Operating Agreement of the Lessee in any way. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents. (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to transfer all or any portion of the Member's equity interest in Lessee to a party that does not as of the date hereof hold an equity interest in the Lessee. (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Transaction Document, (ii) waive any default or potential event of default by Lessor under any Transaction Document, (iii) declare a default or event of default under any Transaction Document, (iv) exercise any right to extend the term of the Lease or (v) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Facility, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merger or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity. (m) ISSUANCE OF SECURITIES. Except for the equity interests of the Lessee that have been issued to the Member and are outstanding as of the date hereof, issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing. ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"), whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to 9 10 any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due, or the Member shall fail to make payments in connection with Fundings (as provided in Section 1.01 hereof) when due (each a "MONETARY DEFAULT"); or (b) Any representation or warranty made by the Lessee or the Member under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) The Lessee or the Member shall fail to perform or observe any term, covenant or agreement contained in this Agreement, or in any other Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) The Lessee shall generally not pay its debts when due; or (e) The Lessee shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Lessee seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of the Lessee of any of its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for the Lessee or for any substantial part of its property; or the Lessee shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $50,000 shall be rendered against the Lessee and the same shall not be discharged within 30 days after entry; or (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $50,000 in value and such warrant or process shall continue undischarged or unstayed for ten consecutive days; or (h) Any material provision of any Transaction Document to which the Lessee or the Member is a party shall for any reason cease to be valid and binding on the Lessee or the Member, or the Lessee or the Member shall so state in writing; or (i) The Leasehold Mortgage shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens; or (j) an Option Agreement Event of Default, a Mortgage Event of Default, a Lease Event of Default, or a Management Agreement Event of Default shall occur and be continuing. 10 11 ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following provisions shall apply: (a) ACCELERATOR AND TERMINATION: (i) Automatic. Upon the occurrence of a Shortfall Event of Default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other Shortfall Event of Default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (b) BCC'S RIGHT TO ENTER PROPERTY. BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof. (c) USE OF PREMISES. BCC may, without payment of any rent or any other charge, enter the Property and, without breach of peace, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Lessee's equipment, for the purpose of (i) operating the Facility and (ii) collecting any accounts receivable. (d) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in Law or in equity. (e) RIGHT TO FORECLOSE. BCC may foreclose upon the Lease, take immediate possession of the Facility and Property and operate the Property, all in accordance with the terms and conditions of the Leasehold Mortgage. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or 11 12 other realization upon, all or any part of the Collateral following a Shortfall Event of Default shall be applied or paid over as follows: (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses for indemnification as provided herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by Law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to monetary defaults 12 13 under this Agreement or any other Transaction Document. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of default under any Transaction Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand. ARTICLE VIII MISCELLANEOUS SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. SECTION 8.02 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Lessee, at: Senior Care Operators of Ohio, LLC c/o Hakman & Company, Incorporated 1350 Old Bayshore Highway Suite 300 Burlingame, CA 94010 (ii) If to BCC, at 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY 13 14 ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY (OR THE MEMBER OR THE MEMBER'S PROPERTY) IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations, and the obligation of the Member, under this Agreement and the other Transaction Documents shall be performed by the Lessee and the Member at their sole cost and expense. If the Lessee or the Member shall fail to do any act or thing which it or they have covenanted to do under this Agreement or any of the other Transaction Documents, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee or the Member, and the Lessee and the Member hereby irrevocably authorizes BCC so to act. SECTION 8.05 INDEMNIFICATION. The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (a) any breach by Lessee or any Member of any covenant, agreement, representation or warranty under any Transaction Document, (b) any and all uncollected items, including all checks or other negotiable instruments returned to BCC for insufficient funds, and (c) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business or sale thereto, which claim, debt, demand, loss, damage, action, cause of action, liability, cost or expense was not caused by the acts or omissions of BCC or a BCC Affiliate. 14 15 The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member recognize that, in the event the Lessee or any Member fails to perform, observe or discharge any of its or their obligations or liabilities under this Agreement or any of the other Transaction Documents, any remedy of Law may prove to be inadequate relief to BCC; therefore, the Lessee and each Member agrees that BCC shall be entitled to temporary and permanent equitable relief in any such case without the necessity of proving actual damages. SECTION 8.07 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee, the Member and BCC and their respective personal representatives, heirs, successors and assigns, except that Lessee shall have no right to assign its rights hereunder or any interest herein. SECTION 8.08 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE LESSEE, THE MEMBER AND BCC OF ANY KIND OR NATURE, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. SECTION 8.09 CONFLICT WITH LEASE DOCUMENTS This Agreement is subject to the covenants and agreements contained in the Lease and other Lease Documents. In the event of any conflict between the provisions of this 15 16 Agreement and the Lease Documents, the provisions of the Lease Documents shall control. 16 17 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Agreement to be executed by their respective officers or authorized agents as of the date first above written. Witness: SENIOR CARE OPERATORS OF OHIO, LLC /s/ D. Mark Brosche, as Manager - --------------------------- ----------------------------------- Witness: SENIOR CARE OPERATORS, LLC: /s/ D. Mark Brosche, as Manager - --------------------------- ----------------------------------- Attest: OAKHAVEN SENIOR LIVING, INC. By: By: /s/ D. Mark Brosche, as Manager ------------------------ -------------------------------- ATTEST: BALANCED CARE CORPORATION - --------------------------- By: /s/ Brian L. Barth ------------------------------- Title: Vice President ---------------------------- 17 18 OMITTED SCHEDULES/EXHIBITS SCHEDULE 1 MEMBERS EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF LEASEHOLD MORTGAGE EXHIBIT C FORM OF OPTION AGREEMENT EX-10.52 49 BALANCED CARE CORPORATION 1 Exhibit 10.52 FORM OF WORKING CAPITAL ASSURANCE AGREEMENT (______________________) THIS AGREEMENT is made as of the _______________________, by and between BALANCED CARE CORPORATION, a Delaware corporation, with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC") and ______________________, a Florida corporation, with a principal place of business at 1675 Palm Beach Lakes Blvd., West Palm Beach, FL 33401 (the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor and __________________________________________, a Delaware limited liability company (the "Lessee") have agreed to enter into that certain Lease Agreement, of even date herewith, relating to certain premises located in _______________________________ (the "Lease") and all capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, pursuant to a Shortfall Funding Agreement dated of even date herewith (the "Shortfall Agreement") between Lessee, the Members (as defined in the Shortfall Agreement) and BCC, Lessee has deposited as of the date hereof in a collateral bank account (the "Cash Collateral Account") for the benefit of Lessor the sum of $_______ (the "Cash Collateral"), and will on or before April 30, 1998, cause to be issued and delivered to Lessor an irrevocable standby letter of credit in the amount of $_______ (the "LC") for the benefit of Lessor and payable to Lessor in form and issued by an institution satisfactory to Lessor in its sole discretion (such LC to replace the initial funding in the Cash Collateral Account and to increase the total amount of capital available for Lessee to fund operations and pay sums owing to Lessor under the Lease and other Lease Documents), which shall be used to fund operational losses anticipated in connection with the Facility (the LC, together with sums deposited in the Cash Collateral Account, are referred to herein as the "Working Capital Reserve"); and WHEREAS, BCC has agreed that, in the event that Lessor for any reason whatsoever is unable to obtain funds pursuant to the LC or in the Cash Collateral Account, or if the LC and Cash Collateral have been depleted, BCC will unconditionally fund operational losses to the Lessee pursuant to the Shortfall Agreement; and WHEREAS, as additional security for the obligations of Lessee under the Lease (the "Lease Obligations"), the Lessor has requested the execution and delivery of this Agreement. NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in 2 consideration of the covenants and agreements set forth herein, the parties hereto agree as follows: 1. (a) BCC unconditionally agrees to loan to the Lessee sufficient funds, by means of working capital loans (collectively, the "Working Capital Loans"), to pay and satisfy the amount by which the Lessee's cash requirements to meet its obligations (including, without limitation, operating expenses, debt service and the obligations of Lessee under the Lease) due and payable during any month exceed the gross revenues received by the Lessee during such month (the "Shortfall"). Working Capital Loans from BCC to Lessee shall be made without regard to any default, breach of condition, bankruptcy of Lessee or failure to satisfy any condition or obligation under the Shortfall Agreement. BCC shall, without further direction, advance to the Lessee an amount equal to the Shortfall within three (3) days after demand by Lessor or Lessee in the form of Working Capital Loans so that the Lessee is able to meet all of its working capital obligations (including, without limitation, the obligations of Lessee under the Lease) when due. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to induce the Lessor to enter into and accept the Lease and enable the Lessee to fulfill its working capital obligations, including, without limitation, the obligations of Lessee under the Lease. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor. In furtherance of the foregoing, Lessor shall have the right to directly request from BCC any advance needed to satisfy such Shortfalls, and upon such request the same shall be funded by BCC. (b) The obligations of BCC contained herein are absolute and unconditional obligations to Lessor, and no provision herein or any other agreement to which BCC is a party (including without limitation the Shortfall Agreement) shall be construed to the contrary. Without limiting the generality of the foregoing, should any conflict exist between the provisions of the Shortfall Agreement and the provisions of this Agreement, the provisions of this Agreement shall control. 2. Notwithstanding any provision to the contrary set forth herein, BCC's obligation to provide the Working Capital Loans, and advance Shortfalls, to the Lessee shall not commence until such time as the full amount to be deposited by Lessee in the Working Capital Reserve has been depleted, by drawing down on the LC or by making withdrawals from the Cash Collateral Account, as appropriate; provided, however, should funds in the Working Capital Reserve available in the Cash Collateral Account or through drawing down on the LC not be available to fund the working capital needs of Lessee for any reason whatsoever, BCC shall nonetheless have the obligation to fund Shortfalls as herein provided. When the working capital needs of Lessee require such action, Lessor shall make demand to draw down on the LC or withdraw sums from the Cash Collateral Account, as appropriate, until fully depleted to fund such working capital needs of Lessee. 3. (a) The Lessor shall not amend, modify or otherwise alter the Lease or any other Lease Document (as defined in Appendix 1 to the Shortfall Agreement) without BCC's prior written consent, in each instance, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the previous sentence, the obligations of BCC hereunder shall not be 2 3 affected by the termination, discontinuance, release or modification of any agreement from any endorser, surety or guarantor of the obligations of Lessee under the Lease. (b) In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise or any of its rights and/or remedies under the Lease Documents, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 4. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee or by reason of any disability of the Lessee. This Agreement shall be in addition to any guaranty or other security for the Lease Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Lease Obligations is rescinded or must otherwise be returned by the Lessor upon the insolvency, bankruptcy or reorganization of the Lessee or otherwise, all as though such payment had not been made. 5. Without limiting BCC's obligation to provide the Working Capital Loans, upon the occurrence of any Default under any of the Lease Documents, BCC shall have the right, but not the obligation, to cure such Default within any applicable notice and grace periods provided in the Lease Documents, and, to the extent permitted by law, enter upon the Facility, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such Default. The Lessor agrees to give written notice to BCC of any Default under the Lease or any other Lease Document for which Lessor becomes aware; provided, however, such notice shall only be required if Lessor is otherwise obligated to give Lessee notice of such Default. The Lessor agrees to accept any remedy performed by BCC or any affiliate of BCC as if the same had been performed by the Lessee. 6. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO BCC: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President WITH COPIES TO: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and 3 4 Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven J. Adelkoff, Esq. IF TO THE LESSOR: Shippensburg ALF, Inc. 1675 Palm Beach Lakes Boulevard West Palm Beach, FL 33401 or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 7. This Agreement shall be construed, and the rights and obligations of the Lessor, the Lessee and BCC shall be determined, in accordance with the laws of the State in which the Leased Property is located, excluding its conflicts of laws. 8. This Agreement and BCC's obligations hereunder shall automatically terminate upon the purchase by BCC or an affiliate of BCC of all of the issued and outstanding equity of the Lessee or substantially all of the assets of Lessee; provided, however, such purchases may only be made in accordance with the terms and conditions of the Lease and other Lease Documents. 9. The Lessor covenants and agrees with BCC that the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except to BCC or an affiliate of BCC) or any transfer of substantially all of the Lessee's assets or any transfer of the issued and outstanding equity of the Lessee without the prior written consent of BCC, which consent BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of the Lease, (a) the Lessee attempts to assign its interest in the Lease (or transfer substantially all of its assets), (b) the current holders of the issued and outstanding equity of the Lessee attempt to transfer any such equity or (c) if any of the events described in Section 25.1.3 of the Lease occurs with respect to Lessee, the Lessor covenants and agrees with BCC that, subject to applicable law, the Lessor shall use reasonable efforts to terminate the Lease (in accordance with the terms thereof) and shall enter into a new lease of the Property with BCC (or any of its wholly-owned subsidiaries, provided, that BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (y) the new lessee shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents and (z) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed and delivered and are enforceable. BCC agrees to pay upon 3 days after written demand all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 11. 4 5 10. (a) Financial Information. Lessor reserves the right to reasonably require financial information (including tax returns, detailed cash flow information and contingent liability information) of BCC at such times as Lessor shall deem reasonably necessary, and BCC shall promptly provide such information to Lessor in a form reasonably satisfactory to Lessor. (b) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (c) Amendments. This Agreement may be modified or amended only by a written instrument executed by the Lessor, the Lessee and BCC. (d) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (f) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. (g) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (h) Third Party Beneficiary. The parties hereto intend and agree that Lessor shall be deemed a third party beneficiary of the Shortfall Agreement with respect to the obligation of BCC to provide Working Capital Loans to Lessee; and in that regard, Lessor shall be permitted to enforce against BCC such provisions in the Shortfall Agreement requiring BCC to advance such Working Capital Loans to Lessee; provided, however, Lessor shall have no obligations whatsoever under, or liability with respect to, the Shortfall Agreement. (g) Cooperation In Bankruptcy. For purposes of this Subsection, the following terms shall have the following meanings: The term "Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, as amended, and codified as 11 U.S.C. Section 101 et seq. and the term "Reorganization" shall mean any voluntary or involuntary dissolution, execution sale, liquidation, winding-up, or bankruptcy, insolvency, receivership or other statutory or common law 5 6 proceedings or arrangements involving Lessee or any equity owner of Lessee (a "Member") or any assignment for the benefit of creditors or any marshaling of the assets or liabilities of Lessee or any Member or any sale of all or substantially all of the assets of Lessee or any Member. In the event (i) of a Reorganization of Lessee or any Member of Lessee, and (ii) in connection with such Reorganization, that the Lessee attempts to reject or otherwise invalidate the Asset Purchase Option (as defined in the Shortfall Agreement) or any Member attempts to reject or otherwise invalidate the Option (as defined in the Option Agreement dated as of March 31, 1998 among BCC and the Members), BCC agrees to cooperate, subject to applicable laws, with Lessor with respect to the Reorganization, which cooperation shall include, without limitation, voting with Lessor regarding any plan of Reorganization proposed or endorsed by Lessor in accordance with the Bankruptcy Code that results in BCC or an Affiliate of BCC controlling the Facility; provided, however, Lessor shall (subject to the provisions of applicable law) in any such Reorganization only endorse or proffer such plans, and take such actions, that require the equity ownership of the Lessee or the assets of the Lessee be acquired by BCC or a wholly-owned subsidiary of BCC (with BCC executing and delivering a guaranty of all obligations of such subsidiary owed to Lessor, in form and substance acceptable to Lessor). (h) Agreement Regarding Acquisition of Equity or Assets of Lessee. Without in any manner limiting the obligations and duties of BCC under that certain Amended and Restated Subordination and Standstill Agreement dated as of March 31, 1998, in favor of Lessor, BCC shall use its best efforts in the case of a foreclosure of the Lease pursuant to its Leasehold Mortgage or the execution by BCC on the equity interests of the Members under that certain Equity Pledge Agreement dated as of March 31, 1998 executed by the Members and Lessee in favor of BCC to acquire all of the assets of or equity interests in Lessee (as the case may be) at the time of such foreclosure or execution. (i) Failure to Fund Working Capital Reserve. In connection with the development of the Facility, the Lessee is obligated to contribute to the Cash Collateral Account sufficient capital to fund pre-opening and start up costs for the Facility, all as more fully described in the Shortfall Agreement. As of the date hereof, the Lessee has deposited cash into the Cash Collateral Account in the amount of $312,500, and is obligated pursuant to Section 27 of the Development Agreement to deliver to Lessor the LC in the amount of $625,000 (where upon, Lessor shall return to Lessee the amount of cash placed as of the date hereof in the Cash Collateral Account). In the event for any reason whatsoever that the Lessee does not deliver to Lessor by April 30, 1998, the LC in the amount of $625,000 required pursuant to Section 27 of the Development Agreement, then BCC shall be unconditionally obligated to (i) exercise (or cause a wholly-owned subsidiary to exercise) BCC's option to purchase the equity ownership interest of the Lessee pursuant to that certain Option Agreement of even date herewith among BCC and the equity owners of Lessee and either (A) enter into direct a lease for the Facility with Lessor on the terms and conditions described in the Lease or (B) cause a wholly-owned subsidiary of BCC to enter into a lease for the Facility with Lessor on the terms and conditions described in the Lease (in which event BCC shall provide to Lessor an unconditional guaranty of all obligations of such wholly-owned subsidiary on terms and conditions satisfactory to Lessor) and (ii) deliver to Lessor the LC as required in Section 27 of the Development Agreement in the amount of $625,000. 6 7 (j) Financial Information/Confidential Information. (a) So long as BCC is subject to reporting requirements under the Securities Act of 1934, as amended (the "'34 Act"), BCC shall provide to Lessor (in lieu of any other financial reporting required by Lessor under the Lease Documents with respect to BCC and its Affiliates) all financial information and financial data that BCC is required to file with the Securities and Exchange Commission (the "SEC") as provided in the '34 Act and the regulations related thereto, at such times as BCC is required to file such information and data with the SEC. Should BCC or any Affiliate of BCC purchase the equity interests of the Tenant or receive an assignment of the Lease from the Tenant, BCC shall comply with all reporting requirements referenced in Section 5 of the Lease. (b) Lessor hereby covenants and agrees, on behalf of Lessor and all Affiliates of Lessor, that all Confidential Information (as hereinafter defined) will be held and treated by Lessor, Lessor's Affiliates and the agents and employees of Lessor and its Affiliates in confidence and will not, except as explicitly consented to by BCC in its sole discretion, be disclosed by Lessor, its Affiliates or the agents and employees of Lessor or its Affiliates, in any manner whatsoever, in whole or in part, and will not be used by Lessor, its Affiliates or the agents and employees of Lessor or its Affiliates other than in connection with the Related Transactions (as defined in Section 36 of the Development Agreement). Lessor further agrees on behalf of itself and its Affiliates (i) to disclose Confidential Information only to (A) Lessor's employees who need to know the Confidential Information for purposes as determined by Lessor and (B) potential or actual participants or assignees of Lessor's interest in the Lease, the other Lease Documents, any other documents related thereto and the Facility, but only after receiving from such potential or actual participants or assignees an agreement whereby the recipient of such Confidential Information agrees to be bound by the provisions hereof relating to confidentiality and non-disclosure, (ii) to employ all reasonable procedures to ensure that neither the Lessor, nor its Affiliates, agents, employees or potential or actual participants or assignees of Lessor or its Affiliates use the Confidential Information in connection with trading in the securities of BCC or communicate such information to others who so trade in such securities and (iii) that any Confidential Information not returned to BCC, the Management Firm or Lessee, as applicable, will be held by Lessor and kept subject to the terms of this Section or destroyed. (c) As used in this Section, (i) "Confidential Information" means all information and data containing or otherwise reflecting information concerning BCC or any Affiliate of BCC, or any facility in a Related Transaction, which is not available to the general public but is material to the business, financial condition, or prospects of BCC and its Affiliates or otherwise would be material to making an investment decision with respect to the publicly traded securities of BCC, together with analyses, compilations, studies or other documents, whether prepared by BCC, Lessor or any other Entity (as defined in Appendix 1 to the Shortfall Agreement), which contain or otherwise reflect such information and (ii) "Affiliates" has the meaning ascribed to such term in the Development Agreement dated as of March 31, 1998 (the "Development Agreement") among Lessor, BCC Development & Management Co. a Delaware corporation and Senior Care Operators of Shippensburg, LLC, a Delaware limited liability company. 7 8 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: BALANCED CARE CORPORATION, a Delaware corporation _____________________________________ By:________________________________ Name: Name: Title: WITNESS: LESSOR: ___________________________________ _____________________________________ By:________________________________ Name: Name: Title: S - 1 [Working Capital Assurance Agreement] 9 Omitted Exhibits Exhibits Description - -------- ----------- 1.1A Real Property Description 1.1B Permitted Encumbrances 2.1 Conditions Precedent 3.1 Budget 3.5 Replacement Reserve Procedures 5.1 Compliance Certificate 19.1(d) Off-Site Construction Agreements 19.1(t) Beneficial Interest of Parties 19.1(w) Permits 19.1(w)(1) Unsatisfied Conditions re Off-Site Improvements 24.b Operating Expenses and Operating Revenues 27.8A Notice of Lease 27.8B Assignment of Leases, Rents and Receivables 27.8C Assignment of Leases, Rents and Receivables re Cross-Coll EX-10.53 50 BALANCED CARE CORPORATION 1 Exhibit 10.53 SCHEDULE TO FORM OF OCWEN WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Letter of Cash Location Date Lessor Lessee Credit Collateral - -------- ---- ------- ------ --------- ---------- Shippensburg, PA March 31, 1998 Shippensburg Senior Care $625,000 $312,500 ALF, Inc. Operators of Shippensburg, LLC Centerville, OH March 31, 1998 Centerville Senior Care $1,250,000 $625,000 ALF, Inc. Operators of Centerville, LLC
EX-10.54 51 BALANCED CARE CORPORATION 1 Exhibit 10.54 WORKING CAPITAL ASSURANCE AGREEMENT (MEDINA, OHIO) THIS AGREEMENT is made as of the 31st day of December, 1997, by and between BALANCED CARE CORPORATION, a Delaware corporation, with a principal place of business at 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC") and Medina ALF, Inc., a Florida corporation, with a principal place of business at 1675 Palm Beach Lakes Blvd., West Palm Beach, FL 33401 (the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor and Senior Care Operators of Ohio, LLC, a Delaware limited liability company (the "Lessee") have agreed to enter into that certain Lease Agreement, of even date herewith, relating to certain premises located in Medina, Ohio (the "Lease") and all capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, pursuant to a Shortfall Funding Agreement dated of even date herewith (the "Shortfall Agreement") between Lessee, the Members (as defined in the Shortfall Agreement) and BCC, Lessee has caused to be issued and delivered to Lessor a standby letter of credit in the amount of $750,000 (the "LC") naming Lessor as beneficiary, which shall be used to fund operational losses anticipated in connection with the Facility; and WHEREAS, BCC has agreed that, in the event that Lessor for any reason whatsoever is unable to obtain funds pursuant to the LC, or if the LC has been depleted, BCC will unconditionally fund operational losses to the Lessee pursuant to the Shortfall Agreement; and WHEREAS, as additional security for the obligations of Lessee under the Lease (the "Lease Obligations"), the Lessor has requested the execution and delivery of this Agreement. NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in consideration of the covenants and agreements set forth herein, the parties hereto agree as follows: 1. (a) BCC unconditionally agrees to loan to the Lessee sufficient funds, by means of working capital loans (collectively, the "Working Capital Loans"), to pay and satisfy the amount by which the Lessee's cash requirements to meet its obligations (including, without limitation, operating expenses, debt service and the obligations of Lessee under the Lease) due and payable during any month exceed the gross revenues received by the Lessee during such month (the 2 "Shortfall"). Working Capital Loans from BCC to Lessee shall be made without regard to any default, breach of condition, bankruptcy of Lessee or failure to satisfy any condition or obligation under the Shortfall Agreement. BCC shall, without further direction, advance to the Lessee an amount equal to the Shortfall within three (3) days after demand by Lessor or Lessee in the form of Working Capital Loans so that the Lessee is able to meet all of its working capital obligations (including, without limitation, the obligations of Lessee under the Lease) when due. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to induce the Lessor to enter into and accept the Lease and enable the Lessee to fulfill its working capital obligations, including, without limitation, the obligations of Lessee under the Lease. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor. In furtherance of the foregoing, Lessor shall have the right to directly request from BCC any advance needed to satisfy such Shortfalls, and upon such request the same shall be funded by BCC. (b) The obligations of BCC contained herein are absolute and unconditional obligations to Lessor, and no provision herein or any other agreement to which BCC is a party (including without limitation the Shortfall Agreement) shall be construed to the contrary. Without limiting the generality of the foregoing, should any conflict exist between the provisions of the Shortfall Agreement and the provisions of this Agreement, the provisions of this Agreement shall control. 2. Notwithstanding any provision to the contrary set forth herein, BCC's obligation to provide the Working Capital Loans, and advance Shortfalls, to the Lessee shall not commence until such time as the full amount to be deposited by Lessee in the Working Capital Reserve has been depleted, by drawing down on the LC; provided, however, should funds in the Working Capital Reserve available through drawing down on the LC not be available to fund the working capital needs of Lessee for any reason whatsoever, BCC shall nonetheless have the obligation to fund Shortfalls as herein provided. When the working capital needs of Lessee require such action, Lessor shall make demand to draw down on the LC until fully depleted to fund such working capital needs of Lessee. 3. (a) The Lessor shall not amend, modify or otherwise alter the Lease or any other Lease Document (as defined in Appendix 1 to the Shortfall Agreement) without BCC's prior written consent, in each instance, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the previous sentence, the obligations of BCC hereunder shall not be affected by the termination, discontinuance, release or modification of any agreement from any endorser, surety or guarantor of the obligations of Lessee under the Lease. (b) In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise or any of its rights and/or remedies under the Lease Documents, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 4. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee or by reason of any disability of the Lessee. This Agreement - 2 - 3 shall be in addition to any guaranty or other security for the Lease Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Lease Obligations is rescinded or must otherwise be returned by the Lessor upon the insolvency, bankruptcy or reorganization of the Lessee or otherwise, all as though such payment had not been made. 5. Without limiting BCC's obligation to provide the Working Capital Loans, upon the occurrence of any Default under any of the Lease Documents, BCC shall have the right, but not the obligation, to cure such Default within any applicable notice and grace periods provided in the Lease Documents, and, to the extent permitted by law, enter upon the Facility, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such Default. The Lessor agrees to give written notice to BCC of any Default under the Lease or any other Lease Document for which Lessor becomes aware; provided, however, such notice shall only be required if Lessor is otherwise obligated to give Lessee notice of such Default.. The Lessor agrees to accept any remedy performed by BCC or any affiliate of BCC as if the same had been performed by the Lessee. 6. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO BCC: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President WITH COPIES TO: Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven J. Adelkoff, Esq. IF TO THE LESSOR: Medina ALF, Inc. 1675 Palm Beach Lakes Boulevard West Palm Beach, FL 33401 - 3 - 4 or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 7. This Agreement shall be construed, and the rights and obligations of the Lessor, the Lessee and BCC shall be determined, in accordance with the laws of the State of Ohio, excluding its conflicts of laws. 8. This Agreement and BCC's obligations hereunder shall automatically terminate upon the purchase by BCC or an affiliate of BCC of all of the issued and outstanding equity of the Lessee or substantially all of the assets of Lessee; provided, however, such purchases may only be made in accordance with the terms and conditions of the Lease and other Lease Documents. 9. The Lessor covenants and agrees with BCC that the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except to BCC or an affiliate of BCC) or any transfer of substantially all of the Lessee's assets or any transfer of the issued and outstanding equity of the Lessee without the prior written consent of BCC, which consent BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of the Lease, (a) the Lessee attempts to assign its interest in the Lease (or transfer substantially all of its assets), (b) the current holders of the issued and outstanding equity of the Lessee attempt to transfer any such equity or (c) if any of the events described in Section 25.1.3 of the Lease occurs with respect to Lessee, the Lessor covenants and agrees with BCC that, subject to applicable law, the Lessor shall use reasonable efforts to terminate the Lease (in accordance with the terms thereof) and shall enter into a new lease of the Property with BCC (or any of its wholly-owned subsidiaries, provided, that BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (y) the new lessee shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents and (z) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed and delivered and are enforceable. BCC agrees to pay upon 3 days after written demand all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 11. 10. (a) Financial Information. Lessor reserves the right to reasonably require financial information (including tax returns, detailed cash flow information and contingent liability information) of BCC at such times as Lessor shall deem reasonably necessary, and BCC shall promptly provide such information to Lessor in a form reasonably satisfactory to Lessor. (b) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. - 4 - 5 (c) Amendments. This Agreement may be modified or amended only by a written instrument executed by the Lessor, the Lessee and BCC. (d) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (f) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. (g) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (h) Third Party Beneficiary. The parties hereto intend and agree that Lessor shall be deemed a third party beneficiary of the Shortfall Agreement with respect to the obligation of BCC to provide Working Capital Loans to Lessee; and in that regard, Lessor shall be permitted to enforce against BCC such provisions in the Shortfall Agreement requiring BCC to advance such Working Capital Loans to Lessee; provided, however, Lessor shall have no obligations whatsoever under, or liability with respect to, the Shortfall Agreement. [SIGNATURE PAGES TO FOLLOW] - 5 - 6 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: BALANCED CARE CORPORATION, a Delaware corporation By: /s/ Brian L. Barth - ------------------------------------- ------------------------------- Name: Name: Brian L. Barth Title: Vice President WITNESS: LESSOR: Medina ALF, Inc. By: /s/ Michael A. Tozzi - ------------------------------------- ------------------------------- Name: Name: Michael A. Tozzi Title: Director, Sr. Housing - 6 - EX-10.55 52 BALANCED CARE CORPORATION 1 Exhibit 10.55 FIRST AMENDMENT TO OPTION AGREEMENTS, SHORTFALL FUNDING AGREEMENTS AND STOCK PLEDGE AGREEMENTS THIS AGREEMENT ("Agreement") is made as of March 6, 1998 by and among Balanced Care Corporation, a Delaware corporation ("BCC"), Senior Care Operators, LLC, a Delaware limited liability company ("SCO"), Senior Care Operators of Ohio, LLC, a Delaware limited liability company ("SCOOL"), Assisted Care Operators, LLC, a Delaware limited liability company ("ACO"), Assisted Care Operators of Jackson, LLC, a Delaware limited liability company ("ACOJ"), Assisted Care Operators of Anderson, LLC, a Delaware limited liability company ("ACOA"), Extended Care Operators, a Delaware limited liability company ("ECO"), Extended Care Operators of Harrisburg, LLC, a Delaware limited liability company ("ECOH"), Extended Care Operators of Ravenna, LLC, a Delaware limited liability company ("ECOR"), Extended Care Operators of Greensboro, LLC, a Delaware limited liability company ("ECOG"), Oakhaven Assisted Living, Inc., a California corporation ("OAL"), Oakhaven Extended Living, Inc., a California corporation ("OEL") and Oakhaven Senior Living, Inc., a California corporation ("OSL"). OAL, OEL and OSL are collectively referred to herein as "Oakhaven". SCO, ACO, ECO and Oakhaven are collectively referred to herein as the "Members" and individually referred to herein as a "Member". SCOOL, ACOJ, ACOA, ECOH, ECOR and ECOG are collectively referred to herein as "Lessees" and individually referred to herein as a "Lessee". WHEREAS, each Lessee has entered into certain leases for properties located in Pennsylvania, Indiana, Ohio, Tennessee and North Carolina (each lease being referred to herein individually as a "Lease" and collectively as the "Leases"). The Leases are more fully described on Schedule 1 attached hereto; and WHEREAS, in connection with each Lease, the Members, the Lessees and BCC entered into Shortfall Funding Agreements (each such Shortfall Funding Agreement being referred to herein collectively as the "Shortfall Agreements" and individually as a "Shortfall Agreement"), which Shortfall Agreements are more fully described on Schedule 1 attached hereto; and WHEREAS, in connection with each Shortfall Agreement, each Lessee has agreed to issue one or more Promissory Notes (each such Promissory Note being collectively referred to herein as the "Notes" and individually as a "Note") to evidence indebtedness regarding Advances (as defined in each Shortfall Agreement), which Notes are in the form of Exhibit A attached to each Shortfall Agreement; and WHEREAS, to secure the obligations of the Lessees and the Members to BCC, each Lessee has granted in favor of BCC a leasehold mortgage encumbering each Lease (each such Leasehold Mortgage being referred to herein collectively as the "Leasehold Mortgages" and individually as a "Leasehold Mortgage"). Such Leasehold Mortgages are more fully described on Schedule 1 attached hereto; and 2 WHEREAS, in connection with each Lease, the Members and BCC entered into Option Agreements whereby BCC has the right to acquire all membership interests in all Lessees (each such Option Agreement being referred to herein collectively as the "Option Agreements" and individually as an "Option Agreement"). Such Option Agreements are more fully described on Schedule 1 attached hereto; and WHEREAS, in connection with certain Leases, certain Members and Lessees and BCC entered into Stock Pledge Agreements (each such Stock Pledge Agreement being referred to herein collectively as the "Pledge Agreements" and individually as a "Pledge Agreement"), which Pledge Agreements are more fully described on Schedule 1 attached hereto. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree to amend all Option Agreements, all Pledge Agreements, and all Shortfall Agreements as follows: 1. Option Agreements. (a) Each Option Agreement is hereby amended by deleting in its entirety Section 1(b) and replacing such Section with the following: "(b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionor: (1) on the earlier of one day after the issuance of the certificate of occupancy for the Facility or twelve months following the commencement of construction under the Development Agreement (the "First Payment Date"), an amount equal to the Current Yield (as hereinafter defined) on the Working Capital Reserve actually funded by Optionor through such date, payable in arrears, plus an amount equal to the Current Yield on the Working Capital Reserve actually funded by Optionor through such date for the next succeeding 12 month period, payable in advance, (2) on that date which is twelve months after the First Payment Date (the "Second Payment Date"), an amount calculated as 25% of the Current Yield on the Working Capital Reserve actually funded by the Optionor, representing the first quarterly installment of the annual Current Yield for the following 12 month period, payable in advance, and (3) thereafter, on the first day of each three-month period following the Second Payment Date and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), 25% of the Current Yield on the Working Capital Reserve actually funded from time to time by the Optionor, compounded on an annual basis, representing quarterly installments of the annual Current Yield, payable in advance. "Current Yield" as used in this Agreement means an annual return equal to 27.5% of the Working Capital Reserve actually funded from time to time through the date of such calculation. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein." (b) Section 1(d) of each Option Agreement is hereby amended by adding at the end of each such Section the following: "To avoid any doubt, BCC shall receive a credit against -2- 3 the Purchase Price for Option Payments paid as Current Yield in advance, to the extent that such advanced Option Payments are attributable to Current Yield accruing after the Closing Date." (c) Each Option Agreement is hereby amended by adding a new Section 7(c) thereto, which shall read as follows: "(c) Notwithstanding the provisions of Section 7(b) and so long as neither a Default nor an Event of Default has occurred under any Transaction Document or Lease Document which was caused by either Optionor or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, Optionor shall have the following remedies and rights, which remedies and rights shall be the sole and exclusive remedies and rights of Optionor in the case of such failure: (i) BCC shall no longer have any right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued by the Company pursuant to the Shortfall Agreement shall automatically be replaced with amended and restated Notes that provide that interest due under the Notes will accrue and not be due and payable until the date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement and (iii) the lien encumbering the Equity Interests and other assets in favor of BCC arising hereunder and under the Pledge Agreement (if applicable) and the Leasehold Mortgage shall automatically be released and terminated. BCC agrees, after the failure to make Option Payments and an opportunity to cure as provided herein, to execute such documents and instruments, and accept delivery of such replacement Notes (returning the Notes to be replaced) as Optionors may reasonably request to effect the provisions of Subsections (c)(i), (c)(ii) and (c)(iii) above." (d) The Option Agreement among BCC, Oakhaven and SCO is hereby amended to delete any reference to "Membership Interests", and replace such reference with "Equity Interests". 2. Stock Pledge Agreement. (a) Each Pledge Agreement is hereby amended to delete any reference to "Stock" and to replace such reference with "Equity Interests". (b) Section 7 of each Pledge Agreement is hereby amended to add the following language at the end thereof: "This Agreement and the grant of the security interests provided herein are subject in all respects to the provisions of Section 7(c) of the Option Agreement." 3. Shortfall Funding Agreement. (a) Section 1.02 of each Shortfall Agreement is hereby amended to delete any reference to the Note being due and payable on demand; instead, each such Section shall be read to provide that the Note shall be due and payable on that date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement; provided, however, interest shall (subject to the provisions of Section 7(c) of the Option Agreement) nonetheless remain payable in arrears in quarterly installments at the -3- 4 rate of interest provided in Section 1.02 of the Shortfall Agreement. Section 1.02 of each Shortfall Agreement is hereby further amended to include the following language at the end thereof: "Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.02, and any Notes issued hereunder, shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement." (b) Section 1.03 of each Shortfall Agreement is hereby modified to refer to that Section as "Section 1.03(a)". Section 1.03(a) of each Shortfall Agreement is hereby amended to include the following language at the end thereof: "Notwithstanding any provision to the contrary contained in the Transaction Documents, the provisions of this Section 1.03(a) shall be subject in all respects to the terms and conditions of Section 7(c) of the Option Agreement." (c) A new Section 1.03(b) shall be added to each Shortfall Agreement, which shall provide as follows: "Notwithstanding any provision to the contrary contained herein or in any other Transaction Document, BCC agrees that the Asset Purchase Option shall not be exercised unless (i) BCC or its designee is prohibited (by operation of law, or any other reason other than the acts or omissions of BCC or any BCC Affiliate) from exercising the Option to acquire the Equity Interests pursuant to the Option Agreement or (ii) the Lessee or any Member is in Default of any covenant, agreement, representation or warranty contained herein or in any other Transaction Document, which Default was not caused by BCC or any BCC Affiliate." 4. Promissory Notes. (a) Each form of Promissory Note attached to each Shortfall Agreement is hereby amended to delete any reference to such Note being payable on demand. Instead, each such Promissory Note shall be due and payable on that date which is the fifth (5th) anniversary of the date of issuance of the first Note so issued by the Company pursuant to the Shortfall Agreement (b) Each form of Promissory Note is hereby amended by adding at the end thereof prior to the signature line the following new paragraph: "THE TERMS AND PROVISIONS OF THIS NOTE ARE SUBJECT TO THE TERMS AND PROVISIONS OF SECTION 7(c) OF THE OPTION AGREEMENT DATED AS OF ____________, 1998 AMONG BALANCED CARE CORPORATION, AND {NAME OF MEMBERS}." 5. Leasehold Mortgages. BCC, each Member and each Lessee hereby agree that each Leasehold Mortgage shall be amended to add the following provisions: "31. Notwithstanding any provision to the contrary contained in this Mortgage, in no event shall the actions or inactions of Mortgagor be deemed a Mortgage Event of Default hereunder if and to the extent that such actions are the responsibility of the Management Firm pursuant to the Management Agreement; provided, however, such actions or inactions shall nonetheless constitute a Mortgage Event of Default hereunder if the Management Firm was unable to perform its responsibilities under the Management Agreement as a result of either (i) the negligent or willful acts or omissions of Mortgagor or (ii) a Default or Event of -4- 5 Default by Mortgagor under any Transaction Document other than this Mortgage. Notwithstanding any provisions to the contrary contained herein or in any other Transaction Document, this Mortgage and the rights of the Mortgagee hereunder are subject in all respects to the provisions of Section 7(c) of the Option Agreement." BCC, each Lessee and each Member hereby agree to cause each Leasehold Mortgage to be amended of record to add the foregoing provision. 6. Miscellaneous Provisions. (a) Entire Agreement. This Agreement, together with all other Transaction Documents (as amended hereby), contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (b) Amendments. This Agreement may be modified or amended only by a written instrument executed by the parties hereto. (c) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (e) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. (f) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (g) Transaction Documents Remain Effective. Except as expressly provided herein, each Shortfall Agreement, Option Agreement and Pledge Agreement (and all other Transaction Documents) shall remain in full force and effect, unmodified except as expressly provided herein. -5- 6 (h) Definition of Transaction Documents. The term "Transaction Documents" as used herein, with respect to each Shortfall Agreement, Option Agreement and (as applicable) Pledge Agreement executed in connection with a particular Lease, shall have the meaning given to such term in Appendix 1 to the applicable Shortfall Agreement, as amended hereby. -6- 7 IN WITNESS WHEREOF, the Members, the Lessees and BCC have caused this First Amendment to be duly executed and delivered as of the date first above written. BALANCED CARE CORPORATION By: ------------------------------------ Name Title SENIOR CARE OPERATORS, LLC By: ------------------------------------ Name Title SENIOR CARE OPERATORS OF OHIO, LLC By: ------------------------------------ Name Title ASSISTED CARE OPERATORS, LLC By: ------------------------------------ Name Title S-1 8 ASSISTED CARE OPERATORS OF JACKSON, LLC By: ------------------------------------ Name Title ASSISTED CARE OPERATORS OF ANDERSON, LLC By: ------------------------------------ Name Title EXTENDED CARE OPERATORS By: ------------------------------------ Name Title EXTENDED CARE OPERATORS OF HARRISBURG, LLC By: ------------------------------------ Name Title EXTENDED CARE OPERATORS OF RAVENNA, LLC By: ------------------------------------ Name Title S-2 9 EXTENDED CARE OPERATORS OF GREENSBORO, LLC By: ----------------------------------- Name Title OAKHAVEN SENIOR LIVING, INC. By: ----------------------------------- Name Title OAKHAVEN EXTENDED LIVING, INC. By: ----------------------------------- Name Title OAKHAVEN ASSISTED LIVING, INC. By: ----------------------------------- Name Title S-3 10 SCHEDULE 1 LEASE AND SECURITY AGREEMENT
Date of Agreement Parties - --------- ------- 12/31/97 Medina ALF, Inc. (Lessor) Senior Care Operators of Ohio, LLC (Lessee) 2/6/98 Capstone Capital Corporation (Lessor) Extended Care Operators of Greensboro, LLC (Lessee) 2/6/98 Capstone Capital of Pennsylvania, Inc. (Lessor) Extended Care Operators of Harrisburg, LLC (Lessee) 2/6/98 Capstone Capital Corporation (Lessor) Extended Care Operators of Ravenna, LLC (Lessee) 1/30/98 AHP of Indiana, Inc. (Lessor) Assisted Care Operators of Anderson, LLC (Lessee) 1/30/98 AHP of Tennessee, Inc. (Lessor) Assisted Care Operators of Jackson, LLC (Lessee)
11 SHORTFALL FUNDING AGREEMENT
Date of Agreement Parties - --------- ------- 12/31/97 Senior Care Operators, LLC Oakhaven Senior Living, Inc. Senior Care Operators of Ohio, LLC (Lessee) Balanced Care Corporation 2/6/98 Extended Care Operators, LLC Oakhaven Extended Living, Inc. Extended Care Operators of Greensboro, LLC (Lessee) Balanced Care Corporation 2/6/98 Extended Care Operators, LLC Oakhaven Extended Living, Inc. Extended Care Operators of Harrisburg, LLC (Lessee) Balanced Care Corporation 2/6/98 Extended Care Operators, LLC Oakhaven Extended Living, Inc. Extended Care Operators of Ravenna, LLC (Lessee) Balanced Care Corporation 1/30/98 Assisted Care Operators, LLC Oakhaven Assisted Living, Inc. Assisted Care Operators of Anderson, LLC (Lessee) Balanced Care Corporation 1/30/98 Assisted Care Operators, LLC Oakhaven Assisted Living, Inc. Assisted Care Operators of Jackson, LLC (Lessee) Balanced Care Corporation
12 OPTION AGREEMENT
Date of Agreement Parties - --------- ------- 12/31/97 Senior Care Operators, LLC (Optionor) Oakhaven Senior Living, Inc. (Optionor) Balanced Care Corporation {NOTE- This Option Agreement includes a pledge of the equity of the Members in favor of BCC - See Section 3(c)} 2/6/98 Extended Care Operators, LLC (Optionor)(1) Oakhaven Extended Living, Inc. (Optionor) Balanced Care Corporation 2/6/98 Extended Care Operators, LLC (Optionor)(2) Oakhaven Extended Living, Inc. (Optionor) Balanced Care Corporation 2/6/98 Extended Care Operators, LLC (Optionor)(3) Oakhaven Extended Living, Inc. (Optionor) Balanced Care Corporation 1/30/98 Assisted Care Operators, LLC (Optionor)(4) Oakhaven Assisted Living, Inc. (Optionor) Balanced Care Corporation 1/30/98 Assisted Care Operators, LLC (Optionor)(5) Oakhaven Assisted Living, Inc. (Optionor) Balanced Care Corporation
- -------- (1) Granting an option to purchase the equity interests in Extended Care Operators of Greensboro, LLC. (2) Granting an option to purchase the equity interests in Extended Care Operators of Harrisburg, LLC. (3) Granting an option to purchase the equity interests in Extended Care Operators of Ravenna, LLC. (4) Granting an option to purchase the equity interests in Assisted Care Operators of Anderson, LLC. (5) Granting an option to purchase the equity interests in Assisted Care Operators of Jackson, LLC. 13 PLEDGE AGREEMENT
Date of Agreement Parties - --------- ------- 2/6/98 Extended Care Operators, LLC (Pledgor) (6) Oakhaven Extended Living, Inc. (Pledgor) Balanced Care Corporation (Secured Party) 2/6/98 Extended Care Operators, LLC (Pledgor) (7) Oakhaven Extended Living, Inc. (Pledgor) Balanced Care Corporation (Secured Party) 2/6/98 Extended Care Operators, LLC (Pledgor) (8) Oakhaven Extended Living, Inc. (Pledgor) Balanced Care Corporation (Secured Party) 1/30/98 Assisted Care Operators, LLC (Pledgor) (9) Oakhaven Assisted Living, Inc. (Pledgor) Balanced Care Corporation (Secured Party) 1/30/98 Assisted Care Operators, LLC (Pledgor) (10) Oakhaven Assisted Living, Inc. (Pledgor) Balanced Care Corporation (Secured Party)
- -------- (6) Pledging the equity interests of Extended Care Operators of Greensboro, LLC. (7) Pledging the equity interests of Extended Care Operators of Harrisburg, LLC. (8) Pledging the equity interests of Extended Care Operators of Ravenna, LLC. (9) Pledging the equity interests of Assisted Care Operators of Anderson, LLC. (10) Pledging the equity interests of Assisted Care Operators of Jackson, LLC. 14 LEASEHOLD MORTGAGES
Date of Agreement Parties - --------- ------- 12/31/97 Balanced Care Corporation (Mortgagee) Senior Care Operators of Ohio, LLC (Mortgagor) 2/6/98 Balanced Care Corporation (Mortgagee) Extended Care Operators of Ravenna, LLC (Mortgagor) 2/6/98 Balanced Care Corporation (Mortgagee) Extended Care Operators of Greensboro, LLC (Mortgagor) 2/6/98 Balanced Care Corporation (Mortgagee) Extended Care Operators of Harrisburg, LLC (Mortgagor) 1/30/98 Balanced Care Corporation (Mortgagee) Assisted Care Operators of Anderson, LLC (Mortgagor) 1/30/98 Balanced Care Corporation (Mortgagee) Assisted Care Operators of Jackson, LLC (Mortgagor)
EX-10.57 53 BALANCED CARE CORPORATION 1 Exhibit 10.57 (________) FORM OF LEASE THIS LEASE ("Lease") dated as of June 15, 1998, is entered into by and between CAPSTONE CAPITAL OF VIRGINIA, INC., an Alabama corporation having its principal office at 1000 Urban Center Drive, Suite 630, Birmingham, Alabama 35242 ("Lessor") and ALCO IX, L.L.C., a North Carolina limited liability company, having its principal office at 56 Third Street N.W., Hickory, North Carolina 28601 ("Lessee"). ARTICLE I LEASED PROPERTY; TERM Upon and subject to the terms and conditions hereinafter set forth, Lessor leases to Lessee and Lessee rents from Lessor all of Lessor's rights and interest in and to the following real property (collectively, the "Leased Property"): (a) the real property more particularly described on Exhibit A attached hereto together with all covenants, licenses, privileges and benefits thereto belonging and any easements, rights-of-way, rights of ingress and egress or other interests of Lessor in, on or to any land, highway, street, road or avenue, open or proposed, in, on, across, in front of abutting or adjoining such real property, including all strips and gores adjacent to or lying between such real property and any adjacent real property (the "Land"); (b) all buildings, structures, Fixtures (as hereinafter defined) and other improvements of every kind (including all alleyways and connecting tunnels, crosswalks, sidewalks, landscaping, parking lots and structures and roadways appurtenant to such buildings and structures presently or hereafter situated upon the Land, and Capital Additions financed by Lessor (but specifically excluding Capital Additions financed by Lessee), drainage and all above-ground and underground utility structures) (collectively the "Leased Improvements"); (c) all permanently affixed equipment, machinery, fixtures and other items of real and/or personal property, including all components thereof, now and hereafter located in on or used in connection with and permanently affixed to or incorporated into the Leased Improvements, including all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, carpet, moveable or immovable walls or partitions and built-in oxygen and 2 vacuum systems, all of which are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Personal Property (collectively the "Fixtures"); (d) the Personal Property; (e) to the extent permitted by law, all permits, approvals and other intangible property or any interest therein now or hereafter owned or held by Lessor in connection with the Leased Property, or any business or businesses now or hereafter conducted by Lessee or any Tenant or with the use thereof, including all leases, contract rights, agreements, trade names, water rights and reservations, zoning rights, business licenses and warranties (including those relating to construction or fabrication) related to the Leased Property or any part thereof, but specifically excluding the general corporate trademarks, service marks, logos, insignia or books and records of Lessor or Lessee; and (f) all site plans, surveys, soil and substrata studies, architectural drawings, plans and specifications, engineering plans and studies, floor plans, landscape plans, and other plans and studies that relate to the Land or the Leased Improvements and are in Lessor's possession or control. SUBJECT, HOWEVER, to the matters set forth on Exhibit B attached hereto (the "Permitted Exceptions"), to have and to hold for a fixed term of 10 years (the "Initial Term") commencing at 12:01 a.m. on June 15, 1998 (the "Commencement Date") and ending at midnight on June 14, 2008, as may be extended pursuant to the terms of Article 34. ARTICLE II RENT 2.1 MINIMUM RENT AND ADJUSTMENTS TO MINIMUM RENT. Lessee shall pay to Lessor without notice, demand, set off (except as set forth in Section 30.2 or Article XXXII hereof) or counterclaim, in advance in lawful money of the United States of America, at Lessor's address set forth herein or at such other place or to such other person, firms or corporations as Lessor from time to time may designate in writing, Minimum Rent, as adjusted annually pursuant to Section 2.1(b) during the Term, as follows: (a) Minimum Rent. Lessee will pay to Lessor as rent (as adjusted from time to time in accordance with Sections 2.1(b), (c) and (f), the "Minimum Rent") for the Leased Property the annual sum equal to the product of (i) 1.10 times the Project Amount, times (ii) the sum of (A) the rate, as of the Commencement Date, equal to the weekly average yield on United States Treasury Securities - Constant Maturity Series for a term of ten years plus (B) 350 basis points. 2 3 The Minimum Rent shall be payable in advance in 12 equal, consecutive monthly installments on the first day of each calendar month during the Term. The parties shall execute an acknowledgment of the calculation of the initial Minimum Rent pursuant to this Section 2.1(a) as soon as reasonably practicable after the Commencement Date. The Minimum Rent shall be prorated for any partial month, and is subject to adjustment as provided in Sections 2.1(b), 2.1(f) and 9.3(b)(iv) below. As used herein, the term "Project Amount" means the total amount funded or to be funded or otherwise expended for the acquisition of the Land and the Personal Property and the development and construction of the Facility and the other Leased Improvements, pursuant to the Loan Agreement or otherwise and including all amounts loaned by Capstone to Charles F. Trefzger (the "Trefzger Loan"), plus all accrued interest owing now or in the future under the Loan Agreement and the Trefzger Loan. The parties agree, subject to adjustment pursuant to Section 2.1(f) below, that the initial Minimum Rent is $456,214.00. (b) Increases to Minimum Rent. Commencing on the first anniversary date of the Commencement Date and on each anniversary date thereafter throughout the remainder of the Initial Term and any Extended Term (each such anniversary date individually being referred to as an "Adjustment Date"), the then current Minimum Rent shall be increased annually effective as of such Adjustment Date by 125% of the increase in the Consumer Price Index for the Base Period (as defined below); provided, however, if the increase in the Consumer Price Index for such Base Period is greater than 2.4%, Lessor and Lessee mutually agree to use their best efforts to negotiate the increase in Minimum Rent based on the fair rental value of the Leased Property to become effective on the Adjustment Date. (c) Capital Expenditures. Beginning on the first (1st) anniversary of the Commencement Date, Lessee shall make an annual Facility upgrade expenditure in an amount equal to $200 per bed for capital improvements, such amount to be increased $50 per bed on each Adjustment Date. If requested by Lessor, Lessee shall promptly provide evidence of such capital expenditures. In the event Lessee fails to make the required capital expenditure in any Lease year, Lessee shall deposit in a money market account with an Acceptable Financial Institution amounts not less than the difference between the required capital expenditures and the amounts actually spent. Such account shall be in the name of the Lessor. Lessee shall make detailed requests for such funds in writing to Lessor in the same form as a Request pursuant to Section 9.3 hereof. Within 30 days of such Request, Lessor shall reasonably approve the amount of requested funds and make mutually agreeable arrangements for the disbursement of the funds or provide Lessee with written notice in reasonable detail specifying Lessor's objections to such Request. (d) Payment of Minimum Rent. All payments of Minimum Rent shall be made in lawful money of the United States by wire/ACH transfer of same day funds to Lessor's account or other location specified by Lessor from time to time in writing on or before 2:00 p.m., Birmingham time, on any Business Day. 3 4 (e) Recalculation of Minimum Rent. The parties agree that the Project Amount may be estimated as of the Commencement Date. As soon as reasonably practicable after the determination of the final Project Amount, Lessor will recalculate the Minimum Rent pursuant to Section 2.1(a) whereupon the parties will execute an acknowledgment of the recalculated Minimum Rent. 2.2 CALCULATION OF INCREASES TO MINIMUM RENT. On or about each Adjustment Date Lessor will calculate the increase in the Minimum Rent pursuant to the provisions of Section 2.l(b) and will provide Lessee with written notice of same. 2.3 ADDITIONAL CHARGES. Lessee will also pay and discharge as and when due (a) all other amounts, liabilities, obligations and Impositions, which Lessee assumes or agrees to pay under this Lease including, to the extent applicable, any condominium association dues, assessments or other charges and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) above, Lessee will also promptly pay and discharge every fine, penalty, interest and cost which may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) above being referred to herein collectively as the "Additional Charges"), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided in this Lease, by statute or otherwise, in the case of non-payment of the Additional Charges as well as the Minimum Rent. If any installment of Minimum Rent or Additional Charges (but only as to those Additional Charges which are payable directly to Lessor) shall not be paid within ten (10) days after the date when due, Lessee will pay Lessor on demand, as Additional Charges, interest (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date when due to the date of payment in full thereof. In the event Lessor provides Lessee with written notice of failure to timely pay any installment of Minimum Rent or any Additional Charges pursuant to Section 15.1(b) more than three times within any twelve-month period, Lessee shall pay an administrative fee to Lessor in the amount of $500.00 per year for such twelve-month period. To the extent that Lessee pays any Additional Charges to Lessor or the Facility Mortgagee pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which such Additional Charges would otherwise be due. Additional Charges shall be deemed Rent hereunder. 2.4 NET LEASE. The Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to Lessor the full amount of the installments of Minimum Rent and the payments of Additional Charges throughout the Term but subject to any provisions of this Lease which expressly provide for payments by Lessor or the adjustment of the Rent or other charges. 2.5 RENT COVERAGE. (a) Beginning with the end of the second calendar quarter after the Commencement Date, for the Applicable Period, the Facility must achieve and maintain the following: 4 5 (i) A Rent Coverage Ratio of not less than 1.25 to 1.0, and (ii) An Adjusted Rent Coverage Ratio of not less than 1.0 to 1.0. For purposes of this provision, the following terms shall have the meanings indicated: "Rent Coverage Ratio" means, for each Applicable Period, the ratio of (i) Cash Flow, plus management fees as determined on an accrual basis of accounting for the Facility, to (ii) the Minimum Rent payable under the Lease. "Adjusted Rent Coverage Ratio" means, for each Applicable Period, the ratio of (i) Cash Flow to (ii) the Minimum Rent payable under the Lease. "Cash Flow" means the pre-tax income of the Facility, plus (i) lease expense with respect to the Lease and (ii) non-cash expenses or allowances for depreciation and amortization with respect to the Facility. In calculating "pre-tax" income, any extraordinary income or extraordinary loss shall be excluded. (b) The Rent Coverage Ratio and the Adjusted Rent Coverage Ratio will be measured quarterly, commencing with the first measurement at the end of the second calendar quarter after the Commencement Date. The first such measurement shall cover an Applicable Period of 3 months; the second such measurement will cover an Applicable Period of 6 months; the third such measurement will cover an Applicable Period of 9 months, and each subsequent measurement will cover an Applicable Period of 12 months. ARTICLE III IMPOSITIONS 3.1 PAYMENT OF IMPOSITIONS. Subject to Article XI relating to permitted contests, Lessee will pay or cause to be paid all Impositions before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and Lessee will promptly, upon request, furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. Lessee's obligation to pay such Impositions and the amount thereof shall be deemed absolutely fixed upon the date such Impositions become a lien upon the Leased Property or any part thereof. If any such Imposition may lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay such installments during the Term hereof as the same becomes due and before any fine, penalty, premium, further interest or cost may be added thereto. Lessor, at its expense, shall, to the extent permitted by applicable law, prepare and file all tax returns and reports as may be required by governmental authorities in 5 6 respect of Lessor's net income, gross receipts, franchise taxes and taxes on its capital stock. Lessee, at its expense, shall, to the extent permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by governmental authorities. If any refund shall be due from any taxing authority in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default shall have occurred hereunder and be continuing. Any such funds retained by Lessor due to an Event of Default shall be applied as provided in Article XV. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. In the event governmental authorities classify any property covered by this Lease as personal property, Lessee shall file all personal property tax returns in such jurisdictions where filing is required. Lessor and Lessee will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Lessor is legally required to file personal property tax returns, and Lessee is obligated for the same hereunder, Lessee will be provided with copies of assessment notices in sufficient time for Lessee to file a protest. Lessee may upon giving 30 days' prior written notice to Lessor, at Lessee's option and at Lessee's sole cost and expense, protest, appeal, or institute such other proceedings as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments and Lessor, if requested by Lessee and at Lessee's expense as aforesaid, shall fully cooperate with Lessee in such protest, appeal, or other action. Billings for reimbursement by Lessee to Lessor of personal property taxes shall be accompanied by copies of an invoice therefor and payments thereof which identify the personal property with respect to which such payments are made. Lessor will cooperate with Lessee in order that Lessee may fulfill its obligations hereunder, including the execution of any instruments or documents reasonably requested by Lessee. 3.2 PRORATION OF IMPOSITIONS. Impositions imposed in respect of the tax-fiscal period during which the Term terminates shall be prorated between Lessor and Lessee, whether or not such Imposition is imposed before or after such termination, and Lessee's and Lessor's obligation to pay their respective prorated shares thereof shall survive such termination. 3.3 UTILITY CHARGES. Lessee will, or will cause Tenants to, contract for, in its own name, and will pay or cause to be paid all charges for, electricity, power, gas, oil, water and other utilities used in the Leased Property during the Term. 3.4 INSURANCE PREMIUMS. Lessee will contract for or cause to be contracted for, in Lessee's own name, and will pay or cause to be paid all premiums for, the insurance coverage required to be maintained by Lessee pursuant to Article XII during the Term. 6 7 ARTICLE IV NO TERMINATION Except as provided in this Lease and to the extent provided by law, Lessee shall remain bound by this Lease in accordance with its terms and shall neither take any action without the consent of Lessor to modify surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of Rent, or set-off against the Rent, nor shall the respective obligations of Lessor and Lessee be otherwise affected by reason of (a) any damage to, or destruction of, the Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, except as otherwise provided in Articles XIII or XIV, (b) the lawful or unlawful prohibition of or restriction upon, Lessee's use of the Leased Property, or any portion thereof, or the interference with such use by any person, corporation, partnership or other entity or by reason of eviction by paramount title, (c) any claim which Lessee has or might have against Lessor or by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee or to which Lessor and Lessee are parties, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, or (e) for any other cause whatsoever whether similar or dissimilar to any of the foregoing. Lessee hereby specifically waives all rights arising from any occurrence whatsoever which may now or hereafter be conferred upon it by law to (i) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (ii) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessor and Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim or seek any damages it may have against Lessor as a result of a breach by Lessor of the terms of this Lease. ARTICLE V OWNERSHIP OF LEASED PROPERTY 5.1 OWNERSHIP OF THE PROPERTY. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease. 5.2 PERSONAL PROPERTY. Lessee may (and shall as provided hereinbelow) at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements any items of Personal Property, and may remove, replace or substitute for the same 7 8 from time to time in the Ordinary Course of Business. Lessee shall provide and maintain during the entire Term all such Personal Property as shall be necessary in order to operate the Facility in compliance with all licensure and certification requirements, in compliance with all applicable Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the Primary Intended Use. Lessee shall provide Lessor with a list of Personal Property provided by Lessee, updated at least semi-annually for all items of Personal Property with a value in excess of $50,000. In addition Lessee shall grant to Lessor a security interest in certain personal property of Lessee as more particularly described in an Assignment and Security Agreement executed on even date herewith and substantially in the form attached hereto as Exhibit C. ARTICLE VI CONDITION AND USE OF LEASED PROPERTY 6.1 CONDITION OF THE LEASED PROPERTY. Lessee acknowledges receipt and delivery of possession of the Leased Property and that Lessee has examined and otherwise acquired knowledge of the condition of the Leased Property prior to the execution and delivery of this Lease and has found the same to be in good order and repair and satisfactory for its purpose hereunder. Lessee is leasing the Leased Property "as is" in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, SUITABILITY, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT IN ALL RESPECTS. 6.2 USE OF THE LEASED PROPERTY. (a) After the Commencement Date and during the entire Term, Lessee shall use or cause to be used the Leased Property and the improvements thereon as a personal care facility and for such other uses as may be necessary in connection with or incidental to such use (the "Primary Intended Use"). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. (b) Lessee covenants that it will obtain and maintain all material approvals needed to use and operate the Leased Property and the Facility for the Primary Intended Use in compliance 8 9 with all applicable Legal Requirements. (c) Lessee covenants and agrees that during the Term it will use its reasonable best efforts to operate continuously the Leased Property in accordance with its Primary Intended Use and to maintain its certifications for reimbursement, if any, and licensure and its accreditation, if compliance with accreditation standards is required to maintain the operations of the Facility and if a failure to comply would adversely affect operations of the Facility. (d) Lessee shall not commit or suffer to be committed any waste (ordinary wear and tear excepted) on the Leased Property or in the Facility or cause or permit any nuisance thereon. (e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, including any Capital Addition whether or not financed by Lessor, to be used in such a manner as (i) might reasonably tend to impair Lessor's estate therein or in any portion thereof, or (ii) may reasonably result in a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof. (f) Lessee will not utilize any Hazardous Materials on the Leased Property except in accordance with applicable Legal Requirements and will not permit any contamination which may require remediation under any applicable Hazardous Materials Law. Lessee agrees not to dispose of any Hazardous Materials or substances within the sewerage system of the Leased Property, and that it will handle all "red bag" wastes in accordance with applicable Hazardous Materials Laws. 6.3 MANAGEMENT OF FACILITY. Unless otherwise agreed to in writing by Lessor (i) Lessee shall cause the Facility to be managed (including any leasing activities) at all times by Lessee or a manager approved by Lessor, (ii) Lessee shall not enter into any agreement (oral or written) with respect to such management and leasing activities unless the terms thereof and the proposed manager or leasing agent have been approved in writing by Lessor, (iii) all such management or leasing agreements must be in writing, and (iv) all management or leasing agreements with an Affiliate of Lessee must contain provisions to the effect that (A) the obligation of Lessee to pay management fees is subordinate to its obligation to pay the Rent, and (B) the manager shall not have the right to collect any management fees during the continuance of an Event of Default. Pursuant to clause (ii) above, Lessor hereby approves the terms of the Management Agreement and the Management Company as the initial manager and leasing agent of the Facility. The parties acknowledge that the Management Company is authorized to satisfy the obligations of, and to cure any default by, Lessee hereunder. 6.4 LESSOR TO GRANT EASEMENTS. Lessor will, from time to time, at the request of Lessee and at Lessee's cost and expense, but subject to the approval of Lessor (a) grant easements and other rights in the nature of easements, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer 9 10 unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Leased Property, and (f) execute and deliver to any person such instruments as may be necessary or appropriate to confirm or effect such grants, releases, dedications and transfers (to the extent of its interest in the Leased Property), but only upon delivery to Lessor of an Officer's Certificate stating (and such other information as Lessor may reasonably require confirming) that such grant, release, dedication, transfer, petition or amendment has no adverse effect on the Primary Intended Use of the Leased Property and does not reduce the value thereof. ARTICLE VII LEGAL, INSURANCE AND FINANCIAL REQUIREMENTS 7.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS. Subject to Article XI relating to permitted contests, Lessee, at its expense, will promptly (a) comply with all material Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, whether or not compliance therewith shall require structural change in any of the Leased Improvements or interfere with the use and enjoyment of the Leased Property, and (b) directly or indirectly with the cooperation of Lessor, but at Lessee's sole cost and expense, procure, maintain and comply with all material licenses, certificates of need, if any, and other authorizations required for (i) any use of the Leased Property then being made, and for (ii) the proper erection, installation, operation and maintenance of the Leased Improvements or any part thereof, including any Capital Additions. 7.2 LEGAL REQUIREMENT COVENANTS. Lessee covenants and agrees that the Leased Property shall not be used for any unlawful purpose. Lessee shall, directly or indirectly with the cooperation of Lessor, but at Lessee's sole cost and expense, acquire and maintain all material licenses, certificates, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use and any other use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee's use of the Leased Property and Lessee's maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all applicable Legal Requirements. 7.3 OCCUPANCY. From and after the end of the fifth calendar year following the Commencement Date, the Lessee must achieve and maintain a daily average occupancy of the Facility of not less than 75% for each calendar quarter, based on an effective capacity of ______ beds. For the first quarter that the Facility fails to achieve and maintain this daily average occupancy, Lessee shall cause the Manager to use its best efforts to increase occupancy at the Facility. After the Facility fails to achieve and maintain this daily average occupancy for two (2) 10 11 consecutive calendar quarters, Lessee shall engage a consultant acceptable to Lessor, with recognized expertise in the long term care industry, to assist Manager in improving the Facility's occupancy level. If for three (3) consecutive quarters the Facility fails to maintain its occupancy requirements and if at such time the Rent Coverage Ratio for the Facility is less than 1.40 to 1.0, then, for so long as such conditions exist, the Lessee shall not be permitted to exercise its purchase rights provided for in Section 29 or its renewal rights provided for in Section 34. ARTICLE VIII REPAIRS; RESTRICTIONS AND ANNUAL INSPECTIONS 8.1 MAINTENANCE AND REPAIR. (a) Lessee, at its expense, will keep the Leased Property and all private roadways, sidewalks, and curbs appurtenant thereto in reasonably good order and repair (whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements, the age of the Leased Property or any portion thereof), and except as otherwise provided in Articles XIII and XIV, with reasonable promptness will make all necessary and appropriate repairs thereto of every kind and nature (including remodeling to the extent necessary to maintain the Leased Property in a condition substantially the same as exists on the date hereof), whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to or after the commencement of the Term of this Lease (concealed or otherwise). All repairs and remodeling shall, to the extent reasonably achievable, be at least equivalent in quality to the original work and shall be accomplished by Lessee or a party selected by Lessee. Lessee will not take or omit to take any action the taking or omission of which might materially impair the value or usefulness of the Leased Property or any part thereof for the Primary Intended Use. If Lessee fails to complete or to diligently pursue completion of any of its obligations hereunder, or if Lessor reasonably determines that action is necessary and is not being taken Lessor may, on giving 30 days' written notice to Lessee (other than in a case reasonably deemed by Lessor to be an emergency, in which case no such notice shall be required), without demand on Lessee, perform any such obligations in such manner and to such extent and take such other action as Lessor may deem appropriate, and all costs, expenses and charges of Lessor relating to any such action shall constitute Additional Charges and shall be payable by Lessee to Lessor in accordance with Section 2.3. (b) Except for the use of any insurance proceeds (to the extent required by Sections 13.1 and 13.2) and any Award (to the extent required by Section 14.3) or the gross negligence or willful acts of Lessor, Lessor shall not under any circumstances be required to build or rebuild any improvements on the Leased Property, or to make any repairs, replacements, alterations, restorations, or renewals of any nature or description to the Leased Property, whether ordinary or extraordinary, structural or nonstructural, foreseen or unforeseen, or to make any expenditure 11 12 whatsoever with respect thereto in connection with this Lease, or to maintain the Leased Property in any way. (c) Nothing contained in this Lease and no action or inaction by Lessor shall be construed as (i) constituting the consent or request of Lessor, expressed or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any particular labor or services or the furnishing of any particular materials or other property for the construction, alteration, addition, repair or demolition of or to the Leased Property or any part thereof, or (ii) giving Lessee any right, power or permission to contract for or permit the performance of any labor or services or the finishing of any materials or other property in such fashion as would permit the making of any claim against Lessor in respect thereof or to make any agreement that may create, or in any way be the basis for, any right, title, interest, lien, claim or other encumbrance upon the estate of Lessor in the Leased Property or any portion thereof. (d) Unless Lessor shall convey any of the Leased Property to Lessee pursuant to the provisions of this Lease, Lessee will, upon the expiration or prior termination of this Lease, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Property in good order and repair during the entire Term), damage caused by the gross negligence or willful acts of Lessor, and damage or destruction described in Article XIII or resulting from a Taking described in Article XIV which Lessee is not required by the terms of this Lease to repair or restore, and except as repaired, rebuilt restored, altered or added to as permitted or required by the provisions of this Lease. 8.2 ENCROACHMENTS; RESTRICTIONS. If any of the Improvements shall at any time, encroach upon any property, street or right-of-way adjacent to the Leased Property, or shall violate the agreements or conditions contained in any applicable Legal Requirement, lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof or shall impair the rights of others under any easement or right-of-way to which the Leased Property is subject, then promptly upon the request of Lessor, Lessee shall at its expense subject to its right to contest the existence of any such encroachment, violation or impairment, (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee, or (b) make such changes in the Improvements, and take such other actions as Lessor in the good faith exercise of its judgment deems reasonably practicable, to remove such encroachment, or to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Facility for the Primary Intended Use substantially in the manner and to the extent the Facility was operated prior to the assertion of such violation or encroachment. Any such alteration shall be made in conformity with the applicable requirements of Article IX. Lessee's obligations under this Section 8.2 shall be in addition to and shall in no way discharge or 12 13 diminish any obligation of any insurer under any policy of title or other insurance and Lessee shall be entitled to a credit for any sums recovered by Lessor under any such policy of title or other insurance. 8.3 INSPECTIONS; UNDERWRITING FEE. From time to time during the Term, Lessor and its agents shall have the right to inspect the Leased Property and all systems contained therein at any reasonable time to determine Lessee's compliance with its obligations under this Lease, including those obligations set forth in Article VII and this article VIII. Lessee shall be responsible for the costs of such inspections which costs shall equal $2,000.00 per year during the Term. In addition, Lessee shall pay Lessor a one-time initial facility due diligence and underwriting fee of $3,000.00 which is due upon full execution of this Lease. ARTICLE IX CAPITAL ADDITIONS 9.1 CONSTRUCTION OF CAPITAL ADDITIONS TO THE LEASED PROPERTY. (a) If no Event of Default shall have occurred and be continuing, Lessee shall have the right, upon and subject to the terms and conditions set forth below, to construct or install Capital Additions on the Leased Property with the prior written consent of Lessor which consent shall not be unreasonably withheld; provided that Lessee shall not be permitted to create any Encumbrance on the Leased Property in connection with such Capital Addition without first complying with Section 9.l(b) hereof. Prior to commencing construction of any Capital Addition, Lessee shall submit to Lessor in writing a proposal setting forth in reasonable detail any proposed Capital Addition and shall provide to Lessor such plans and specifications, permits, licenses, contracts and other information concerning the proposed Capital Addition as Lessor may reasonably request. Without limiting the generality of the foregoing, such proposal shall indicate the approximate projected cost of constructing such Capital Addition and the use or uses to which it will be put. Notwithstanding the foregoing, Lessee shall be permitted to construct or install Capital Additions whose cost does not exceed $25,000 in any one Lease year without the need to obtain the prior written consent of Lessor provided that such improvements shall be architecturally integrated into and consistent with the Leased Property. (b) Prior to commencing construction of any Capital Addition, Lessee shall first request Lessor to provide funds to pay for such Capital Addition in accordance with the provisions of Section 9.3 unless the Capital Addition Cost is less than $25,000. If Lessor declines or is unable to provide such financing on terms acceptable to Lessee and Lessee rejects Lessor's offer of financing, Lessee may arrange or provide other financing, subject to the provisions of Section 9.2. Lessor will reasonably cooperate with Lessee regarding the grant of any consents or easements or the like necessary or appropriate in connection with any Capital Addition; provided 13 14 that no Capital Addition shall be made which would tie in or connect any Leased Improvements on the Leased Property with any other improvements on property adjacent to the Leased Property (and not part of the Land covered by this Lease) including tie-ins of buildings or other structures or utilities, unless Lessee shall have obtained the prior written approval of Lessor, which approval shall not be unreasonably withheld. All proposed Capital Additions shall be architecturally integrated into and consistent with the Leased Property. 9.2 CAPITAL ADDITIONS FINANCED BY LESSEE. If Lessee finances or arranges to finance any Capital Addition with a party other than Lessor or if Lessee pays cash for any Capital Addition, this Lease shall be and hereby is amended to provide as follows: (a) There shall be no adjustment in the Minimum Rent by reason of any such Capital Addition. (b) Upon the expiration or earlier termination of this Lease, Lessor shall compensate Lessee for all Capital Additions (if consented to by Lessor and Lessor's consent is required) paid for or financed by Lessee in any of the following ways: (i) By purchasing all Capital Additions paid for by Lessee from Lessee for cash in the amount of the Fair Market Added Value at the time of purchase by Lessor of all such Capital Additions paid for or financed by Lessee; or (ii) any other arrangement regarding such compensation as shall be mutually acceptable to Lessor and Lessee. Any amount owed by Lessee to Lessor under this Lease at such termination or expiration may be deducted from any compensation for Capital Additions payable by Lessor to Lessee under this Section 9.2. 9.3 CAPITAL ADDITIONS FINANCED BY LESSOR. (a) Lessee shall request that Lessor provide or arrange financing for a Capital Addition by providing to Lessor such information about the Capital Addition as Lessor may reasonably request (a "Request"), including all information referred to in Section 9.1 above. Lessor may, but shall be under no obligation to, provide or obtain the funds necessary to meet the Request. Within 30 days of receipt of a Request, Lessor shall notify Lessee as to whether it will finance the proposed Capital Addition and, if so, the terms and conditions upon which it would do so, including the terms of any amendment to this Lease. In no event (i) shall the portion of the projected Capital Addition Cost comprised of land (if any), materials, labor charges, a five percent (5%) development fee and fixtures be less than 100% of the total amount of such cost, or (ii) shall Lessee or any of its Affiliates be entitled to any commission or development fee (other than 14 15 described in (i)), directly or indirectly, as a portion of the Capital Addition Cost. Any Capital Addition not financed by Lessor must still be approved in writing by Lessor pursuant to the terms of Section 9.1 hereof, which consent will not be unreasonably withheld. Lessee may withdraw its Request by notice to Lessor at any time before or after receipt of Lessor's terms and conditions. (b) If Lessor agrees to finance the proposed Capital Addition, Lessor's obligation to advance any funds shall be subject to receipt of all of the following, in form and substance reasonably satisfactory to Lessor: (i) such loan documentation as may be required by Lessor; (ii) any information, certificates, licenses, permits or documents requested by Lessor, or by any lender with whom Lessor has agreed or may agree to provide financing which are necessary or appropriate to confirm that Lessee will be able to use the Capital Addition upon completion thereof in accordance with the Primary Intended Use, including all required federal, state or local government licenses and approvals; (iii) an Officer's Certificate and, if requested, a certificate from Lessee's architect, setting forth in detail reasonably satisfactory to Lessor the projected (or actual, if available) cost of the proposed Capital Addition; (iv) an amendment to this Lease, duly executed and acknowledged in form and substance satisfactory to Lessor and Lessee (the "Lease Amendment"), containing such provisions as may be necessary or appropriate due to the Capital Addition, including any appropriate changes in the legal description of the Land and the Rent, all such changes to be mutually agreed upon by Lessor and Lessee; (v) a deed conveying title to Lessor to any land and improvements or other rights acquired for the purpose of constructing the Capital Addition, free and clear of any liens or encumbrances except those approved in writing by Lessor and, both prior to and following completion of the Capital Addition, an as-built survey thereof reasonably satisfactory to Lessor; (vi) endorsements to any outstanding policy of title insurance covering the Leased Property or a supplemental policy of title insurance covering the Leased Property reasonably satisfactory in form and substance to Lessor (A) updating the same without any additional exceptions, except as may be permitted by Lessor; and (B) increasing the coverage thereof by an amount equal to the Fair Market Value of the Capital Addition (except to the extent covered by the owner's policy of title insurance referred to in subparagraph (vii) below); (vii) if required by Lessor, (A) an owner's policy of title insurance insuring fee simple title to any land conveyed to Lessor pursuant to subparagraph (v), free and clear of all liens 15 16 and encumbrances except those approved by Lessor and (B) a lender's policy of title insurance satisfactory in form and substance to Lessor and the Lending Institution advancing any portion of the Capital Addition Cost; (viii) if required by Lessor upon completion of the Capital Addition, an M.A.I. appraisal of the Leased Property; and (ix) such other certificates (including endorsements increasing the insurance coverage, if any, at the time required by Section 12.1), documents, customary opinions of Lessee's counsel, appraisals, surveys, certified copies of duly adopted resolutions of the Board of Directors of Lessee authorizing the execution and delivery of the Lease Amendment and any other instruments or documents as may be reasonably required by Lessor. (c) Upon making a Request to finance a Capital Addition, whether or not such financing is actually consummated, Lessee shall pay the reasonable costs and expenses of Lessor and any Lending Institution which has committed to finance such Capital Addition paid or incurred in connection with the financing of the Capital Addition including (i) the fees and expenses of their respective counsel, (ii) the amount of any recording or transfer taxes and fees, (iii) documentary stamp taxes, if any, (iv) title insurance charges, (v) appraisal fees, if any, and (vi) commitment fees, if any. (d) Notwithstanding the foregoing, Lessor and Developer have entered into a Development Agreement of even date herewith pursuant to which the Developer shall cause the Facility to be constructed. 9.4 REMODELING AND NON-CAPITAL ADDITIONS. Lessee shall have the right and the obligation to make additions, modifications or improvements to the Leased Property which are not Capital Additions, including tenant improvements made in connection with the Tenant Leases, from time to time as may reasonably be necessary for its uses and purposes and to permit Lessee to comply fully with its obligations set forth in this Lease; provided that such action will be undertaken expeditiously, in a workmanlike manner and will not significantly alter the character or purpose or detract from the value or operating efficiency of the Leased Property and will not significantly impair the revenue producing capability of the Leased Property or adversely affect the ability of Lessee to comply with the provisions of this Lease. Title to all non-Capital Additions, modifications and improvements shall, without payment by Lessor at any time, be included under the terms of this Lease and, upon expiration or earlier termination of this Lease, shall pass to and become the property of Lessor. 9.5 SALVAGE. All materials which are scrapped or removed in connection with the making of either Capital Additions permitted by Section 9.1 or repairs required by Article VIII shall be or become the property of Lessor; provided that Lessor may require Lessee to dispose of 16 17 such materials and remit the net proceeds thereof to Lessor within 15 days of such disposal. ARTICLE X LIENS Subject to the provisions of Article XI relating to permitted contests, Lessee will not directly or indirectly create or suffer to exist and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim, or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, set forth in Exhibit B attached hereto, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor, or any easements granted pursuant to the provisions of Section 6.4 of this Lease, (d) liens for those taxes of Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested in accordance with the provisions of Article XI, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due, provided that (1) the payment of such sums shall not be postponed for more than 60 days after the completion of the action (including any appeal from any judgment rendered therein) giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor or (2) any such liens are in the process of being contested in accordance with the provisions of Article XI, and (h) any Encumbrance placed on the Leased Property by Lessor. ARTICLE XI PERMITTED CONTESTS Lessee, after ten days' prior written notice to Lessor, on its own or on Lessor's behalf (or in Lessor's name), but at Lessee's expense, may contest, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy, encumbrance, charge or claim (collectively "Charge") not otherwise permitted by Article X, which is required to be paid or discharged by Lessee or any Tenant; provided that (a) in the case of an unpaid Charge, the commencement and continuation of such proceedings, or the posting of a bond or certificate of deposit as may be permitted by applicable law, shall suspend the collection thereof from Lessor and from the Leased Property; (b) neither the Leased Property nor any Rent therefrom nor any part thereof or interest therein would be in any immediate danger of being sold, forfeited, attached or lost; (c) Lessor would not be in any immediate danger of civil or criminal liability for failure to comply therewith pending the outcome of such proceedings; (d) in the event 17 18 that any such contest shall involve a sum of money or potential loss in excess of $50,000.00, then Lessee shall deliver to Lessor and its counsel an Officer's Certificate as to the matters set forth in clauses (a), (b) and (c) and such opinions of legal counsel as Lessor may reasonably request; (e) in the case of an Insurance Requirement, the coverage required by Article XII shall be maintained; and (f) if such contest be finally resolved against Lessor or Lessee, Lessee shall, as Additional Charges due hereunder, promptly pay the amount required to be paid, together with all interest and penalties accrued thereon, or otherwise comply with the applicable Charge; provided further that nothing contained herein shall be construed to permit Lessee to contest the payment of the Rent, or any other sums payable by Lessee to Lessor hereunder. Lessor, at Lessee's expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in any such contest and, if reasonably requested by Lessee or if Lessor so desires and then at its own expense, Lessor shall join as a party therein. Lessor shall do all things reasonably requested by Lessee in connection with such action. Lessee shall indemnify and save Lessor harmless against any liability, cost or expense of any kind that may be imposed upon Lessor in connection with any such contest and any loss resulting therefrom. ARTICLE XII INSURANCE 12.1 GENERAL INSURANCE REQUIREMENTS. During the Term of this Lease, Lessee shall at all times keep the Leased Property, and all property located in or on the Leased Property insured with the kinds and amounts of insurance described below and written by companies reasonably acceptable to Lessor authorized to do insurance business in the state in which the Leased Property is located. The policies must name Lessor as an additional insured and losses shall be payable to Lessor and/or Lessee as provided in Article XIII. In addition, the policies shall name as an additional insured the holder ("Facility Mortgagee") of any mortgage, deed of trust or other security agreement securing any Encumbrance placed on the Leased Property or any part thereof in accordance with the provisions of Article XXXII ("Facility Mortgage"), if any, by way of a standard form of mortgagee's loss payable endorsement. Any loss adjustment in excess of $100,000.00 shall require the written consent of Lessor and each affected Facility Mortgagee. Evidence of insurance shall be deposited with Lessor and if requested, with any Facility Mortgagee(s). If any provision of any Facility Mortgage which constitutes a first lien on the Leased Property requires deposits of insurance to be made with such Facility Mortgagee, Lessee shall either pay to Lessor monthly the amounts required and Lessor shall transfer such amounts to such Facility Mortgagee or, pursuant to written direction by Lessor, Lessee shall make such deposits directly with such Facility Mortgagee. The policies on the Leased Property, including the Leased Improvements, the Fixtures and the Personal Property, shall insure against the following risks: (a) Loss or damage by fire, vandalism and malicious mischief extended coverage perils 18 19 commonly known as "All Risk" and all physical loss perils, including sprinkler leakage and business interruption, in an amount not less than 90% of the then Full Replacement Cost thereof (as defined below in Section 12.2) after deductible with a replacement cost endorsement sufficient to prevent Lessee from becoming a co-insurer together with an agreed value endorsement; (b) Loss or damage by explosion of steam boilers, pressure vessels or similar apparatus now or hereafter installed in the Facility, in such limits with respect to any one accident as may be reasonably requested by Lessor from time to time; (c) Loss or damage by hurricane and earthquake in the amount of the Full Replacement Cost, after deductible; (d) Loss of rental under a rental value insurance policy covering risk of loss during the first 6 months of reconstruction necessitated by the occurrence of any of the hazards described in Sections 12.1(a), 12.1(b) or 12.1 (c), in an amount sufficient to prevent Lessee from becoming a co-insurer; provided that in the event that Lessee shall not be in default hereunder and Lessor shall receive any proceeds from such rental insurance which when added to rental amounts received with respect to the applicable time period exceed the amount of rental owed by Lessee hereunder, Lessor shall immediately pay such excess to Lessee; (e) Claims for personal injury or property damage under a policy of comprehensive general public liability insurance including insurance against assumed or contractual liability including indemnities under this Lease, with amounts not less than $5,000,000.00 per occurrence in respect of bodily injury and death and $5,000,000.00 for property damage; provided that if it becomes customary for tenants occupying similar buildings in the same City where the Leased Property is located to be required to provide liability coverage with higher limits than the foregoing, then Lessee shall provide Lessor with an insurance policy with coverage limits that are not less than such customary limits; and (f) Flood (when the Leased Property is located in whole or in part within a designated flood plain area) and such other hazards and in such amounts as may be customary for comparable properties in the area and if available from insurance companies authorized to do business in the state in which the Leased Property is located. 19 20 12.2 REPLACEMENT COST. The term "Full Replacement Cost" as used herein shall mean the actual replacement cost of the Facility from time to time, including increased cost of construction endorsement, less exclusions provided in the normal fire insurance policy. In the event Lessor or Lessee believes that the Full Replacement Cost has increased or decreased at any time during the Term, it shall have the right at its own expense to have such Full Replacement Cost redetermined by the insurance company which is then providing the largest amount of casualty insurance carried on the Leased Property, hereinafter referred to as the "impartial appraiser. The party desiring to have the Full Replacement Cost so redetermined shall forthwith, on receipt of such determination by the impartial appraiser, give written notice thereof to the other party hereto. The determination of such impartial appraiser shall be final and binding on the parties hereto, and Lessee shall forthwith increase, or may decrease, the amount of the insurance carried pursuant to this Article to the amount so determined by the impartial appraiser. 12.3 ADDITIONAL INSURANCE. In addition to the insurance described above, Lessee shall maintain such additional insurance as may be reasonably required from time to time by any Facility Mortgagee which is consistent with insurance coverage for similar properties in the city, county and state where the Leased Property is located, or required pursuant to any applicable Legal Requirement, and shall at all times maintain or cause to be maintained adequate worker's compensation insurance coverage for all persons employed by Lessee on the Leased Property in accordance with all applicable Legal Requirements. 12.4 WAIVER OF SUBROGATION. All insurance policies carried by either party covering the Leased Property, the Fixtures, the Facility and/or the Personal Property, including contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such a waiver clause or endorsement so long as the same is obtainable without extra cost, and in the event of such an extra charge the other party, at its election, may request and pay the same, but shall not be obligated to do so. 12.5 FORM OF INSURANCE. All of the policies of insurance referred to in this Section shall be written in form reasonably satisfactory to Lessor by insurance companies reasonably satisfactory to Lessor: provided that the deductibles for insurance required by Sections 12.1 (a) through 12.1 (d) shall be no greater than $50,000.00 and the deductible for coverage required by Section 12.1(e) shall be no greater than $100,000.00. Lessee shall pay all premiums therefor, and deliver such policies for certificates thereof to Lessor prior to their effective date (and with respect to any renewal policy, at least 30 days prior to the expiration of the existing policy). In the event of the failure of Lessee to effect such insurance in the names herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to Lessor at the times required, Lessor shall be entitled, but shall have no obligation, to enact such insurance and pay the premiums therefor, which premiums shall be repayable by Lessee to Lessor upon written demand therefor, and failure to repay the same shall constitute an Event of Default within the meaning of 20 21 Section 15.1(c). Each insurer mentioned in this Section shall agree, by endorsement on the policy or policies issued by it, or by independent instrument furnished to Lessor, that it will give to Lessor prior written notice before the policy or policies in question shall be altered, allowed to expire or canceled. 12.6 CHANGE IN LIMITS. In the event that Lessor shall at any time reasonably and in good faith believe the limits of the personal injury, property damage or general public liability insurance then carried to be insufficient, the parties shall endeavor to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. If the parties shall be unable to agree thereon, the proper and reasonable limits for such insurance shall be determined by an impartial third party selected by the parties the costs of which shall be divided equally between the parties. Such redeterminations, whether made by the parties or by arbitration shall be made no more frequently than every year. Nothing herein shall permit the amount of insurance to be reduced below the amount or amounts reasonably required by any Facility Mortgagee. 12.7 BLANKET POLICY. Notwithstanding anything to the contrary contained in this Section, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee or the Management Company; provided that the coverage afforded Lessor will not be reduced or diminished or otherwise be different from that which would exist under separate policies meeting all other requirements of this Lease: provided further that the requirements of this Article XII are otherwise satisfied. 12.8 NO SEPARATE INSURANCE. Without the prior written consent of Lessor, Lessee shall not on Lessee's own initiative or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article XII to be furnished by, or which may reasonably be required by a Facility Mortgagee to be furnished by, Lessee, or increase the amounts of any then-existing insurance required under this Article XII by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Lessor and all Facility Mortgagees, are included therein as additional insureds and the loss is payable under said insurance in the same manner as losses are required to be payable under this Lease. Lessee shall immediately notify Lessor of the taking out of any such separate insurance or of the increasing of any of the amounts of the then-existing insurance required under this Article XII by securing an additional policy or additional policies. 12.9 INSURANCE FOR CONTRACTORS. If Lessee shall engage or cause to be engaged any contractor to perform work on the Leased Property, Lessee shall require such contractor to carry and maintain insurance coverage comparable to the foregoing requirements, at no expense to 21 22 Lessor; provided that in cases where such coverage is excessive in relation to the work being done, Lessee may allow any such contractor to carry or maintain alternative coverage in reasonable amounts upon Lessor's prior written consent which shall not be unreasonably withheld. ARTICLE XIII FIRE AND CASUALTY 13.1 INSURANCE PROCEEDS. All proceeds payable by reason of any loss or damage to the Leased Property or any portion thereof, and insured under any policy of insurance required by Article XII of this Lease shall be paid to Lessor and held by Lessor in trust (subject to the provisions of Section 13.7) and shall be made available for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and shall be paid out by Lessor from time to time for the reasonable cost of such reconstruction or repair in accordance with this Article XIII after Lessee has expended an amount equal to or exceeding the deductible under any applicable insurance policy. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be retained by Lessee free and clear upon completion of any such repair and restoration except as otherwise specifically provided below in this Article XIII; provided that in the event neither Lessor nor Lessee is required or elects to repair or restore the Leased Property, then all such insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessee, including any salvage relating to Capital Additions paid for by Lessee. 13.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY INSURANCE. (a) Facility Rendered Unsuitable for Its Primary Intended Use. Except as provided in Section 13.7, if during the Term, the Facility is totally or partially destroyed from a risk covered by the insurance described in Article XII and the Facility thereby is rendered Unsuitable for Its Primary Intended Use, such damage or destruction shall not terminate this Lease and all of Lessee's obligations with respect to payment of the Rent shall continue in full force and effect and shall not be affected thereby and Lessee shall either: (i) apply all proceeds payable with respect thereto to restore the Facility to substantially the same condition as existed immediately prior to such damage or destruction, or (ii) offer either (A) to acquire the Leased Property from Lessor for a purchase price equal to the Minimum Repurchase Price of the Leased Property immediately prior to such damage or destruction or (B) to substitute a new property or properties for the Leased Property pursuant to and in accordance with the provisions of Article XX (which offers Lessor may in its sole discretion refuse). 22 23 Lessee shall give written notice to Lessor within 60 days after the date of such damage or destruction whether Lessee chooses option (i) or option (ii), and if option (ii) is chosen, such notice shall be accompanied by the offer referred to therein. In the event Lessee fails to give such notice or does not make an offer under option (ii), Lessee shall promptly proceed to restore the Facility to substantially the same condition as existed immediately prior to the damage or destruction. If Lessor does not accept Lessee's offer to substitute for or purchase the Leased Property within 30 days after the date of such offer, Lessee's offer shall be deemed withdrawn on such 30th day and Lessee shall promptly proceed to restore the Facility to substantially the same condition as existed immediately prior to such damage for destruction. (b) Facility Not Rendered Unsuitable for Its Primary Intended Use. Except as provided in Section 13.7, if during the Term, the Facility is partially destroyed from a risk covered by the insurance described in Article XII, but the Facility is not thereby rendered Unsuitable for Its Primary Intended Use, Lessee shall restore the Facility to substantially the same condition as existed immediately prior to the damage or destruction and such damage or destruction shall not terminate this Lease and all of Lessee's obligations hereunder, including Lessee's obligations with respect to the payment of the Rent, shall continue in full force and effect and shall not be affected thereby; provided that if Lessee cannot within a reasonable time obtain all necessary governmental approvals, including building permits, licenses, conditional use permits and any certificates of need, after diligent efforts to do so, in order to be able to perform all required repair and restoration work and to operate the Facility for Its Primary Intended Use in substantially the same manner as immediately prior to such damage or destruction then Lessee shall either offer, either: (i) offer either (A) to acquire that Leased Property from Lessor for a purchase price equal to the Minimum Repurchase Price immediately prior to such damage or destruction, or (B) to substitute a new property or properties for the Leased Property pursuant to and in accordance with the provisions of Article XX (which offers Lessor in its sole discretion may refuse), or (ii) after the fourth anniversary of the Commencement Date, offer to purchase the Leased Property from Lessor for a purchase price equal to the Minimum Repurchase Price of the Leased Property immediately prior to such damage or destruction. Lessee shall give written notice to Lessor within 60 days after the date of such damage or destruction whether Lessee chooses option (i) or option (ii), and if option (i) is chosen, such notice shall be accompanied by the offer referred to therein. In the event Lessee fails to give such notice or does not make an offer under option (i), Lessee shall promptly proceed to restore the Facility to substantially the same condition as existed immediately prior to the damage or destruction. If Lessor does not accept Lessee's offer to substitute for or purchase the Leased Property within 30 days after the date of such offer, Lessee's offer shall be deemed withdrawn on 23 24 such 30th day and Lessee shall promptly proceed to restore the Facility to substantially the same condition as existed immediately prior to such damage for destruction. 13.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED BY INSURANCE. Except as provided in Section 13.7, if during the Term the Facility is totally or materially destroyed from a risk (including earthquake) not covered by the insurance described in Article XII, whether or not such damage or destruction renders the Facility Unsuitable for Its Primary Intended Use, Lessee shall: (i) restore the Facility to substantially the same condition it was in immediately prior to such damage or destruction and such damage or destruction shall not terminate this Lease, and all of Lessee's obligations hereunder, including Lessee's obligations with respect to the payment of the Rent, shall continue in full force and effect and not be affected thereby, or (ii) offer either (A) to acquire the Leased Property from Lessor for a purchase price equal to the Minimum Repurchase Price immediately prior to such damage or destruction, or (B) to substitute a new property or properties for the Leased Property pursuant to and in accordance with the provisions of Article XX (which offers Lessor in its sole discretion may refuse); provided that if such damage or destruction is not material in the reasonable opinion of Lessor, Lessee shall restore the Facility to substantially the same condition as existed immediately prior to any such damage or destruction. Lessee shall give written notice to Lessor within 60 days after the date of such damage or destruction whether Lessee chooses option (i) or option (ii), and if option (ii) is chosen such notice shall be accompanied by the offer referred to therein. If Lessor does not accept Lessee's offer to substitute for or purchase the Leased Property within 30 days after the date of such offer Lessee's offer shall be deemed to be withdrawn on such 30th day. If such offer is so withdrawn, or if Lessee fails to purchase the Leased Property or to provide a Substitute Property in accordance with Article XX, then such damage and destruction shall be deemed to be a total Taking of such Facility under Section 14.2 and the provisions of said Section 14.2 shall apply to the rights of the parties and all insurance proceeds payable in connection with such damage or destruction shall be treated as if such proceeds constituted an "Award" under said Section 14.2 13.4 LESSEE'S PROPERTY. Lessee shall use any insurance proceeds payable by reason of any loss of or damage to any of the Personal Property to restore such Personal Property to the Leased Property with items of substantially equivalent value to the items being replaced. 13.5 RESTORATION OF LESSEE'S PROPERTY. If Lessee is required or elects to restore the Facility as provided in Sections 13.2 or 13.3, Lessee shall also restore the Personal Property related thereto as required by Section 13.4 and all Capital Additions paid for or financed by Lessor. Insurance proceeds payable by reason of damage to Capital Additions paid for or 24 25 financed by Lessor shall be paid to Lessor and Lessor shall hold such insurance proceeds in trust to pay the cost of repairing or replacing such Capital Additions in the event Lessee does not purchase or substitute other property or properties for the Leased Property. 13.6 NO ABATEMENT OF THE RENT. This Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required by this Lease shall remain unabated during any period required for repair and restoration. 13.7 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of Sections 13.2 or 13.3 to the contrary, if damage to or destruction of the Facility occurs during the last 12 months of the Term, and if such damage or destruction cannot be fully repaired and restored within the lesser of (i) six months or (ii) the period remaining in the Term immediately following the date of loss, then either party shall have the right to terminate this Lease by giving notice of termination to the other within 30 days after the date of such damage or destruction, in which event Lessor shall be entitled to retain the insurance proceeds and Lessee shall pay to Lessor on demand the amount of any deductible or uninsured loss arising in connection therewith; provided that any such notice given by Lessor shall be void and of no force and effect if Lessee exercises an available option to extend the Term for one Extended Term, or one additional Extended Term, as the case may be, within 30 days following receipt of such termination notice. 13.8 PURCHASE OR SUBSTITUTION. In the event Lessor accepts any offer by Lessee to purchase the Leased Property or to substitute a property or properties for the Leased Property, this Lease shall terminate upon payment of the purchase price and execution and delivery of all documentation in accordance with Article XVII, or execution and delivery of all documents required in connection with a Substitute Property under Article XX. Lessor shall remit to Lessee, or in the case of a purchase allow Lessee a credit toward the purchase price, an amount equal to all insurance proceeds being held in trust by Lessor. 13.9 WAIVER. Lessee hereby knowingly and expressly waives any statutory or common law rights of termination which may arise by reason of any damage or destruction of the Facility. ARTICLE XIV CONDEMNATION 14.1 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any Taking of all or any part of the Leased Property or any interest in this Lease by Condemnation, the rights and obligations of the parties shall be determined by this Article XIV. 14.2 TOTAL TAKING. If there is a Taking of all of the Leased Property by Condemnation, this Lease shall terminate on the Date of Taking, and the Minimum Rent and all Additional 25 26 Charges paid or payable hereunder shall be apportioned and paid to the Date of Taking. 14.3 PARTIAL TAKING. If there is a Taking of a portion of the Leased Property by Condemnation such that the Facility is not thereby rendered Unsuitable for Its Primary Intended Use, this Lease shall not terminate and all of Lessee's obligations hereunder, including Lessee's obligations with respect to the payment of the Rent, shall continue in full force and effect and shall not be affected thereby. If however, the Facility is thereby rendered Unsuitable for Its Primary Intended Use, Lessee shall either: (i) at Lessee's expense, restore the Facility to the extent possible, to substantially the same condition as existed immediately prior to the partial Taking, in which case the proceeds of any Award shall be applied to such restoration to the extent necessary or appropriate, or (ii) offer either (A) to acquire the Leased Property from Lessor for a purchase price equal to the Minimum Repurchase Price of the Leased Property immediately prior to such partial Taking, or (B) to substitute a new property or properties for the Leased Property pursuant to and in accordance with the provisions of Article XX (which offers Lessor may in its sole discretion refuse), or (iii) terminate this Lease effective upon the effective date of such Taking. Lessee will give written notice to Lessor within 60 days after Lessee receives notice of the Taking whether Lessee chooses option (i), option (ii) or option (iii), and if option (ii) is chosen, such notice shall be accompanied by the offer referred to therein. In the event Lessor does not accept Lessee's offer to so purchase the Leased Property within 30 days after receipt of the notice described in the preceding sentence, Lessee may either (a) withdraw its offer to purchase the Leased Property and proceed to restore the Facility, to the extent possible, to substantially the same condition as existed immediately prior to before the partial Taking, or (b) terminate the offer and this Lease by written notice to Lessor. 14.4 RESTORATION. If there is a partial Taking of the Leased Property and this Lease remains in full force and effect pursuant to any provision of this Article XIV. Lessee shall accomplish all necessary restoration in order that the Leased Property may continue to be used for Its Primary Intended Use. 14.5 AWARD DISTRIBUTION. In the event Lessee purchases the Leased Property pursuant to Section 14.3 or Lessor accepts any offer by Lessee to purchase the Leased Property or to provide a Substitute Property therefor pursuant to this Article XIV, then the entire Award shall belong to Lessee and Lessor agrees to assign to Lessee all of its rights thereto. Except as otherwise expressly provided in this Article XIV, in any other event the entire Award shall belong 26 27 to and be paid to Lessor; provided that if this Lease is terminated in accordance with Section 14.2 and subject to the rights of any Facility Mortgagees, Lessee shall be entitled to receive from the Award any sum attributable to any Capital Additions for which Lessee would be entitled to reimbursement at the end of the Term pursuant to the provisions of Section 9.2(b), but only if any to the extent such Award expressly includes such items and allocates a value thereto. If Lessee is required or elects to restore the Facility, Lessor agrees that, subject to the rights of the Facility Mortgagees, its portion of the Award shall be used for such restoration and it shall hold such portion of the Award in trust, for application to the costs of the restoration. 14.6 TEMPORARY TAKING. The Taking of the Leased Property, or any part thereof, by military or other public authority shall constitute a Taking by Condemnation only when the use and occupancy by the Taking authority has continued for longer than six months. During any such six-month period all the provisions of this Lease shall remain in full force and effect and the Rent shall not be abated or reduced during such period of Taking; provided that to the extent any compensation is paid by the Taking authority as a result of such temporary Taking, Lessee will retain such compensation. 14.7 PURCHASE OR SUBSTITUTION. In the event Lessor accepts any offer by Lessee to purchase the Leased Property or to substitute a property or properties for the Leased Property this Lease and Lease obligations shall terminate upon payment of the purchase price and execution and delivery of all appropriate documentation in accordance with Article XVII, or execution and delivery of all documents required in connection with a Substitute Property under Article XX. ARTICLE XV DEFAULT 15.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute events of default (individually, an "Event of Default" and collectively, "Events of Default") hereunder: (a) An event of default shall occur under (i) any other lease or other agreement between Lessor or any of its Affiliates and Lessee or any of its Affiliates, (b) any Support Document, or (c) the Development Agreement; or (b) Lessee shall fail to make a payment of the Rent payable by Lessee under this Lease when the same becomes due and payable and such failure shall continue for a period of ten calendar days after written notice from Lessor to Lessee; or (c) Lessee shall fail to observe or perform any other term covenant or condition of this 27 28 Lease or any document executed in connection herewith and such failure is not cured by Lessee within a period of 30 days after receipt by Lessee of notice thereof from Lessor, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure shall not be deemed to continue if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof (as soon as reasonably possible); or (d) Lessee shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition in bankruptcy or a petition to take advantage of any insolvency law and such petition is not discharged within sixty days of filing, (iii) make an assignment for the benefit of its creditors,(iv) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or (v) file a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof; or (e) Lessee shall default beyond any applicable grace period contained in one or more major credit facilities which by their terms would permit an outstanding balance equal to or greater than $1,000,000.00 in the aggregate and the same shall be accelerated by the lenders or other applicable parties; or (f) Lessee shall default beyond any applicable grace period contained in one or more of the Leases; or (g) any certificate, financial statement or information, or any representation or warranty provided herein or pursuant to this Lease by Lessee should prove to be false or misleading in any material respect. Notwithstanding the foregoing, it shall not be an Event of Default hereunder if upon discovering such false or misleading statements and before Lessor relies upon the same (i) Lessor notifies Lessee and (ii) Lessee, within ten (10) days of such notice, takes appropriate action necessary to correct such false or misleading statements. 15.2 REMEDIES. If an Event of Default shall have occurred, Lessor may, at its election then or at any time thereafter, pursue any one or more of the following remedies, in addition to any remedies which may be permitted by law or by other provisions of this Lease, without further notice or demand except as hereinafter provided: (a) Without any notice or demand whatsoever, Lessor may take any one or more actions permissible at law to ensure performance by Lessee of Lessee's covenants and obligations under this Lease. In this regard, it is agreed that if Lessee abandons or vacates the Leased Property, Lessor may enter upon and take possession of such Leased Property in order to protect it from deterioration and continue to demand from Lessee the monthly rentals and other charges provided in this Lease. Lessor shall use reasonable efforts to relet but shall have no absolute 28 29 obligation to relet. If Lessor does, at its sole discretion, elect to relet the Leased Property, such action by Lessor shall not be deemed as an acceptance of Lessee's surrender of the Leased Property unless Lessor expressly notifies Lessee of such acceptance in writing, Lessee hereby acknowledging that Lessor shall otherwise be reletting as Lessee's agent. It is further agreed in this regard that in the event of any Event of Default described in this Article XV, Lessor shall have the right to enter upon the Leased Property and do whatever Lessee is obligated to do under the terms of this Lease, Lessee agrees to reimburse Lessor on demand for any reasonable expenses which Lessor may incur in thus effecting compliance with Lessee's obligations under this Lease and further agrees that Lessor shall not be liable for any damages resulting to Lessee from such action, except as may result from Lessor's gross negligence or willful misconduct. (b) Lessor may terminate this Lease by written notice to Lessee, in which event Lessee shall immediately surrender the Leased Property to Lessor, and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which Lessor may have for possession or arrearage in rent (including any interest which may have accrued pursuant to Section 2.3 of this Lease or otherwise), enter upon and take possession of the Leased Property and expel or remove Lessee and any other person who may be occupying said premises or any part thereof other than Tenants pursuant to Tenant Leases. In addition Lessee agrees to pay to Lessor on demand the amount of all loss and damage which Lessor may suffer by reason of any termination effected pursuant to this subsection (b), said loss and damage to be determined, at Lessor's option, by either of the following alternative measures of damages: (i) Although Lessor shall be under no absolute obligation to attempt and shall be obligated only to use reasonable efforts, to relet the Leased Property, until the Leased Property is relet Lessee shall pay to Lessor on or before the first day of each calendar month the monthly rentals and other charges provided in this Lease. After the Leased Property has been relet by Lessor, Lessee shall pay to Lessor on the 10th day of each calendar month the difference between the monthly rentals and other charges provided in this Lease for the preceding calendar month and that actually collected by Lessor for such month. If it is necessary for Lessor to bring suit in order to collect any deficiency, Lessor shall have a right to allow such deficiencies to accumulate and to bring an action on several or all of the accrued deficiencies at one time. Any such suit shall not prejudice in any way the right of Lessor to bring a similar action for any subsequent deficiency or deficiencies. Any amount collected by Lessor from subsequent tenants for any calendar month in excess of the monthly rentals and other charges provided in this Lease shall be credited to Lessee in reduction of Lessee's liability for any calendar month for which the amount collected by Lessor will be less than the monthly rentals and other charges provided in this Lease, but Lessee shall have no right to such excess other than the above described credit; or (ii) When Lessor desires, Lessor may demand a final settlement not to exceed the Minimum Repurchase Price at the time of such final settlement. Upon demand for a final settlement, Lessor shall have a right to, and Lessee hereby agrees to pay, the difference between 29 30 the total of all monthly rentals and other charges provided in this Lease for the remainder of the Term and the reasonable rental value of the Leased Property for such period (including a reasonable time to relet the Leased Property), as determined pursuant to the provisions of Article XXVIII hereof, such difference to be discounted to present value at a rate equal to the lowest rate of capitalization (highest present worth) reasonably consistent with industry standards at the time of such determination and allowed by applicable law. The rights and remedies of Lessor hereunder are cumulative, and pursuit of any of the above remedies shall not preclude pursuit of any other remedies prescribed in other sections of this Lease and any other remedies provided by law or equity. Forbearance by Lessor to enforce one or more of the remedies herein provided upon an Event of Default shall not be deemed or construed to constitute a waiver of such Event of Default. Exercise by Lessor of any one or more remedies shall not constitute an acceptance of surrender of the Leased Property by Lessee, it being understood that such surrender can be effected only by the prior written agreement of Lessor and Lessee 15.3 ADDITIONAL EXPENSES. In addition to payments required pursuant to subsections (a) and (b) of Section 15.2 above, Lessee shall compensate Lessor for all reasonable expenses incurred by Lessor in repossessing the Leased Property (including any increase in insurance premiums caused by the vacancy of the Leased Property), all reasonable expenses incurred by Lessor in reletting (including repairs, remodeling, replacements, advertisements and brokerage fees), all reasonable concessions granted to a new tenant upon reletting (including renewal options), all fees and expenses incurred by Lessor as a direct or indirect result of any appropriate action by a Facility Mortgagee, any expenses of Lessor incurred for the installation of separate lines or meters for any public utilities not previously metered separately from adjacent property of Lessee and a reasonable allowance for Lessor's administrative efforts, salaries and overhead attributable directly or indirectly to Lessee's default and Lessor's pursuing the rights and remedies provided herein and under applicable law. 15.4 WAIVER. If this Lease is terminated pursuant to law or the provisions of this Article XV, Lessee waives, to the extent permitted by applicable law, (a) any right of redemption, reentry or repossession and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt. 15.5 APPLICATION OF FUNDS. All payments otherwise payable to Lessee which are received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Lessee's obligations in the order which Lessor may reasonably determine or as may be prescribed by the laws of the state in which the Facility is located. 15.6 NOTICES BY LESSOR. The provisions of this Article XV concerning notices shall be 30 31 liberally construed insofar as the contents of such notices are concerned, and any such notice shall be sufficient if it shall generally apprise Lessee of the nature and approximate extent of any default. ARTICLE XVI LESSOR'S RIGHT TO CURE If Lessee, without the prior written consent of Lessor, shall fail to make any payment, or to perform any act required to be made or performed under this Lease and to cure the same within the relevant time periods provided in Section 15.1, Lessor, without waiving or releasing any obligation or Event of Default, may (but shall be under no obligation to) make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and take all such action thereon as, in Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, and all costs and expenses (including reasonable attorneys' fees and expenses, in each case, to the extent permitted by law) so incurred shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. ARTICLE XVII PURCHASE OF THE LEASED PROPERTY In the event Lessee purchases the Leased Property from Lessor pursuant to any of the terms of this Lease, Lessor shall, upon receipt from Lessee of the applicable purchase price together with full payment of any unpaid Rent due and payable with respect to any period ending on or before the date of the purchase and any other amounts owing to Lessor hereunder, deliver to Lessee an appropriate special warranty deed and any other documents reasonably requested by Lessee to convey the interest of Lessor in and to the Leased Property to Lessee, and such other standard documents usually and customarily prepared in connection with such transfers, free and clear of all encumbrances other than (a) those that Lessee has agreed hereunder to pay or discharge, (b) those mortgage liens, if any, which Lessee has agreed in writing to accept and to take title subject to, (c) any other Encumbrances permitted to be imposed on the Leased Property under the provisions of Article XXXII which are assumable at no cost to Lessee, and (d) any matters affecting the Leased Property on or as of the Commencement Date. The difference between the applicable purchase price and the total of the encumbrances assigned or taken subject to shall be paid in cash to Lessor, or as Lessor may direct, in federal or other immediately available funds except as otherwise mutually agreed by Lessor and Lessee. The closing of any 31 32 such sale shall be contingent upon and subject to Lessee obtaining all required governmental consents and approvals for such transfer. If such sale shall fail to be consummated by reason of the inability of Lessee to obtain all such approvals and consents, any options to extend the Term which otherwise would have expired during the period from the date when Lessee elected or became obligated to purchase the Leased Property until Lessee's inability to obtain the approvals and consents is confirmed shall be deemed to remain in effect for 30 days after the end of such period. The closing with respect to any such sale shall be appropriately timed to accommodate the determination of the Minimum Repurchase Price in accordance with Article XXVIII. All expenses of such conveyance, including the cost of title examination or standard coverage title insurance, attorneys' fees incurred by Lessor in connection with such conveyance, transfer taxes and recording fees shall be paid by Lessee. Additionally, any sale to Lessee shall be subject to delivery of an opinion of Lessor's counsel confirming that (i) the sale will not result in ordinary recapture income to Lessor pursuant to Code Section 1245 or 1250 under applicable Legal Requirements as they exist on the date hereof, or any other Code provision, (ii) the sale will result in income, if any, to Lessor of a type described in Code Section 856(c)(2) or 856(c)(3) and will not result in income of the types described in Code Section 856(c)(4) or result in the tax imposed under Code Section 857(b)(6), and (iii) the sale, together with all other substitutions and sales made or requested by Lessee pursuant to any other leases with Lessor of properties hereto or any other transfers of the Leased Property or the properties leased under other such operating leases, during the relevant time period, will not jeopardize the qualification of Lessor as a real estate investment trust under Code Sections 856-860; provided Lessor is a real estate investment trust thereunder. ARTICLE XVIII HOLDING OVER If Lessee shall for any reason remain in possession of the Leased Property after the expiration of the Term or any earlier termination of the Term hereof, such possession shall be as a tenancy at will during which time Lessee shall pay as rental each month an amount equal to the sum of (a) 150% of the aggregate of l/12 of the aggregate Minimum Rent payable with respect to the last complete year prior to the expiration of the Term, plus (b) all Additional Charges accruing during such month, plus (c) all other sums, if any, payable pursuant to the provisions of this Lease with respect to the Leased Property. During such period of tenancy, Lessee and Lessor shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease and to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. ARTICLE XIX 32 33 ABANDONMENT 19.1 DISCONTINUANCE OF OPERATIONS ON THE LEASED PROPERTY; OFFER OF SUBSTITUTION. If Lessee has discontinued use of the Leased Property for Its Primary Intended Use for 90 consecutive days without Lessor's prior written consent for alterations or remodeling pursuant to Article IX, repairs or restoration pursuant to Article XIII or Article XIV or otherwise, then provided Lessor has not terminated this Lease pursuant to Section 15.2, Lessee may offer to substitute a new property or properties for the Leased Property pursuant to and in accordance with the provisions of Article XX (which offers Lessor may in its sole discretion refuse). 19.2 OBSOLESCENCE OF THE LEASED PROPERTY; OFFER TO PURCHASE. If the Leased Property becomes Unsuitable for Its Primary Intended Use, all as set forth in an Officer's Certificate delivered to Lessor, Lessee may on or after the fifteenth anniversary of the Commencement Date (provided this Lease is still in effect), purchase the Leased Property for the Minimum Repurchase Price on the first Payment Date occurring not less than 120 days after the date of such Officer's Certificate. 19.3 CONVEYANCE OF LEASED PROPERTY. In the event Lessee elects to purchase the Leased Property pursuant to Section 19.2, then on the first Payment Date occurring not less than 120 days after the date of the Officer's Certificate referred to in Section 19.2, Lessor shall, upon receipt from Lessee of the Minimum Repurchase Price as of the date of such purchase and all Rent and or other sums then due and payable under this Lease (excluding any installment of Minimum Rent due on such Payment Date), convey the Leased Property to Lessee on such date in accordance with the provisions of Article XVII and this Lease shall thereupon terminate as to the Leased Property. ARTICLE XX SUBSTITUTION OF PROPERTY 20.1 SUBSTITUTION OF PROPERTY FOR THE LEASED PROPERTY. (a) In the event Lessor accepts an offer by Lessee to substitute other property for the Leased Property under Article XIII, Article XIV or Article XIX, and provided that no Event of Default shall have occurred and be continuing, Lessee shall have the right (subject to the conditions set forth below in this Article XX, and upon notice to Lessor) to substitute one or more properties (collectively referred to as "Substitute Properties" or individually as a "Substitute Property") for the Leased Property on a monthly Payment Date specified in such notice (the "Substitution Date") occurring not less than 90 days after receipt by Lessor of such notice. The notice shall be in the form of an Officer's Certificate and shall specify the reason(s) for the proposed substitution and the proposed Substitution Date. Notwithstanding anything contained 33 34 herein to the contrary, any other substitution for the Leased Property shall require the prior written consent of Lessor which shall be within the sole discretion of Lessor. (b) If Lessee gives the notice referred to in Section 20.1(a) above, Lessee shall present to Lessor one or more properties (or groups of properties) each of which property (or groups of properties) shall provide Lessor with a yield (i.e., an annual return on its equity in such property) equal to or greater than the Current Yield (and the yield reasonably expected to be received thereafter throughout the remainder of the term) from the Leased Property at the time of such proposed substitution (or in the case of a proposed substitution as a result of damage, destruction or Condemnation, the Current Yield immediately prior to such damage, destruction or Condemnation) and as reasonably projected over the remaining Term of this Lease and shall have a Fair Market Value substantially equivalent to the Fair Market Value of the Leased Property. Lessor shall have a period of 90 days within which to review such information and either to accept or to reject the Substitute Property or Substitute Properties so presented; provided that if Lessee is required by a court order or administrative action to divest or otherwise dispose of the Leased Property within a shorter time period, in which case the time period shall be shortened appropriately to meet the reasonable needs of Lessee, but in no event shall said period be less than 15 Business Days after Lessor's receipt of said notice (subject to further extension for any period of time in which Lessor is not timely provided with the information provided for in Section 20.2 and Section 20.3 below); provided that if Lessor shall contend that the Substitute Properties fail to meet all the conditions for substitution set forth in this Article XX, including the provisions of Sections 20.1(c), (d) and (e) below, the matter shall be submitted to arbitration in accordance with Article XXXI and the time periods for Lessor's approval or rejection shall be tolled during the period of such arbitration. (c) It shall be a condition to consummation of any substitution hereunder that all of the conditions set forth in Section 20.2 below, shall have been satisfied with respect to such substitution, and to the delivery of an opinion of counsel for Lessor confirming that (i) the substitution of the Substitute Property for the Leased Property will qualify as an exchange solely of property of a like-kind under Section 1031 of the Code, in which, generally, except for "boot" such as cash needed to equalize exchange values or discharge indebtedness, no gain or loss is recognized to Lessor, (ii) under applicable Legal Requirements as they exist on the date hereof, 1997, the substitution or sale will not result in ordinary recapture income to Lessor pursuant to Code Section 1245 or 1250 or any other Code provision, (iii) the substitution or sale will result in income, if any, to Lessor of a type described in Code Section 856(c)(2) or 856(c)(3) and will not result in income of the types described in Code Section 856(c)(4) or result in the tax imposed under Code Section 857(b)(6), and (iv) the substitution or sale, together with all other substitutions and sales made or requested by Lessee pursuant to any other leases with Lessor of properties hereto or any other transfers to the Leased Property or the properties leased under other such operating leases, during the relevant time period, will not jeopardize the qualification of Lessor as a real estate investment trust under Code Sections 856-860. 34 35 (d) In the event that the equity value of the Substitute Property or group of Substitute Properties (i.e., the Fair Market Value of the Substitute Property or group of Substitute Properties minus the encumbrances subject to which Lessor will take the Substitute Property or group of Substitute Properties) as of the Substitution Date is greater than the equity value of the Leased Property (i.e., the Fair Market Value of the Leased Property minus the encumbrances subject to which Lessee will take the Leased Property) as of the Substitution Date (or in the case of damage destruction or Condemnation, the Fair Market Value immediately prior to such damage, destruction or Condemnation), Lessor shall pay to Lessee an amount equal to the difference, subject to the limitation set forth below. In the event that said equity value of the Substitute Property or group of Substitute Properties is less than said equity value of the Leased Property, Lessee shall pay to Lessor an amount equal to the difference, subject to the limitation set forth below. Notwithstanding the foregoing, neither Lessor nor Lessee shall be obligated to consummate any substitution if such party would be required to make a payment to the other in excess of an amount equal to ten percent of said Fair Market Value of the Leased Property (the amount of cash paid by one party to the other being hereinafter referred to as the "Cash Adjustment"). (e) The Rent for such Substitute Property in all respects shall provide Lessor with a yield at the time of such substitution (i.e., annual return on its investment in such Substitute Property) not less than the Current Yield (and the yield reasonably expected to be received thereafter throughout the remainder of the Term) from the Leased Property prior to any damage, destruction or Condemnation, taking into account the Cash Adjustment paid or received by Lessor and any other relevant factors (f) The Minimum Repurchase Price of any Substitute Property or Substitute Properties shall be an amount equal to the Minimum Repurchase Price of the Leased Property on the Substitution Date (i) increased by any Cash Adjustment paid by Lessor pursuant to Section 20.1(d) above, or (ii) decreased by any Cash Adjustment paid by Lessee pursuant to Section 20.1(d) above. 20.2 CONDITIONS TO SUBSTITUTION. On the Substitution Date, the Substitute Property will become the Leased Property hereunder upon delivery by Lessee to Lessor of the following, items in form and substance reasonably satisfactory to Lessor: (a) an Officer's Certificate representing, warranting and certifying that (i) the Substitute Property has been accepted by Lessee for all purposes of this Lease and there has been no material damage to the improvements located on the Substitute Property nor is any condemnation or eminent domain proceeding pending with respect thereto; (ii) all permits, licenses and certificates (including a permanent, unconditional certificate of occupancy and, to the extent permitted by law, all certificates of need and licenses) which are necessary to permit the use 35 36 of the Substitute Property in accordance with the provisions of this Lease have been obtained and are in full force and effect; (iii) under applicable zoning and use laws, ordinances, rules and regulations the Substitute Property may be used for the purposes contemplated by Lessee and all necessary subdivision approvals have been obtained; (iv) there are no mechanic's or materialmen's liens outstanding or threatened to the knowledge of Lessee against the Substitute Property arising out of or in connection with the construction of the improvements thereon, other than those being contested by Lessee pursuant to Article XI; (v) any mechanic's or materialmen's liens being contested by Lessee will be promptly paid by Lessee if such contest is resolved in favor of the mechanic or materialman; (vi) to the best knowledge of Lessee, there exists no Event of Default under this Lease, and no defense, offset or claim exists with respect to any sums to be paid by Lessee hereunder; and (vii) any exceptions to Lessor's title to the Substitute Property do not materially interfere with the intended use of the Substitute Property by Lessee; (b) a special warranty deed with warranties against claims arising under Lessee conveying to Lessor title to the Substitute Property free and clear of any liens and encumbrances except those approved in writing or assumed by Lessor; (c) a lease duly executed, acknowledged and delivered by Lessee, containing the same terms and conditions as are contained herein, except that (i) the legal description of the Land shall refer to the Substitute Property, (ii) the Minimum Repurchase Price, Rent and any Additional Charges for the Substitute Property shall be consistent with the requirements of Section 20.1 and (iii) such other changes therein as may be necessary or appropriate under the circumstances shall be made; (d) a standard owner's or lessee's (as applicable) policy of title insurance covering the Substitute Property (or a valid, binding, unconditional commitment therefor), dated the Substitution Date, in current form and including mechanics' and materialmen's lien coverage, issued to Lessor by a title insurance company reasonably satisfactory to Lessor. Such policy shall (i) insure (A) Lessor's fee title to the Substitute Property, subject to no liens or encumbrances except those approved or assumed by Lessor, and (B) that any restrictions affecting the Substitute Property have not been violated and that further violation thereof will not result in a forfeiture or reversion of title, (ii) be in an amount at least equal to the Fair Market Value of the Substitute Property, and (iii) contain such endorsements as may be reasonably requested by Lessor; (e) certificates of insurance with respect to the Substitute Property fulfilling the requirements of Article XII; (f) current appraisals or other evidence satisfactory to Lessor, in its sole discretion, as to the current Fair Market Values of such Substitute Property; (g) all available revenue data relating to the Substitute Property for the period from 36 37 the date of opening for business of the Substitute Property to the date of Lessee's most recent Fiscal-Year end, or for the most recent three years, whichever is less; and (h) such other certificates, documents, opinions of counsel (which may be in-house counsel), and other instruments as may be reasonably required by Lessor. 20.3 CONVEYANCE TO LESSEE. On the Substitution Date Lessor will convey the Leased Property to Lessee in accordance with the provisions of Article XVII (except as to payment of any expenses in connection therewith which shall be governed by Section 20.4 below) upon either (a) payment in cash therefor or (b) conveyance to Lessor of the Substitute Property, as appropriate. 20.4 EXPENSES. Lessee shall pay or cause to be paid, on demand, all reasonable costs and expenses paid or incurred by Lessor in connection with the substitution and conveyance of the Leased Property and the Substitute Property, including (a) fees and expenses of Lessor's counsel, (b) the amount of any recording taxes and filing fees, (c) the cost of preparing and recording, if appropriate, a release of the Leased Property from the lien of any mortgage, (d) broker's fees and commissions for Lessee, if any, (e) documentary stamp and transfer taxes, if any, (f) title insurance charges, and (g) escrow fees, if any. ARTICLE XXI RISK OF LOSS Except as otherwise provided in this Lease, during the Term of this Lease, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than by Lessor and those claiming from, through or under Lessor) is assumed by Lessee and, Lessor shall in no event be answerable or accountable therefor nor shall any of the events mentioned in this Section entitle Lessee to any abatement of the Rent except as specifically provided in this Lease. 37 38 ARTICLE XXII INDEMNIFICATION Notwithstanding the existence of any insurance or self insurance provided for in Article XII, and without regard to the policy limits of any such insurance or self insurance, Lessee will protect, indemnify, save harmless and defend Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessor by reason of: (a) any accident, injury to or death of persons or loss to property occurring on or about the Leased Property, including any claims of malpractice, (b) any use, misuse, no use, condition, maintenance or repair by Lessee of the Leased Property, (c) any Impositions (which are the obligations of Lessee to pay pursuant to the applicable provisions of this Lease), (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, (e) the non-performance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by Lessee as landlord thereunder and (f) the violation of any Hazardous Materials Law. Any amounts which become payable by Lessee under this Section shall be paid within ten days after liability therefor on the part of Lessor is finally determined by litigation or otherwise (including the expiration of any time for appeals) and, if not timely paid, shall bear interest (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. Lessee, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Lessor or may compromise or otherwise dispose of the same as Lessee sees fit. Lessor shall cooperate with Lessee in a reasonable manner to permit Lessee to satisfy Lessee's obligations hereunder, including the execution of any instruments or documents reasonably requested by Lessee. Nothing herein shall be construed as indemnifying Lessor or its agents for their own negligent acts or omissions or willful misconduct. Lessee's liability for a breach of the provisions of this Article shall survive any termination of this Lease. ARTICLE XXIII SUBLETTING AND ASSIGNMENT 23.1 SUBLETTING AND ASSIGNMENT. Subject to the rights of Tenants under existing Tenant Leases and subject to the provisions of Section 23.2 below and any other express conditions or limitations set forth herein, Lessee may, without the consent of Lessor, sublet all or any part of the Leased Property consistently with the Primary Intended Use. Lessor shall not unreasonably withhold its consent to any other or further subletting or assignment; provided that (a) in the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, (b) in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be and become jointly and severally liable with Lessee for the performance thereof, (c) an original 38 39 counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance reasonably satisfactory to Lessor, shall be delivered promptly to Lessor, and (d) in case of either an assignment or subletting, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. In addition to Lessee's rights to sublet and assign as provided in this section above, Lessee shall also have the right (upon Lessor's prior consent, which consent shall not unreasonably be withheld) to enter into Tenant Leases which extend beyond the Term of this Lease. To the extent that any such Tenant Leases extend beyond the Term of this Lease, Lessor shall receive the rents from, and be responsible for any obligations on the part of the landlord or lessor under such Tenant Leases. Any and all such Tenant Leases shall, to the extent applicable, be subject to the provisions of this Section and Section 23.2. No sublease or assignment shall release Lessee from their obligations under the Lease. Notwithstanding the foregoing, Lessor's consent shall not be required if Lessee's rights hereunder are assigned to or acquired by BCC or an Affiliate of BCC as a result of an exercise by BCC of its rights under the Asset Purchase Option or the Equity Option in accordance with the terms of the Shortfall Funding Agreement or the Option Agreement, or under the Right of First Refusal Agreement, and otherwise in accordance with the foregoing paragraph and the other provisions of this Lease, and upon such assignment or acquisition the obligations of Lessee and any guarantor which is BCC or an Affiliate of BCC hereunder shall be extinguished. 23.2 NON-DISTURBANCE, SUBORDINATION AND ATTORNMENT. Except for existing Tenant Leases, Lessee shall insert in each sublease permitted under Section 23.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) in the event this Lease shall terminate before the expiration of such sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease and (c) in the event the sublessee receives a written notice from Lessor or Lessor's assignees, if any, stating that Lessee is in default under this Lease, the sublessee, shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor's assignees, if any, shall be credited against amounts owing by Lessee under this Lease. Lessor agrees that notwithstanding any default, termination, expiration, sale, entry or other act or omission of Lessee pursuant to the terms of this Lease, or at law or in equity, Tenant's possession shall not be disturbed unless such possession may otherwise be terminated pursuant to the terms of the applicable Tenant Lease. Lessor hereby agrees, upon Lessee's request, to execute a nondisturbance agreement in favor of any Tenant or in favor of any sublessee under any sublease permitted under Section 23.1 above; provided that the Tenant or any such sublessee has acknowledged all of the foregoing provisions and executed all documents required by this Section 23.2. 39 40 ARTICLE XXIV OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS 24.1 ESTOPPEL CERTIFICATE. At any time and from time to time within 20 days following written request by Lessor, Lessee will furnish to Lessor an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications) the amounts of and the dates to which the Rent has been paid, and such other matters regarding the Lease as Lessor may reasonably request. Any such Officer's Certificate furnished pursuant to this Article may be relied upon by Lessor, any prospective purchaser of the Leased Property and any third parties who have an interest in the Leased Property, including any lender or professional advisor or Lessor. 24.2 FINANCIAL STATEMENTS AND CERTIFICATES. Lessee will furnish or cause to be furnished to the Lessor, (a) within forty-five (45) days after the end of each calendar quarter, a certificate of Lessee, in form acceptable to Lessor substantially similar to the form set forth on Exhibit G hereto, that no Default or Event of Default then exists and no event has occurred (that has not been cured) and no condition currently exists (herein, a "Default") that would, but for the giving of any required notice or explanation of any applicable cure period, constitute an Event of Default; (b) upon Lessor's request, within thirty (30) days of the end of each calendar month, an aged accounts receivable report of the Facility from Lessee in sufficient detail to show amounts due from each class of patient-mix (i.e. private, Medicare (if applicable), Medicaid (if applicable) and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days; (c) upon Lessor's request, within thirty (30) days of the end of each calendar month, a current year-to-date operating statement from the Lessee for the Facility; (d) upon Lessor's request, within thirty (30) days of the end of each calendar month, monthly census information of the Facility in sufficient detail to show patient-mix on a daily average basis for such month; (e) within ten (10) days of filing or receipt (i) all cost reports, if any, and any amendments thereto filed with respect to the Facility and (ii) all responses, audits reports, or inquiries with respect to such cost reports, all of which Lessee shall prepare and file on a timely basis; 40 41 (f) within ten (10) days of Lessee's receipt, copies of all licensure and certification survey reports, if any, and statements of deficiencies (with plans of correction attached thereto); (g) within three (3) days of Lessee's receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the license and/or any applicable reimbursement contract or certification of the Facility is being downgraded to a substandard category, revoked, or suspended, or that action is pending or being considered to downgrade to a substandard category, revoke, or suspend the Facility's license or certification; and (h) Upon Lessor's request, evidence of payment by Lessee of any applicable provider bed taxes or similar taxes, which taxes Lessee agrees to pay. The Lessee shall correct any deficiency within the date required by any licensure and certification agency. Lessor reserves the right to require such other financial information and tax returns of Lessee at such other times as it shall deem necessary. All financial statements must be in such form and detail as the Lessor shall from time to time request. ARTICLE XXV INSPECTION Lessee shall permit Lessor and its authorized representatives to inspect the Leased Property during usual business hours subject to any security, health, safety or confidentiality requirements of Lessee, the rights of the Tenants, any Insurance Requirements relating to the Leased Property, or any other restrictions imposed by law or applicable regulations. ARTICLE XXVI QUIET ENJOYMENT So long as Lessee shall pay all Rent as the same becomes due and shall fully comply with all of the terms of this Lease and fully perform its obligations hereunder, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances of record as of the date hereof or hereafter consented to by Lessee. No failure by Lessor to comply with the foregoing covenant shall give Lessee any right to cancel or terminate this Lease, or to fail to pay any other sum payable under this Lease, or to fail to perform any other obligation of Lessee hereunder. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim or seek any damages it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this 41 42 Article. ARTICLE XXVII NOTICES Any notices, demands, approvals and other communications provided for herein shall be in writing and shall be delivered by telephonic facsimile, overnight air courier, personal delivery or registered or certified U.S. Mail with return receipt requested, postage paid, to the appropriate party at its address as follows: If to Lessor: Capstone Capital of Virginia, Inc. 1000 Urban Center Parkway, Suite 630 Birmingham, Alabama 35242 Attn: John McRoberts Telephone: (205) 292-6078 Telecopy: (205) 292-9066 With a copy to: Sirote & Permutt, P.C. 2222 Arlington Avenue Birmingham, Alabama 35205 Attention: Thomas A. Ansley, Esq. Telephone: (205) 930-5300 Telecopy: (205) 930-5301 If to Lessee: ALCO IX, L.L.C. c/o Daniel Green, Esq. 56 Third Street, N.W. Hickory, North Carolina 28601 Pittsburgh, Pennsylvania 15222 Telephone: (704) 322-8406 Telecopy: (704) 327-2402 With copies to: Balanced Care Corporation c/o Balanced Care Development and Management Co. 5021 Louise Drive Suite 200 42 43 Mechanicsburg, Pennsylvania 17055 Attention: Karen Connelly, Esq. Telephone: (717)796-6100 Telecopy: (717) 796-6150 and Kirkpatrick & Lockhart, LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attention: Anil Aggarwal, Esq. Telephone: (412) 355-6500 Telecopier: (423) 355-6501 or to such other address, and to the attention of such other person (including a Facility Mortgagee) or officer as either party may designate in writing by notice. Addresses for notice may be changed from time to time by written notice to all other parties. Any communication given by mail will be effective (i) upon the earlier of (a) three business days following deposit in a post office or other official depository under the care and custody of the United States Postal Service or (b) actual receipt, as indicated by the return receipt; (ii) if given by telephone facsimile, when sent; and (iii) if given by personal delivery or by overnight air courier, when delivered to the appropriate address set forth. ARTICLE XXVIII APPRAISAL In the event that it becomes necessary to determine the Fair Market Value, Fair Market Value Purchase Price, the Fair Market Added Value, the Minimum Repurchase Price or the Fair Market Rental Value of the Leased Property or a Substitute Property for any purpose of this Lease, the party required or permitted to give notice of such required determination shall include in the notice the name of a person selected to act as an appraiser on its behalf. Within ten days after receipt of any such notice, Lessor (or Lessee, as the case may be) shall by notice to Lessee (or Lessor, as the case may be) appoint a second person as an appraiser on its behalf. The appraisers thus appointed (each of whom must be a member of the American Institute of Real Estate Appraisers or any successor organization thereto) shall, within 45 days after the date of the notice appointing the first appraiser, proceed to appraise the Leased Property or the Substitute Property, as the case may be, to determine any of the foregoing values as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date) provided that if only one appraiser shall have been so appointed, or if two appraisers shall have been so appointed but only one such appraiser shall have made such determination within 50 days 43 44 after the making of Lessee's or Lessor's request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers shall have been appointed and shall have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined shall not exceed ten percent of the lesser of such amounts, then the Fair Market Value or Fair Market Added Value or the Fair Market Rental Value shall be an amount equal to 50% of the sum of the amounts so determined. If the difference between the amounts so determined shall exceed 10% of the lesser of such amounts, then such two appraisers shall have 20 days to appoint a third appraiser, but if such appraisers fail to do so, then either party may request the American Arbitration Association or any successor organization thereto to appoint an appraiser within 20 days of such request, and both parties shall be bound by any appointment so made within such 20-day period. If no such appraiser shall have been appointed within such 20 days or within 90 days of the original request for a determination of Fair Market Value or Fair Market Added Value or the Fair Market Rental Value, whichever is earlier, either Lessor or Lessee may apply to any court having jurisdiction to have appointment made by such court. Any appraiser appointed, by the American Arbitration Association or by such court, shall be instructed to determine the Fair Market Value or Fair Market Added Value or the Fair Market Rental Value within 30 days after appointment of such appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and 50% of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee as the Fair Market Value or Fair Market Added Value or the Fair Market Rental Value for such interest. However, in the event that following the appraisal performed by said third appraiser, the dollar amount of two of such appraisals are higher and lower, respectively, than the dollar amount of the remaining appraisal in equal degrees, the determinations of both the highest and lowest appraisal, respectively, shall be rejected and the determination to the remaining appraisal shall be final and binding upon Lessor and Lessee as the Fair Market Value or Fair Market Added Value or the Fair Market Rental Value for such interest. This provision for determination by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other costs and expenses incurred in connection with each appraisal. ARTICLE XXIX PURCHASE RIGHTS 29.1 PURCHASE OPTION. Not more than 180 days prior to the end of the Initial Term and each Extended Term exercised by Lessee pursuant to the terms of Article 34, Lessee shall have the option to purchase the Leased Property upon written notice to Lessor for a purchase price equal to the Minimum Repurchase Price. If not sooner exercised, the option to purchase 44 45 granted hereby will expire and be of no further force and effect upon the expiration of the Term or the earlier termination of this Lease. ARTICLE XXX DEFAULT BY LESSOR 30.1 DEFAULT BY LESSOR. Lessor shall be in default of its obligations under this Lease if Lessor shall fail to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure shall continue for a period of 30 days after written notice thereof is received by Lessor, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure shall not be deemed to continue if Lessor, within said 30-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof. The time within which Lessor shall be obligated to cure any such failure shall also be subject to extension of time due to the occurrence of any Unavoidable Delay. In the event Lessor fails to cure any such default, Lessee, without waiving or releasing any obligations hereunder, and in addition to all other remedies available to Lessee hereunder or at law or in equity, may purchase the Leased Property from Lessor for a purchase price equal to the greater of the Fair Market Value Purchase Price or the Minimum Repurchase Price of the Leased Property minus an amount equal to any damage suffered by Lessee by reason of such default. In the event Lessee elects to purchase the Leased Property, it shall deliver a notice thereof to Lessor specifying a Payment Date occurring no less than 90 days subsequent to the date of such notice on which it shall purchase the Leased Property, and the same shall be thereupon conveyed in accordance with the provisions of Article XVII. Any sums owed Lessee by Lessor hereunder shall bear interest at the Overdue Rate from the date due and payable until the date paid. 30.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of Section 30.1, if Lessor shall breach any covenant to be performed by it under this Lease, Lessee, after giving notice to and demand upon Lessor in accordance with Section 30.1, without waiving or releasing any obligation of Lessor hereunder, and in addition to all other remedies available to Lessee hereunder and at law or in equity, Lessee may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including reasonable attorneys' fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or set off against the Rent. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 30.2 shall survive the termination of this Lease. ARTICLE XXXI ARBITRATION 45 46 31.1 CONTROVERSIES. Except with respect to the payment of Minimum Rent hereunder, in case any controversy shall arise between the parties hereto as to any of the requirements of this Lease or the performance thereof which controversy the parties shall be unable to settle by agreement or as otherwise provided herein, such controversy shall be determined by arbitration to be initiated and conducted as provided in this Article XXXI. 31.2 APPOINTMENT OF ARBITRATORS. The party or parties requesting arbitration shall serve upon the other a written demand therefor specifying the matter to be submitted to arbitration, and nominating an arbitrator who is a member in good standing of the American Arbitration Association ("AAA"). Within 20 days after receipt of such written demand and notification, the other party shall, in writing, nominate a person who is a member in good standing with AAA and the two arbitrators so designated shall, within ten days thereafter, select a third arbitrator who is a person who is a member in good standing with AAA and give immediate written notice of such selection to the parties and shall fix in said notice a time and place for the first meeting of the arbitrators, which meeting shall be held as soon as conveniently possible after the selection of all arbitrators, at which time and place the parties to the controversy may appear and be heard. 31.3 THIRD ARBITRATOR. In case the notified party or parties shall fail to make a selection upon notice as aforesaid, or in case the first two arbitrators selected shall fail to agree upon a third arbitrator within ten days after their selection, then such arbitrator or arbitrators may, upon application made by either of the parties to the controversy, after 20 days' written notice thereof to the other party or parties have a third arbitrator appointed by any judge of any United States court of record having jurisdiction in the state in which the Leased Property is located or, if such office shall not then exist, by a judge holding an office most nearly corresponding thereto. 31.4 ARBITRATION PROCEDURE. Said arbitrators shall give each to the parties not less than ten days' written notice of the time and place of each meeting at which the parties or any of them may appear and be heard and after hearing the parties in regard to the matter in dispute and taking such other testimony and making such other examinations and investigations as justice shall require and as the arbitrators may deem necessary, they shall decide the questions submitted to them in accordance with the rules of AAA. The decision of said arbitrators in writing signed by a majority of them shall be final and binding upon the parties to such controversy. In rendering such decisions and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of this Lease. 31.5 EXPENSES. The expenses of such arbitration shall be divided between Lessor and Lessee unless otherwise specified in the decision of the arbitrators. Each party in interest shall pay the fees and expenses of its own counsel. 46 47 ARTICLE XXXII FINANCING OF THE LEASED PROPERTY Lessor agrees that it will not grant or create any mortgage deed of trust, lien encumbrance or other title retention agreement upon the Leased Property to secure any indebtedness of Lessor (an "Encumbrance"), unless each holder of such an Encumbrance agrees (a) to give Lessee the same notice, if any, given to Lessor of any default or acceleration of any obligation underlying any such Encumbrance or any sale in foreclosure of such Encumbrance, (b) to permit Lessee to appear with its representatives and to bid at any public foreclosure sale with respect to any such Encumbrance, (c) agrees to release the Leased Property from the Encumbrance upon the exercise by Lessee of a right to purchase contained in this Lease and the payment by Lessee of the applicable purchase price, and (d) enters into an agreement with Lessee containing the provisions described in Article XXXIII of this Lease. Lessee agrees to execute and deliver to Lessor or the holder of an Encumbrance any written agreement required by this Article within ten days of written request thereof by Lessor or the holder of an Encumbrance. Lessee hereby consents to the assignment of and grant of a security interest and lien in this Lease together with the other documents and instruments delivered to Lessor by Lessee pursuant hereto and in connection herewith (collectively, the "Assigned Documents"), including all rights and obligations of Lessor in, to and under each Assigned Document, by Lessor to Capstone, as lender pursuant to the Loan Agreement, pursuant to which Capstone has established a credit facility in favor of Lessor for the purpose of constructing the Facility. ARTICLE XXXIII ATTORNMENT AND NON-DISTURBANCE At the request from time to time by one or more holders of an Encumbrance that may hereafter be placed upon the Leased Property or any part thereof, and any and all renewals, replacements, modifications, consolidations, spreaders and extensions thereof, Lessee will subordinate this Lease and all of Lessee's rights and estate hereunder to each such Encumbrance and will attorn to and recognize such holder (or the purchaser at any foreclosure sale or any sale under a power of sale contained in any such Encumbrance or a holder by a deed in lieu of foreclosure, as the case may be) as Lessor under this Lease for the balance of the Term then remaining, subject to all of the terms and provisions of this Lease; provided that each such institutional holder simultaneously with or prior to recording any such Encumbrance executes and delivers a written agreement in recordable form (a) consenting to this Lease, and agreeing that, notwithstanding any such other lease, mortgage, deed of trust, right, title or interest, or any default, expiration, termination, foreclosure, sale, entry or other act or omission under, pursuant to or affecting any of the foregoing, Lessee shall not be disturbed in peaceful enjoyment of the 47 48 Leased Property nor shall this Lease be terminated or canceled at any time, except in the event Lessor shall have the right to terminate this Lease under the terms and provisions expressly set forth herein; (b) agreeing that it will be bound by all the terms of this Lease, perform and observe all of Lessor's obligations set forth herein; and (c) agreeing that all proceeds of the casualty insurance described in Article XIII of this Lease and all Awards described in Article XIV will be made available to Lessor for restoration of the Leased Property as and to the extent required by this Lease, subject only to reasonable regulation regarding the manner of disbursement and application thereof. Lessee agrees to execute and deliver to Lessor or the holder of an Encumbrance any written agreement required by this Article within ten days of written request thereof by Lessor or the holder of an Encumbrance. Lessee agrees to execute at the request from time to time of Lessor or an institutional investor a certificate setting forth any defaults of Lessor hereunder and the dates through which Rent has been paid and such other matters as may be reasonably requested. ARTICLE XXXIV EXTENDED TERMS If no Event of Default shall have occurred and be continuing, Lessee is hereby granted the right to extend the Term of this Lease for three (3) consecutive five (5) year periods ("Extended Term") for a maximum possible Term of twenty-five (25) years, by giving written notice to Lessor of each such extension at least 180 days, but not more than 270 days, prior to the expiration of the then-current Term; subject, however, to the provisions of Section 13.7 hereof. Lessor agrees to use its best efforts to provide Lessee with prior written notice at least 210 days prior to the expiration of the then-current Term. Lessee may not exercise its option for more than one Extended Term at a time. During each Extended Term, all of the terms and conditions of this Lease shall continue in full force and effect, except that the Minimum Rent for and during each of the Extended Terms shall be the greater of (i) the Fair Market Rental Value on the first day of such Extended Term or (ii) the Minimum Rent in effect immediately prior to the first day of such Extended Term. In any event, the Minimum Rent shall continue to be increased throughout the Extended Terms in accordance with the provisions of Section 2.1(b) hereof. In addition to the foregoing, Lessee may not exercise any renewal option hereunder unless each lessee of the Leases exercises its respective renewal option in accordance with the terms of each such Lease. ARTICLE XXXV MISCELLANEOUS 35.1 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of the Rent during the continuance of any such 48 49 breach, shall constitute a waiver of any such breach or any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach. 35.2 REMEDIES CUMULATIVE. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies. 35.3 SURRENDER. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender. 35.4 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person, firm, corporation or other entity may acquire, own or hold, directly or indirectly, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or (b) such leasehold estate and the fee estate in the Leased Property. 35.5 TRANSFERS BY LESSOR. If Lessor or any successor owner of the Leased Property shall convey the Leased Property in accordance with the terms hereof, other than as security for a debt, the grantee or transferee of the Leased Property shall expressly assume all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, and shall be reasonably capable of performing the obligations of Lessor hereunder and Lessor or such successor owner as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer and all such future liabilities and obligations shall thereupon be binding upon the new owner. 35.6 GENERAL. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee and Lessor against the other arising out of or relating to this Lease and arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. If any late charges provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision 49 50 hereof may be changed, waived, discharged or terminated except by an instrument in writing and in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of Alabama, but not including its conflict of laws rules. This Lease may be executed in one or more counterparts, each of which shall be an original but, when taken together, shall constitute but one document. 35.7 MEMORANDUM OF LEASE. Lessor and Lessee shall, promptly upon the request of either, enter into a short form memorandum of this Lease in form suitable for recording under the laws of the state in which the Leased Property is located in which reference to this Lease, and all options contained herein, shall be made. Recordation shall be at Lessee's expense. 35.8 TRANSFER OF LICENSES. Upon the expiration or earlier termination of the Term, Lessee shall take all action necessary to effect or useful in effecting the transfer to Lessor or Lessor's nominee of all licenses, operating permits and other governmental authorizations and all service contracts which may be necessary or useful in the operation of the Facility and which relate exclusively to the Facility which have not previously been transferred or assigned to Lessor. 35.9 DEPOSIT ACCOUNT. Subject to the Deposit Pledge Agreement and the Management Agreement, all deposit accounts established pursuant to this Lease shall either be in Lessee's name or in Lessor's name as and for the benefit of Lessee, at Lessee's option. Lessee shall be entitled to receive all interest on such accounts and to select investments in money market accounts or certificates of deposit up to a two (2) month maturity, so long as no Event of Default exists. Lessor shall have an assignment of such accounts as collateral for Lessee's obligations hereunder. Upon termination of the Lease without any Event of Default then existing or these being amounts owed to Lessor, Lessee shall be entitled to receive the balance of funds in such accounts. 35.10 LEASE TERMINATION. Upon any termination or expiration of this Lease Agreement for any reason (other than the exercise by Lessee of a purchase option provided for herein), the Lessee shall peaceably quit and surrender to Lessor the Leased Property and the right to receive all rental and other income of and from the same. Upon such surrender, Lessee shall fully cooperate with Lessor or Lessor's designee to enable Lessor or Lessor's designee to obtain all such licenses, permits, certifications, and any other such items necessary to operate the Leased Property as an assisted living/personal care facility and, to the extent applicable, qualify for third-party payor programs, such as Medicare or Medicaid. 35.11 ACCESS TO RECORDS. To the extent required by law, Lessor shall (and, if Lessor carries out any of the duties under this Lease, whether on Lessor's or Lessee's behalf, through a subcontract with a related organization and such subcontract has a value or cost of Ten Thousand 50 51 Dollars ($10,000) or more during any twelve (12) month period, such subcontract shall contain a clause to the effect that the subcontractor shall) until the expiration of four (4) years after the furnishing of services pursuant to this Lease, make available, upon request by the Secretary of Health and Human Services or upon the request by the U.S. Comptroller General, or any duly authorized representative of either of them, the books, documents and records of Lessor (or such subcontractor) that are necessary to verify the nature and extent of such costs in connection with said services. ARTICLE XXXVI GLOSSARY OF TERMS 36.1 For purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article XXXVI have the meanings assigned to them in this Article XXXVI and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as at the time applicable, (c) all references in this Lease to designated "Articles", "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease, and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision, (e) the word "including" shall mean including without limitation," and (f) all consents required of Lessor hereunder shall be in Lessor's sole and absolute discretion, unless otherwise specifically set forth herein. For purposes of this Lease, the following terms shall have the meanings indicated: "AAA" means the American Arbitration Association. "Acceptable Financial Institution" means AmSouth Bank, Colonial Bank, SouthTrust Bank or First Commercial Bank, each in Birmingham, Alabama, or such other financial institution as may be acceptable to Lessor. "Additional Charges" has the meaning set forth in Section 2.3 hereof together with all other items specifically included as "Additional Charges" in this Agreement. "Additions" means that certain 25-unit addition to be constructed at the Facility in accordance with the Development Agreement. "Adjustment Date" has the meaning set forth in Section 2.1 (b) hereof. "Affiliate", when used with respect to Lessee, means any Person directly or indirectly controlling, controlled by or under direct or indirect common control with Lessee. For the 51 52 purposes of this definition, "control", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. "Applicable Period" means, except as described in Section 2.5, the immediately preceding twelve (12) months. "Approved Budget Costs" has the meaning set forth in Section 2.1 of the Development Agreement. "Asset Purchase Option" means BCC's option to purchase all of Lessee's assets contained in Section 1.03 of the Shortfall Funding Agreement. "Assigned Documents" has the meaning set forth in Article XXXII hereof. "Assignment and Assumption Agreement" means that certain Assignment and Assumption Agreement dated as of even date herewith among Lessor, Borrower and Capstone, pursuant to which Borrower has assigned to Lessor and Lessor has assumed from Borrower all of the rights and obligations of Borrower under the Loan Agreement. "Assignment, Assumption and Amendment Agreement" means that certain Assignment, Assumption and Amendment Agreement dated as of even date herewith among Lessor, Borrower and Developer, pursuant to which Borrower has assigned to Lessor and Lessor has assumed from Borrower all of the rights and obligations of Borrower under the Development Agreement, as amended thereby. "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. "BCC" means Balanced Care Corporation, a Delaware corporation. "Borrower" means ALCO I, L.L.C., a North Carolina limited liability company. "Business Day" means each Monday, Tuesday, Wednesday, Thursday, and Friday which is not a day on which national banks in the City of Birmingham, Alabama are closed. "Capital Additions" means one or more new buildings or one or more additional structures annexed to any portion of any of the Leased improvements which are constructed on any parcel or portion of the Land during the Term, including the construction of a new wing or new story or the rebuilding of the existing Leased Improvements or any portion thereof not normal, ordinary or 52 53 recurring to maintain the Leased Property, excluding, however, any construction governed by the provisions of Article XIII. "Capital Addition Cost" means the cost of any Capital Additions proposed to be made by Lessee whether paid for by Lessee or Lessor. Such cost shall include and be limited to (a) the cost of construction of the Capital Additions, including site preparation and improvement, materials, labor supervision and certain related design, engineering and architectural services and the cost of any fixtures construction financing and miscellaneous items approved in writing by Lessor, (b) if agreed to by Lessor in writing in advance, the cost of any land contiguous to the Leased Property purchased for the purpose of placing thereon the Capital Additions or any portion thereof or for providing means of access thereto, or parking facilities therefor including the cost of surveying the same, (c) the cost of insurance real estate taxes water and sewage charges and other carrying charges for such Capital Additions during construction, (d) the cost of title insurance, (e) reasonable fees and expenses of legal counsel and accountants, (f) filing, registration and recording taxes and fees, (g) documentary stamp taxes, if any (h) environmental assessments and boundary surveys and (i) all reasonable costs and expenses of Lessor and any Lending Institution which has committed to finance the Capital Additions, including (A) the reasonable fees and expenses of their respective legal counsel (B) all printing expenses, (C) the amount of any filing, registration and recording taxes and fees (D) documentary stamp taxes, if any (E) title insurance charges appraisal fees, if any, (F) rating agency fees, if any, (G) commitment fees, if any, charged by any Lending Institution advancing or offering to advance any portion of the financing for such Capital Additions, (H) a development fee not exceeding five percent (5%) of total Capital Additions Cost. "Capstone" means Capstone Capital Corporation, a Maryland corporation. "Cash Adjustment" has the meaning set forth in Section 20.l(d). "Charge" has the meaning set forth in Article XI hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Commencement Date" has the meaning set forth in Article I. "Condemnation" means the transfer of all or any part of the Leased Property as a result of (i) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of Condemnation or while legal proceedings for Condemnation are pending. "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. 53 54 "Consolidated Financial Statements" means for any fiscal year or other accounting period for Lessee and its respective consolidated Affiliates, audited statements of earnings and retained earnings and of changes in financial position for such period and for the period from the beginning of the respective fiscal year of Lessee to the end of such period and the related balance sheet as at the end of such period, together with the notes thereto, all in reasonable detail and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year of Lessee, and prepared in accordance with generally accepted accounting principles consistently applied, except as noted. "Consumer Price Index" or "CPI" means the Consumer Price Index for All Urban Consumers for the U S. City Average for all Items (1982-1984=100) as published by the United States Department of Labor, Bureau of Labor Statistics. If the manner in which the Consumer Price Index is determined by the Bureau of Labor Statistics shall be substantially revised (including a change in the base index year), an adjustment shall be made by Lessor in such revised index which would produce results equivalent, as nearly as possible, to those which would have been obtained if the Consumer Price Index had not been so revised. If the Consumer Price Index shall become unavailable to the public because publication is discontinued or otherwise, or if equivalent data is not readily available to enable Lessor to make the adjustment referred to in the preceding sentence, Lessor will substitute therefor a comparable index based upon changes in the cost of living or purchasing power of the consumer dollar published by any other governmental agency, or if no such index shall be available, then a comparable index published by a major bank or other financial institution or by a university or a recognized financial publication. "Credit Enhancements" means all cash collateral, security deposits, security interests, letters of credit, pledges, prepaid rent or other sums, deposits or interests held by Lessee, if any, to secure obligations with respect to the Leased Property, the Tenant Leases or the Tenants. "Current Yield" means as of any date the annual Minimum Rent, as adjusted from time-to-time pursuant to the terms of this Lease, divided by the sum of (i) the Project Amount plus (ii) all Capital Additions Costs paid for or financed by Lessor which have not been repaid by Lessee. "Date of Taking" means the date the Condemnor has the right to possession of the property being condemned. "Deposit Pledge Agreement" means that certain Deposit Pledge Agreement dated as of even date herewith made by Lessee in favor of BCC and Lessor. "Developer" means BCC Development and Management Co., a Delaware corporation. "Development Agreement" means that certain Development Agreement dated as of 54 55 June 30, 1997, by and between Developer and Borrower, Borrower's rights and liabilities under which have been assigned to and assumed by Lessor pursuant to the Assignment, Assumption and Amendment Agreement. "Encumbrance" has the meaning set forth in Article XXXII. "Equity Option" means the option granted to BCC to purchase equity in Lessee pursuant to the Option Agreement. "Event of Default" has the meaning set forth in Section 15.1 "Extended Term" has the meaning set forth in Article XXXIV. "Facility" means the 51-unit, 60-bed licensed assisted living facility to be constructed and operated on the Leased Property. "Facility Mortgage" has the meaning set forth in Section 12.1. "Facility Mortgagee" has the meaning set forth in Section 12.1. "Fair Market Added Value" means the Fair Market Value (as hereinafter defined) of the Leased Property (including all Capital Additions) less the Fair Market Value of the Leased Property determined as if no Capital Additions paid for by Lessee without financing by Lessor had been constructed. "Fair Market Rental Value" means the fair market rental value of the Leased Property or any Substitute Property, (a) assuming the same is unencumbered by this Lease, (b) determined in accordance with the appraisal procedures set forth in Article XXVIII or in such other manner as shall be mutually acceptable to Lessor and Lessee, and (c) not taking into account any reduction in value resulting from an indebtedness to which the Leased Property or Substitute Property may be subject. 55 56 "Fair Market Value" means the fair market value of the Leased Property or any Substitute Property, including all Capital Additions, (a) assuming the same is unencumbered by this Lease, (b) determined in accordance with the appraisal procedures set forth in Article XXVIII or in such other manner as shall be mutually acceptable to Lessor and Lessee, and (c) not taking into account any reduction in value resulting from any indebtedness to which the Leased Property or such Substitute Property is subject or which encumbrance Lessee or Lessor is otherwise required to remove pursuant to any provision of this Lease or agrees to remove at or prior to the closing of the transaction as to which such Fair Market Value determination is being made. The positive or negative effect on the value of the Leased Property or Substitute Property attributable to the interest rate, amortization schedule, maturity date, prepayment penalty and other terms and conditions of any Encumbrance on the Leased Property or any Substitute Property, as the case may be, which is not so required or agreed to be removed shall be taken into account in determining such Fair Market Value. "Fair Market Value Purchase Price" means the Fair Market Value less the Fair Market Added Value. "Fiscal Year" means the 12-month period from January 1 to December 31. "Fixtures" has the meaning set forth in Article I. "Full Replacement Cost" has the meaning set forth in Section 12.1. "Hazardous Materials" means any substance, including asbestos or any substance containing asbestos, the group of organic compounds known as polychlorinated biphenyls, flammable explosives, radioactive materials, medical waste, chemicals, pollutants, effluents, contaminants, emissions or any other related materials and items included in the definition of hazardous or toxic wastes, materials or substances under any Hazardous Materials Law. "Hazardous Materials Law" means any law, regulation or ordinance relating to environmental conditions, medical waste and industrial hygiene, including the Resource Conservation and Recovery Act of 1976 ("RCRA") the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Hazardous Materials Transportation Act, the Federal Water Pollution Control Act the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Safe Drinking Water Act, the Atomic Energy Act and all similar federal, state and local environmental statutes and ordinances, whether heretofore or hereafter enacted or effective and all regulations, orders, or decrees heretofore or hereafter promulgated thereunder. "Impositions" means, collectively, all taxes relating to the Leased Property, including all 56 57 ad valorem, sales and use, gross receipts, action, privilege, rent (with respect to the Tenant Leases) or similar taxes, assessments (including all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), water, sewer or other rents and charges, excises, tax levies, fees (including license permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property and/or the Rent (including all interest and penalties thereon due to any failure in payment by Lessee), which at any time prior to, during or in respect of the Term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Lessor or Lessor's interest in the Leased Property, (b) the Rent, the Leased Property or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, sales from, or activity conducted on, or in connection with, the Leased Property or the Tenant Leases or use of the Leased Property or any part thereof; provided that nothing contained in this Lease shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor, (2) any transfer or net revenue tax of Lessor, (3) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any portion of the Leased Property or the proceeds thereof, or (4) except as expressly provided elsewhere in this Lease, any principal or interest on any Encumbrance on the Leased Property, except to the extent that any tax, assessment, tax levy or charge which Lessee is obligated to pay pursuant to this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1), (2) or (3) is levied, assessed or imposed expressly in lieu thereof. "Indemnification Agreement" means that certain Indemnification Agreement dated as of the date hereof made by BCC in favor of Lessor. "Initial Term" has the meaning set forth in Article I. "Insurance Requirements" means all terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy. "Land" has the meaning set forth in Article I. "Lease" means this Lease. "Leases" means, collectively, (i) this Lease; (ii) that certain lease of even date herewith between Lessor and ALCO X, L.L.C, a North Carolina limited liability company, for a residential care facility located in _______, Virginia; and (iii) that certain lease of even date herewith between Lessor and ALCO XI, L.L.C, a North Carolina limited liability company, for a residential care facility located in ___________, Virginia. 57 58 "Lease Amendment" has the meaning set forth in Section 9.3(b)(iv). "Lease Assignment" means that certain Assignment of Rents and Leases, substantially in the form attached hereto as Exhibit D, to be dated on or about the date hereof executed by Lessee to Lessor, pursuant to the terms of which Lessee assigns to Lessor each of the Tenant Leases and Credit Enhancements, if any, as security for the obligations of Lessee under this Lease, and any other obligations of Lessee, or any Affiliate of Lessee to Lessor. "Leased Improvements" and "Leased Property" have the meanings set forth in Article I. "Legal Requirements" means all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Leased Property or the construction, use or alteration thereof, whether now or hereafter enacted and in force, including any which may (a) require repairs, modifications or alterations of or to the Leased Property, or (b) in any way adversely affect the use and enjoyment thereof, and all permits, licenses, authorizations and regulations relating thereto, and all covenants, agreements, actions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property. "Lending Institution" means any insurance company, federally insured commercial or savings bank, national banking association, savings and loan association, employees' welfare, pension or retirement fund or system, corporate profit-sharing or pension plan, college or university, or real estate investment company including any corporation qualified to be treated for federal tax purposes as a real estate investment trust having a net worth of at least $50,000,000. "Lessee" means ALCO IX, L.L.C., a North Carolina limited liability company. "Lessor" means Capstone Capital of Virginia, Inc., an Alabama corporation. "Loan Agreement" means that certain that certain Building and Term Loan Agreement dated as of June 30, 1997 (the "Loan Agreement") between Capstone, as lender, and ALCO I, L.L.C., as borrower, the borrower's rights under which have been assigned to and assumed by Lessor pursuant to the Assignment and Assumption Agreement. "Management Agreement" means that certain Management Agreement dated as of even date herewith between Lessee and Management Company. "Management Company" means , a Delaware corporation. 58 59 "Minimum Rent has the meaning set forth in Section 2.1(a). "Minimum Repurchase Price" means the greater of (i) the Fair Market Value of the Leased Property less the Fair Market Added Value at the time of repurchase hereunder by Lessee or (ii) the Project Amount (and in the case of a substitution pursuant to Article XX, as adjusted pursuant to Section 20.1(f)) as such amount is increased at the rate of three percent compounded annually for each year (to be prorated for partial years) between the Commencement Date and the date of repurchase by Lessee, plus the sum of all Capital Addition Costs relating to the Leased Property paid for or financed by Lessor which as of the date of repurchase of the Leased Property have not been repaid by Lessee, less the net amount (after deduction of all reasonable legal fees and other costs and expenses, including expert witness fees, incurred by Lessor in connection with obtaining any such award or proceeds) of all Awards received by Lessor from Condemnation of the Leased Property. "Officer's Certificate" means a certificate of Lessee signed by the Chairman of the Board of Directors, the President, any Vice President or another officer authorized to so sign by the Board of Directors or By-Laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any of the persons holding the foregoing offices. "Option Agreement" means that certain option agreement dated as of even date herewith between Lessee and BCC. "Ordinary Course of Business" means the ordinary course of business for Lessee consistent with past custom and practice (including quantity and frequency). "Overdue Rate" means as of any date, a rate per annum equal to the Prime Rate as of such date, plus two percent, but in no event greater than the maximum rate then permitted under applicable law. "Payment Date" means any due date for the payment of the installments of Minimum Rent under this Lease. "Permitted Exceptions" has the meaning set forth in Article I hereof. "Permitted Liens" means (i) liens described on Exhibit E attached hereto, (ii) pledges or deposits made to secure payments of worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs, (iii) liens imposed by mandatory provisions of law such as for materialmen, mechanics, warehousemen and other like liens arising in the Ordinary Course of Business, securing indebtedness whose payment is not yet due and payable, (iv) liens for taxes, assessments and governmental charges or levies if the same are not yet due and payable or if the 59 60 same are being contested in good faith and as to which adequate cash reserves have been provided, (v) liens arising from good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations and deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, duties or other similar charges, (vi) liens to secure purchase money indebtedness, so long as the indebtedness incurred to purchase the new asset is secured only by such asset, or (vii) encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property; provided that such items do not impair the use of such property for the purposes intended, none of which is violated by existing or proposed structures or land use. "Person" means a natural person, corporation, partnership, trust, association, limited liability company or other entity. "Personal Property" means all machinery, equipment, furniture, furnishings, computers, signage, trade fixtures or other personal property and consumable inventory and supplies used or useful in the operation of the Leased Property for Its Primary Intended Use, together with all replacements and substitutions therefor, except for any portion of the Leased Property, all as more specifically set forth on Exhibit F attached hereto. "Primary Intended Use" has the meaning set forth in Section 6.2(a). "Prime Rate" means the annual rate reported by The Wall Street Journal, Eastern Edition (or, if The Wall Street Journal shall no longer be published or shall cease to report such rates, then a publication or journal generally acceptable in the financial industry as authoritative evidence of prevailing commercial lending rates) from time to time as being the prevailing prime rate (or, if more than one such rate shall be published in any given edition, the arithmetic mean of such rates). The prime rate is an index rate used by The Wall Street Journal to report prevailing lending rates and may not necessarily be its most favorable lending rate available. Any change in the Prime Rate hereunder shall take effect on the effective date of such change in the prime rate as reported by The Wall Street Journal, without notice to Lessee or any other action by Lessor. Interest shall be computed on the basis that each year contains 360 days, by multiplying the principal amount by the per annum rate set forth above, dividing the product so obtained by 360, and multiplying the quotient thereof by the actual number of days elapsed. "Project Amount" has the meaning set forth in Section 2.1(a). "Rent" means, collectively, the Minimum Rent and the Additional Charges. "Request" has the meaning set forth in Section 9.3(a). 60 61 "Right of First Refusal Agreement" means that certain Right of First Refusal Agreement dated as of even date herewith between Lessor and BCC. "Shortfall Funding Agreement" means that certain Shortfall Funding Agreement dated as of even date herewith among Lessee, the members of the Lessee parties thereto, and BCC in favor of Lessor. "Subordination Agreement" means that certain Subordination and Standstill Agreement dated as of even date herewith among Lessor, Lessee, Capstone and BCC. "Substitution Date" has the meaning set forth in Section 20.1. "Substitute Properties" has the meaning set forth in Section 20.1. "Support Document" means the Working Capital Assurance Agreement, the Deposit Pledge Agreement, the Indemnification Agreement or any other agreement pursuant to which the obligations of Lessee hereunder and under the related documents are guaranteed or supported by a third party or parties. "Taking" means a taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced. "Tenant" means the lessees or tenants under the Tenant Leases, if any. "Tenant Leases" means all residency agreements and similar rental agreements (written or verbal, now or hereafter in effect), if any, that grant a possessory interest in and to any individual unit in the Improvements, and all Credit Enhancements, if any, held in connection therewith. "Term" means the Initial Term and any Extended Term as to which Lessee has exercised its options to extend contained in Article XXXIV hereof unless earlier terminated pursuant to the provisions hereof. "Unavoidable Delays" means delays due to strikes, lockouts, inability to procure materials after the exercise of reasonable efforts, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such other party under this Lease. 61 62 "Unsuitable for Its Primary Intended Use" as used anywhere in this Lease, shall mean that, by reason of damage or destruction, or a partial Taking, in the good faith judgment of Lessee, reasonably exercised, the Facility cannot be profitably operated for its Primary Intended Use, taking into account, among other relevant factors, the number of usable suites and number and diversity of Tenants affected by such damage or destruction or partial Taking. "Working Capital Assurance Agreement" means that certain Working Capital Assurance Agreement dated as of even date herewith between BCC and Lessor. 62 63 IN WITNESS WHEREOF, the parties have caused this Lease to be executed and their respective corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized as of the date first written above. LESSOR: CAPSTONE CAPITAL OF VIRGINIA, INC., an Alabama corporation By: ------------------------------------- Title: LESSEE: ALCO IX, L.L.C., a North Carolina limited liability company By: ------------------------------------- Title: 63 64 OMITTED EXHIBITS EXHIBIT A PROPERTY DESCRIPTION EXHIBIT B LIST OF PERMITTED EXCEPTIONS EXHIBIT C ASSIGNMENT AND SECURITY AGREEMENT EXHIBIT D ASSIGNMENT OF RENTS AND LEASES EXHIBIT E PERMITTED LIENS EXHIBIT F PERSONAL PROPERTY EXHIBIT G COMPLIANCE CERTIFICATE EX-10.58 54 BALANCED CARE CORPORATION 1 Exhibit 10.58 SCHEDULE TO FORM OF CAPSTONE LEASE FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Management Company - ----------------- ------------------ Danville, VA BCC at Danville, Inc. Harrisonburg, VA BCC at Harrisonburg, Inc. Roanoke, VA BCC at Roanoke, Inc.
EX-10.59 55 BALANCED CARE CORPORATION 1 Exhibit 10.59 DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT (this "Agreement") is made and entered into as of June 30, 1997, between ALCO II, L.L.C., a North Carolina limited liability company ("Owner") and BCC Development and Management Company, a Delaware corporation ("Developer"), and Balanced Care Corporation, a Delaware corporation ("Guarantor"). RECITALS WHEREAS, Owner is purchasing certain real estate located in (1) Roanoke County, (2) City of Danville, (3) City of Harrisonburg, Virginia (the "Property"), on which it plans to construct an assisted living facility; and WHEREAS, Developer has experience and knowledge in the areas of development, construction and operation of assisted living facilities; and WHEREAS, Owner wishes to develop, with Developer's assistance, a (1) 59-unit (Roanoke), (2) 60-unit (Danville), (3) 51-unit (Harrisonburg) assisted living facility and all of the personal property necessary or appropriate for the use and operation of such an assisted living facility (the "Project"); and WHEREAS, Construction Lender [as defined in the Construction Disbursement Agreement set forth in Exhibit 2.1(i)] has been appointed by Owner as agent for Owner to function as construction lending manager and to administer fund disbursement on behalf of Owner to Developer up to 100% of the approved, budgeted development costs set forth in the Construction Disbursement Agreement; and WHEREAS, Owner wishes to employ Developer to provide Owner with assistance in the development of the Project and to cause Developer's affiliate, BCC at Harrisonburg, Inc. ("Lessee") to lease the Project under a triple-net, pass through lease as more particularly set forth below. WITNESSETH NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Owner and the Developer do hereby agree as follows: 1. DEFINITIONS. The definitions of certain terms used herein are set forth on Exhibit 1 attached hereto. 2 2. THE PROJECT. 2.1 Development of Project. Developer agrees (i) to develop and construct the Project for an amount not to exceed the sum of ($_____________________), including Developer's fees, Developer's incentive fee, contingency, fees and accrued interest on advances made by Construction Lender on behalf of Owner (which interest shall accrue on all sums advanced or deemed to be advanced and shall be posted on the first of each month), all as set forth on the line-item budget attached hereto as Exhibit 2.1 (i) under the heading of "Maximum Project Amount", subject to such increases, reallocations or other modifications as shall be made only upon Construction Lender's prior written consent on behalf of Owner, which consent shall be in Construction Lender's sole discretion (the "Approved Budget"); (ii) to cause the construction of the Project pursuant to the plans and specifications set forth as Exhibit 2.1 (ii); (iii) to obtain or execute a construction contract for the Project with a fixed price or guaranteed maximum amount, such contract to be in the form set forth in Exhibit 2.1(iii); (iv) to satisfy any requirements in the Lease or sought to be imposed by Lessee relating to acceptance of occupancy or commencement of rent; and (v) to cause completion of construction and equipping of the Project in accordance with plans and specifications which are submitted to and approved by Construction Lender on behalf of Owner and in accordance with all Laws and any licensure requirements and so as to permit the "Primary Intended Use" described in the Lease. Developer agrees to comply with and timely satisfy the terms and conditions (including, but not limited to, the conditions for obtaining advances from Construction Lender) pursuant to the Construction Disbursement Agreement, which agreement is incorporated herein by this reference in full and deemed a part of this Agreement. 2.2 Developer's Services. Until Completion of the Project or termination as provided in Sections 4.2 or 8.2 below, Developer, acting within the parameters of the Approved Budget and the plans and specifications approved by Construction Lender on behalf of Owner, shall have the authority in its own name (not as Owner's Agent) to supervise, direct and coordinate all development and project management matters pertaining to the Project, including, without limitation: (a) Development Services: (1) completing a market analysis to confirm bed need; (2) finding a suitable site and obtaining rights thereto; (3) obtaining architectural plans for the Project; (4) retaining and supervising engineers, architects, land planners, surveyors, consultants, independent contractors, subcontractors, attorneys, service agents, suppliers and other providers of materials or services; 2 3 (5) pursuing with the appropriate governmental agencies obtaining any necessary permits and approvals to permit the Property's use and development in a manner reflected in the plans and specifications approved in advance by Construction Lender on behalf of Owner; (6) entering into contracts for labor, materials and services; (7) creating and filing, after Owner's express approval of, and, where required, execution of any easements, plats, maps, plans, declarations of covenants and restrictions, right-of-way deeds and other similar instruments necessary to the development of the Project; (8) purchasing all necessary supplies and equipment required for the development, construction, management and operation of the Project and all improvements forming a part thereof; (b) Project Management Services: (1) coordinating with all applicable federal, state, county and city governmental authorities and securing all necessary permits, authorizations and approvals to permit Lessee's Primary Intended Use of the Project; (2) negotiating for the provision of utilities to serve the Property and the Project; (3) supervising all construction on the Property and supervising contractor compliance with construction, architectural or development criteria applicable to the Project; (4) paying the reasonable fees, charges, expenses and commissions of all independent contractors, architects, engineers, subcontractors, suppliers and service agents utilized in the development and construction of the Project; and (5) __________ all other construction administration with respect to the Project. 2.3 Financing of Project. Fund disbursement will be administered by Owner as construction lending manager pursuant to the Construction Disbursement Agreement set forth on Exhibit 2.3 hereto. 2.4 Lease of Project. Simultaneously with the execution of this Development Agreement, Developer will cause Lessee to execute a lease of the Project from Owner in the form attached hereto as Exhibit 2.4 ("Lease"). 3 4 2.5 Opinion of Counsel. Simultaneously with the execution hereof, Developer shall deliver or cause to be delivered to Owner an opinion of counsel, in form and substance reasonably satisfactory to Owner, regarding the due authorization, execution and enforceability of the Lease and related documents. 2.6 Guaranty. All obligations of the Developer under this Agreement are unconditionally guaranteed by Guarantor which joins in this Agreement for such purpose. The obligation of Guarantor is primary and not secondary. 2.7 Owner Cooperation. Owner shall take all reasonable and necessary steps to cooperate with Developer as necessary to enable Developer to discharge its obligations hereunder; provided, however, that Construction Lender shall not be required to expend funds on behalf of Owner not provided for in the Approved Budget unless consented to by Construction Lender on behalf of Owner under Section 2.1 above. 3. REPRESENTATIONS AND WARRANTIES. 3.1 Representations and Warranties of Developer and Guarantor. Developer and Guarantor represent and warrant to Owner that: (a) Formation and Qualification. Developer and Guarantor are corporations duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and are duly qualified and in good standing in the Commonwealth of Virginia, and have both all requisite power and authority to enter into this Agreement, the Construction Disbursement Agreement and any guarantees and other documents to which Developer or Guarantor is a party and contemplated herein or therein (collectively, the "Transaction Documents") and to conduct their respective businesses and own and lease their respective properties. (b) Transaction Documents. The execution, delivery and performance of the Transaction Documents to which the Developer and Guarantor are parties are within the Developer's and Guarantor's power and authority, have been duly authorized by all necessary action and do not and will not (a) require any Authorization which has not been obtained, (b) contravene the Charter Documents of Developer or Guarantor, any applicable Laws or any agreement or restriction binding on or affecting Developer or Guarantor or their properties, or (c) except to the extent created under the Transaction Documents, result in or require the creation or imposition of any Lien upon or with respect to any property now owned by Developer or Guarantor. No Authorization of Developer or Guarantor (except which has already been obtained) is required for the enforcement by Owner of its remedies under the Transaction Documents. Each Transaction Document, when executed and delivered, will constitute the legal, valid and binding obligation of Developer and Guarantor, enforceable against Developer and Guarantor, as applicable, in accordance with its terms, except as enforcement may be limited by principles of equity, bankruptcy, insolvency or other similar Laws affecting the rights of creditors generally. 4 5 (c) Financial Information. The Financial Statements of Developer and Guarantor which have been furnished to Owner fairly present Developer's and Guarantor's financial condition as at the dates of such Financial Statements and results of operations, properties or prospects of Developer and Guarantor. Developer and Guarantor have filed all tax returns required to be filed by them, and have paid all Taxes due pursuant to such returns or in respect of any of their properties, and to the current, actual knowledge of Developer and Guarantor without special inquiry or investigation, no basis exists for additional assessments which have not been adequately reserved against in the Financial Statements referred to above or otherwise disclosed in writing to Owner. (d) Litigation and Other Matters. Except as otherwise disclosed in writing to Owner: (a) no actions or other proceedings affecting or relating to Developer or Guarantor or any of the Project are pending or, to the best knowledge of Developer and Guarantor, threatened, and (b) no actions or other proceedings are pending or, to the best knowledge of Developer and Guarantor, threatened against or affecting Developer or Guarantor or any of their property which (as regards both clauses (a) and (b) immediately preceding), if determined adversely to Developer or Guarantor, could materially impair the financial condition, operations, properties or prospects of Developer or Guarantor or the ability of Developer or Guarantor to perform their respective obligations under the Transaction Documents. (e) Documents and Other Information. All Documents and other information delivered to Owner pursuant to any of the Transaction Documents to which Developer or Guarantor are parties are and will be complete and correct in all material respects at the time of delivery to Owner. 3.2 Representations and Warranties of Owner. (a) Formation and Qualification. Owner is a limited liability company duly incorporated, validly existing and in good standing under the Laws of the State of North Carolina and is duly qualified and in good standing in the Commonwealth of Virginia, and has all requisite power and authority to enter into this Agreement, the Construction Disbursement Agreement, the Loan Agreement with Construction Lender, and any other documents to which it is a party and contemplated herein or therein and to conduct its business and own and lease its properties. 4. EVENTS OF DEFAULT AND REMEDIES OF OWNER. 4.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default. (a) Developer shall fail to perform or observe any material term, covenant or condition of this Agreement or any documents executed in connection herewith and such failure is not cured by Developer within a period of thirty (30) days after receipt by Developer of notice thereof from Owner, unless such failure cannot with reasonable due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to continue if Developer 5 6 proceeds promptly and with reasonable due diligence to cure the failure and diligently completes the curing thereof (as soon as reasonably possible); (b) any representation or warranty of Developer or Guarantor contained in this Agreement or any Transaction Document or made in connection with the Project, this Agreement or any Transaction Document proves to have been incorrect in any material respect when made; (c) Developer is enjoined by any court or other Governmental Agency from constructing the Project or entering into the Transaction Documents and such injunction continues unreleased and unstayed for forty-five (45) days; (d) Without Construction Lender's consent of behalf of Owner, which shall not be unreasonably withheld, Developer is dissolved or liquidated or merged with or into any other Person; or for any period of more than thirty (30) days, after Developer has received notice, Developer ceases to exist in its present form and (where applicable) be in good standing and duly qualified under the Laws of the States of Delaware and Virginia; or all or substantially all of the assets of Developer are sold or otherwise transferred. (e) The Guarantor ceases to own 100% of the Voting Stock of Developer (unless consented to by Construction Lender on Owner's behalf in Construction Lender's reasonable discretion). (f) Developer or Guarantor is subject to an order for relief by the bankruptcy court, or is unable or admits in writing its inability to pay its debts as they mature or makes an assignment for the benefit of creditors; or Developer or Guarantor applies for or consents to the appointment of any receiver, trustee or similar official for it or for all or any part of its property (or any such appointment is made without its consent and the appointment continues undischarged and unstayed for sixty (60) days); or Developer or Guarantor institutes or consents to any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, custodianship, conservatorship, liquidation, rehabilitation or similar proceeding relating to it or to all or any part of its property under the Laws of any jurisdiction (or any such proceeding is instituted without its consent and continues undismissed and unstayed for sixty (60) days); or any judgment, writ, warrant of attachment or execution or similar process is issued or levied against any property of Developer or any Guarantor and is not released, vacated or fully bonded within sixty (60) days after its issue or levy; or 4.2 Remedies of Owner. Upon the occurrence of any Event of Default hereunder by Developer, Owner may, without further notice to or demand, if any, upon Developer, which are expressly waived by Developer (except for notices or demands otherwise required by applicable Laws to the extent not effectively waived by Developer and any notices or demands specified in the Transaction Documents), exercise any one or more of the following Remedies as Owner may determine: (a) Construction Lender, on behalf of Owner, may recover all previously paid 6 7 Developer fees and accrued and unpaid interest on advances at the Advance Rate, terminate further advances to Developer; (b) Owner may terminate Developer's rights with respect to the Project and perform any of Developer's obligations in such manner as Owner may reasonably determine; or (c) Owner may proceed to protect, exercise and enforce any and all other Remedies provided under the Transaction Documents or by applicable Laws. All actual and reasonable costs, expenses, charges and advances of Owner in exercising any such Remedies shall be payable by Developer to Owner as Transaction Expenses in accordance herewith. 4.3 Remedies Cumulative. Each of the Remedies of Owner provided in the Transaction Documents is cumulative and not exclusive of, and shall not prejudice, any other Remedy provided in the Transaction Documents or by applicable Laws. Each Remedy may be exercised from time to time as often as deemed necessary by Owner, and in such order and manner as Owner may determine. No failure or delay on the part of Owner in exercising any Remedy shall operate as a waiver of such Remedy; nor shall any single or partial exercise of any Remedy preclude any other or further exercise of such Remedy or of any other Remedy. No application of payments, or any advances or other action by or on behalf of Owner, will cure or waive any Event of Default or prevent acceleration, or continued acceleration, of amounts payable under the Transaction Documents or prevent the exercise, or continued exercise, of any Remedies of Owner. 5. IMPOSITIONS. Prior to the commencement of the term of the Lease, Developer will pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and Developer will promptly, upon request, furnish to Construction Lender on behalf of Owner copies of official receipts or other satisfactory proof evidencing such payments. Developer's obligation to pay such Impositions become payable without a penalty. 6. PERMITTED CONTESTS. Notwithstanding any provision of this Agreement to the contrary, Developer may contest by appropriate action any Imposition, and Owner shall have no right to pay such Imposition on Developer's behalf during the pendency of such contest, provided that (a) no "Event of Default" has occurred and is continuing under this Agreement or under any of the other Transaction Documents; (b) Developer has given Owner written notice that Developer is contesting the application, interpretation or validity of the law, regulation, order or agreement pertaining to the Imposition by appropriate legal or administrative proceedings conducted in good faith and with due diligence and dispatch; (c) such contest shall not subject Owner or any of its affiliates to any assignment of all or any portion of the Owner's interest in any of the Project to civil or criminal liability and does not jeopardize any such party's interest in the Project; and (d) Developer shall give such security or assurances as may be reasonably required by Construction Lender to ensure ultimate compliance with all legal or contractual requirements 7 8 pertaining to the Imposition (and payment of all costs, expenses, interest and penalties in connection therewith) and to prevent any sale, forfeiture or loss by reason of nonpayment or noncompliance. 7. DOCUMENTS TO BE PROVIDED BY DEVELOPER. 7.1 Certificate of Occupancy. The Developer shall furnish Owner a copy of the final certificate of occupancy for the Project, as well as any related operating licenses or other certificates of authority within twelve (12) months (unless extended by Owner in Owner's reasonable discretion) of the date of this Agreement (but no later than the date required by any regulatory agency) and satisfy within such period any other conditions, if any, necessary to trigger the obligations of Lessee under the Lease to commence the payment of rent. The commencement and first payment by Lessee of said rent payments under the Lease shall be a condition of Construction Lender's payment obligation on behalf of Owner with respect to the final installment of the Developer's fee. 7.2 Plans and Specifications: Project Compliance. The Developer will provide two (2) complete sets of the final Plans and Specifications for Construction Lender and its construction inspector. The Project, as completed, must conform substantially to such approved Plans and Specifications and comply with covenants and restrictions of record and all applicable laws, ordinances and regulations, including, without limitation, the Americans with Disabilities Act and regulations thereunder, the Fair Housing Act and regulations thereunder, and laws, ordinances and regulations relating to zoning, building codes, set back requirements and environmental matters. Developer, by its execution and delivery of this Agreement, represents and warrants to Owner and Construction Lender that the Project will, if constructed in accordance with plans and specifications provided by Developer, comply with covenants and restrictions of record and all applicable Laws. 7.3 Soils Report; Architect's Certificate of Soil Conditions and Other Matters. Developer must furnish Construction Lender with a copy of the soils report addressed to Construction Lender and a letter from Developer's architect in form and content satisfactory to Construction Lender stating that the structural foundations have been adequately designed considering soil conditions at the site, permitting assignment of the plans and specifications to Construction Lender for its use on behalf of Owner in the event of default without responsibility on the part of the Owner or Construction Lender for the architect's fees, and certifying as to compliance of the plans and specifications with applicable laws, ordinances and regulations and such other matters as Owner and/or Construction Lender may reasonably request. 7.4 Financial and Other Information. The Construction Lender must receive, prior to closing hereunder, current financial statements of Developer, Lessee and Guarantor and any applicable regulatory approvals required for the Project. The contents of these financial statements and approvals are subject to the Owner's review and approval. 8 9 7.5 Construction Contract and Completion. Developer will provide Construction Lender with a guaranteed maximum price construction contract in an amount not greater than the proceeds allocable thereto, together with payment and performance bonds with a dual obligee rider naming the Owner and Construction Lender. The general contractor, the form and content of the contract and the form and content of the bonds must be acceptable to Construction Lender. Owner reserves the right for Construction Lender to approve changes in the general contractor. Developer shall cause the general contractor to provide a lien waiver and affidavit of payment of all subcontractors, laborers and materialmen as a condition to the payment of the remainder of Developer's fee. Developer shall be responsible for assuring that the Project is completed, licensed and certified for occupancy within the earlier of twelve (12) months (unless extended by Owner in Owner's reasonable discretion) from commencement of construction or the date required by any regulatory approval, and the construction contract will obligate the general contractor to timely complete the Project within such period. 8. TERM. 8.1 Term. The term of this Agreement shall commence on the date hereof and shall, unless sooner terminated as provided in Section 4.2 above or Section 8.2 below, or unless extended by agreement between Developer and Owner, terminate upon Completion of the Project. 8.2 Termination by Developer. Developer may terminate this Agreement following forty-five (45) days written notice to Owner if the Developer has fully complied with all of its obligations hereunder and under the Transaction Documents, has satisfied all conditions for an advance of funds under this Agreement and the Construction Disbursement Agreement and no Event of Default exists, and Construction Lender nevertheless shall fail to advance funds required under this Agreement and the Construction Disbursement Agreement and such failure is not cured within such forty-five (45) day period. Upon such a termination, Developer shall also be entitled to exercise an option to purchase the Project in its then current condition (which option must be exercised, and the Purchase closed, if at all, within ninety (90) days following the end of such aforesaid forty-five (45) day period). The purchase price shall equal all Approved Budget funds previously advanced or deemed advanced excluding fees and interest to Construction Lender. 9. MISCELLANEOUS. 9.1 Waiver of Trial by Jury. THE PARTIES TO THIS AGREEMENT DESIRE TO AVOID THE ADDITIONAL TIME AND EXPENSE RELATED TO A JURY TRIAL OF ANY DISPUTES ARISING HEREUNDER. THEREFORE, IT IS MUTUALLY AGREED BY AND BETWEEN THE PARTIES HERETO, AND FOR THEIR SUCCESSORS AND ASSIGNS, THAT THEY SHALL AND HEREBY DO WAIVE TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, OR THIRD-PARTY CLAIM, INCLUDING ANY AND ALL CLAIMS OF INJURY OR DAMAGES, BROUGHT BY EITHER PARTY AGAINST THE OTHER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT AND THE 9 10 RELATIONSHIP WHICH ARISES HEREFROM. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS WAIVER IS KNOWINGLY, FREELY AND VOLUNTARILY GIVEN, IS DESIRED BY ALL PARTIES, AND IS IN THE BEST INTEREST OF ALL PARTIES. 9.2 Notice. Any notices, demands, approvals and other communications provided for herein shall be in writing and shall be delivered by telephonic facsimile and by overnight air courier, personal delivery or registered or certified U.S. Mail with return receipt requested, postage paid, to the appropriate party at its address as follows: If to Owner: ALCO II, L.L.C. c/o Charles E. Trefzger 46 Third Street N.W. Hickory, North Carolina 28601 With a copy to: CAPSTONE CAPITAL CORPORATION 1000 Urban Center Drive, Suite 630 Birmingham, Alabama 35242 Attention: Mr. Daryl D. McCombs, Assistant Vice President Telephone: (205) 967-2092 Telecopy: (205) 967-9066 If to Developer: BCC Development and Management Co. 5021 Louise Drive, Suite 200 Mechanicsburg, Pennsylvania 17055 Attention: Karen Barber, Esq. With copies to: Kirkpatrick and Lockhart, L.L.P. 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: John C. Rodney, Esq. Addresses for notice may be changed from time to time by written notice to all other parties. Any communication given by mail will be effective (i) upon the earlier of (a) three business days following deposit in a post office or other official depository under the care and custody of the United States Postal Service or (b) actual receipt, as indicated by the return receipt; (ii) if given by telephone facsimile, when sent; and (iii) if given by personal delivery or by 10 11 overnight air courier, when delivered to the appropriate address set forth. 9.3 Governing Law. This Agreement shall be interpreted according to the laws of the State of Alabama. All disputes hereunder shall be adjudicated in the federal courts sitting in the State of Alabama, or should such courts refuse to recognize jurisdiction over such matters, the courts of the State of Alabama. 9.4 Assignment. Neither party shall assign its rights and obligations under this Agreement without the prior written approval of the other party except that Developer may assign it rights and obligations to a wholly-owned subsidiary or an affiliate of Developer. Developer shall provide notice to Owner of such assignment. 9.5 Entire Agreement. This Agreement constitutes the entire Agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral or written, and all other communications between the parties relating to such subject matter. 9.6 Amendments. This Agreement shall not be modified or amended except by mutual written agreement. 9.7 Waiver of Breach. The waiver by either party of a breach or violation of any provisions of this Agreement shall not operate as, or be construed to be, a waiver of any subsequent breach of the same or other provision. 9.8 Severability. In the event any provision of this Agreement is held to be unenforceable or invalid for any reason, this Agreement shall remain in full force and effect and enforceable in accordance with its terms disregarding such enforceable or invalid provision; provided, however, that in the event that a provision of this Agreement is rendered invalid or unenforceable and its removal has the effect of materially altering the obligations or benefits to either party, the party so affected shall have the right to terminate this Agreement upon thirty (30) days' prior written notice to the other party. 9.9 Captions and Headings. The captions or headings in this Agreement are made for convenience and general reference only and should not be construed to describe, define or limit the scope and intent of the provisions of this Agreement. 9.10 Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute only one Agreement. 9.11 Binding Effect. This Agreement shall be binding and shall inure to the benefit of the parties hereto, and their respective heirs, legatees, executors, administrators, legal representatives, successors and assigns. 9.12 No Rule of Construction. The parties acknowledge that this Agreement was 11 12 initially prepared by Owner solely as a convenience and that all parties hereto, and their counsel, have read and fully negotiated all of the language used in this Agreement. The parties acknowledge that, because all parties and their counsel participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous and unclear language in favor of or against any party because such party drafted this Agreement. 9.13 No Third Party Beneficiary. This Agreement is solely for the benefit of the parties hereto and shall not inure to the benefit of any individual or entity not a party to this Agreement, except for Construction Lender. 9.14 Time is of the Essence. With respect to all provisions of this Agreement, time is of the essence. 9.15 Other Terms. The term "document" is used in its broadest sense and encompasses agreements, certificates, opinions, consents, instruments and other written material of every kind. The terms "including" and "include" mean "including without limitation" and "including, but not limited to". The term "any" as a modifier to any noun, shall be construed to mean "any and/or all" preceding the same noun in the plural. The terms "herein" "hereunder" and other similar compounds of the word "here" refer to the entire document in which the term appears and not to any particular provision or section of the document in which the term appears and not to any particular provision or section of the document. 9.16 Unavoidable Delay. An Unavoidable Delay shall toll the time for performance by Developer hereunder for the duration of the Unavoidable Delay, except that in no event shall Developer have more than eighteen (18) months from the execution hereof to discharge all of its obligations hereunder. THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK. SIGNATURES APPEAR ON THE FOLLOWING PAGE. 12 13 OWNER: ALCO II, L.L.C., a North Carolina limited liability company By /s/ Charles Trefzger ------------------------------------------ Name ---------------------------------------- Title --------------------------------------- DEVELOPER: BCC DEVELOPMENT AND MANAGEMENT COMPANY, a Delaware corporation By /s/ Brian L. Barth ----------------------------------------- Brian L. Barth Vice President GUARANTOR: BALANCED CARE CORPORATION By /s/ Brian L. Barth ----------------------------------------- Brian L. Barth Vice President 13 14 EXHIBIT 1 DEFINITIONS As used in this Agreement, the following terms shall have the meanings as indicated: "Advance Rate" means the prime rate of interest as reported by the Wall Street Journal on the date of each advance plus two percent (2%). "Agreement" means this agreement and all exhibits and schedules attached hereto. "Approved Budget" has the meaning set forth in Section 2.1. "Authorization" means any authorization, consent, approval, order, license, permit, exemption or other action by or from, or any filing, registration or qualification with, any Governmental Agency or other Person. "Charter Documents" means (a) in the case of a corporation, its articles of incorporation and bylaws, (b) in the case of a partnership, its partnership agreement and any certificate or statement of partnership, and (c) in the case of a trust or any other entity, its formation documents, in each case as amended from time to time. "Completion of the Project" means the date which is the earlier of _______________ or the date the Project obtains all certificates and licenses necessary to operate the Facility as a (1) 59-unit (Roanoke), (2) 60-unit (Danville), (3) 51-unit (Harrisonburg) assisted living/personal care facility. "Developer" has the meaning set forth in the introductory paragraph to this Agreement. "Events of Default" means the events set forth in Section 4.1. "Financial Statements" means for any Fiscal Year or other accounting period for Developer, audited statements of earnings and retained earnings and of changes in financial position for such period and for the period from the beginning of the respective fiscal year of Developer to the end of such period and the related balance sheet as at the end of such period, together with the notes thereto, all in reasonable detail and setting forth in comparative form the corresponding figures for the corresponding period in the preceding Fiscal Year of Developer, and prepared in accordance with generally accepted accounting principles consistently applied, except as noted. "Fiscal Year" means Developer's fiscal year, ending on June 30 of each calendar year. "Governmental Agency" means, as relates to the Project, (a) any government or municipally or political subdivision of any government or municipality, (b) any assessment, 15 improvement, community facilities or other special taxing district, (c) any governmental or quasi-governmental agency, authority, board, bureau, commission, corporation, department, instrumentality or public body, (d) any court, administrative tribunal, arbitrator, public utility or regulatory body, or (e) any central bank or comparable authority. "Impositions" means, collectively, all taxes relating to the Property and the Project, including all ad valorem, sales and use, gross receipts, action, privilege, rent or similar taxes, assessments (including all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed prior to the termination hereof) water, sewer or other rents and charges, excises, tax levies, fees (including license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Property and the Project (including all interest and penalties thereon due to any failure in payment by Developer); provided that nothing contained in this Agreement shall be construed to require Developer to pay any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Owner. "Laws" means all federal, state and local laws, rules, regulations, ordinances and codes. "Lease" has the meaning set forth in Section 2.4. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, equitable or other charge or encumbrance, or the option or right to acquire any such item, except for ad valorem real estate taxes that are timely paid. "Net Operating Income" means, with respect to the Project, earnings before interest, taxes (other than ad valorem taxes), rent, depreciation and amortization, less all expenses. "Owner" has the meaning set forth in the introductory paragraph to this Agreement. "Person" means any person or entity, whether an individual, trustee, corporation, partnership, joint stock company, trust, unincorporated organization, bank, business association or firm, joint venture, Governmental Agency or otherwise. "Project" has the meaning set forth in recitals of this Agreement. "Property" has the meaning set forth in the recitals of this Agreement. "Remedy" means any right, power or remedy. "Taxes" means all taxes, assessments, charges, fees and levies (including interest and penalties) imposed, assessed or collected by any Governmental Agency. "Transaction Documents" has the meaning set forth in Section 3.1. 16 "Unavoidable Delay" means an act of God, civil unrest, natural disaster or failure by Owner to cure a failure to provide funding called for by this Agreement after performance by Developer of all conditions precedent thereto. "Voting Shares" of any corporation means shares of any class or classes (however designated) having ordinary voting power for the election of at least a majority of the members of the board of directors (or other governing bodies) of such corporation, other than shares having such power only by reason of the happening of a contingency. - --------------------------------------------------------------------------------
OMITTED EXHIBITS ---------------- EXHIBIT 2.1 (i) APPROVED BUDGET EXHIBIT 2.1 (ii) PLANS AND SPECIFICATIONS EXHIBIT 2.1 (iii) CONSTRUCTION CONTRACT EXHIBIT 2.3 CONSTRUCTION CONTRACT EXHIBIT 2.4 LEASE
EX-10.60 56 BALANCED CARE CORPORATION 1 Exhibit 10.60 FORM OF OPTION AGREEMENT THIS OPTION AGREEMENT ("AGREEMENT") is made and entered into as of the Documentation Date by and among Charles E. Trefzger, John K. Earl, James R. Hodges, W. Lee Young III, and William C. Thompson, individuals resident of Catawba County, North Carolina (collectively, the "OPTIONORS") and Balanced Care Corporation, a Delaware corporation, or its successors and assigns ("BCC"). W I T N E S S E T H WHEREAS, Optionors are the owners of 100% of the equity interests (the "EQUITY INTERESTS") of ALCO __, L.L.C., a North Carolina limited liability company (the "COMPANY"), which Equity Interests are evidenced by certificate numbers 1, 2, 3, 4 and 5 of the Company, and represent 100% of the equity interests in the Company; and WHEREAS, the Company is the Lessee under that certain Lease dated as of the Documentation Date (the "LEASE") between CAPSTONE CAPITAL OF VIRGINIA, INC., an Alabama corporation (the "LESSOR") and the Company for certain property, together with all improvements now or hereafter located thereon, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, the Company and , a Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby the Company has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, BCC, Optionors and the Company have entered into that certain Shortfall Funding Agreement dated as of the Documentation Date (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC has agreed to fund certain Shortfalls by making loans to the Company, as more fully provided in the Shortfall Agreement; and WHEREAS, Lessee and CAPSTONE CAPITAL CORPORATION, a Maryland corporation ("LENDER") have entered into that certain Promissory Note dated as of the Documentation Date (the "PROMISSORY NOTE") whereby Lender has agreed to loan Lessee certain funds to pay certain start-up expenses associated with the Facility; WHEREAS, BCC is willing to enter into the Shortfall Agreement, and all other Transaction Documents to which BCC is a party, only if Optionors execute and deliver an option agreement whereby BCC or its successors and assigns may acquire all of the Equity Interests of Optionors, on the terms and conditions provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. GRANT OF OPTION/CONSIDERATION. (a) Optionors hereby grant to BCC an option (the "OPTION") to purchase all of Optionors' right, title and interest in and to the Equity Interests on the terms and conditions provided herein. The Purchase Price for the Equity Interests 2 shall be paid to Optionors on the Closing Date in immediately available funds. The Option shall be exercisable by providing written notice to Optionors on or before the ninth anniversary after the date of this Agreement (the "OPTION TERM"). (b) In consideration of the grant of the Option to BCC, BCC shall make the following payments (the "OPTION PAYMENTS") to Optionors: (1) no later than twelve months following the issuance of the certificate of occupancy for the Facility by the applicable governing body (the "FIRST PAYMENT DATE"), the sum of $50,000 and (2) on that date which is twelve months after the First Payment Date (the "SECOND PAYMENT DATE") and thereafter, on the first day of each annual period following the Second Payment Date and for so long as this Agreement is in effect (but ending in all events at the time of exercise of the Option), the sum of $50,000. Notwithstanding anything to the contrary contained herein, if the Option is exercised, BCC's obligation to make Option Payments thereafter shall cease. Option Payments shall be made to Optionors without demand or notice, except as expressly provided herein. (c) Until BCC provides written notice of its exercise of the Option, BCC shall be under no obligation whatsoever to purchase the Equity Interests or exercise the Option, and shall not otherwise have any liability whatsoever hereunder in connection with Option Payments or the purchase of the Equity Interests. BCC may only exercise the Option with respect to all Equity Interests of the Company. The Optionors shall allocate the Option Payments and the Purchase Price in accordance with each Optionor's percentage interest in the Company. (d) The "PURCHASE PRICE" as used herein shall mean (i) all amounts due under the Promissory Note including the total amount funded into the Working Capital Reserve, plus (ii) an amount which, when combined with all Option Payments made pursuant to Section 2(b) hereof, equals $250,000, plus (iii) the aggregate amount of all Advances and all other obligations due and payable by Lessee or Optionors to BCC or a BCC Affiliate under the Transaction Documents through the Closing Date (exclusive of the Management Fee under the Management Agreement). The aggregate amount of all Advances and all other obligations due and payable by Lessee or Optionors through the Closing Date to BCC or a BCC Affiliate under the Transaction Documents as provided in Subsection (iii) of this Section 1(d), shall be paid to BCC or the BCC Affiliate (as appropriate) on the Closing Date from the Purchase Price. Any amounts due and payable pursuant to the Promissory Note on the Closing Date to the Lender or the Holder (as defined in the Promissory Note), as the case may be, as provided in Subsection (i) of this Section 1(d), shall be paid to the Lender or the Holder on the Closing Date from the Purchase Price. 2. CLOSING. (a) The closing of the purchase of the Equity Interests (the "CLOSING"), pursuant to the exercise of the Option, shall take place at such time and location in Pennsylvania as shall be designated by BCC upon three (3) days prior written notice to Optionors (the "CLOSING DATE"). At the Closing (i) BCC shall deliver the Purchase Price and (ii) Optionors shall deliver to BCC (A) the certificates representing the original Equity Interests, together with such powers and other instruments as BCC may request and (B) the certificate of an appropriate officer of the Company stating that the transfer of the Equity Interests to BCC has been recorded on the books and records of the Company, and affirming to BCC such additional matters as BCC may reasonably request. Additionally, both BCC and Optionors shall take such further actions and execute and deliver such further documents and instruments as either party may reasonably request. The Equity Interests shall be transferred to BCC free and clear of all Liens and restrictions of any kind or nature, except for Liens in favor of BCC as expressly provided herein and Liens in favor of Lessor as expressly provided in the Lease. 2 3 (b) Notwithstanding anything to the contrary contained herein or in the other Transaction Documents, if and to the extent that the Working Capital Reserve is borrowed by Lessee (such borrowings, together with all interest, penalties and other costs and fees assessed or incurred in connection therewith, are referred to herein as the "BORROWINGS"), the Borrowings shall be repaid in full from the Purchase Price at the Closing to the extent that such Borrowings remain unpaid. BCC shall have the right at the Closing to pay to the holder of any note evidencing Borrowings from the Purchase Price the total amount outstanding with respect to the Borrowings. Without limiting the generality of the foregoing, in connection with the exercise of the Option, BCC and Optionors agree that, at the time the Option is exercised, any amounts due under the Promissory Note shall be paid in full to Lender or the Holder, as the case may be, from the Purchase Price. 3. COVENANTS OF OPTIONORS/LEGEND/PLEDGE. (a) Optionors shall not (i) sell, assign, convey, pledge (except as expressly provided herein), encumber or otherwise transfer (by operation of law or otherwise) any of Optionors' right, title or interest under, in or to the Equity Interests, (ii) cause or permit the Company to merge, consolidate, dissolve, liquidate, change its capital structure, issue new or substitute equity interests (including the issuance of warrants) or sell, convey, assign or otherwise transfer all or any portion of the Company's assets or (iii) cause or permit the Company to otherwise take any action that with the passage of time and/or the giving of notice would constitute a default under or a breach of any covenant or provision of the Shortfall Agreement or the other Transaction Documents. (b) Optionors shall cause the Company to place the following legend on all certificates representing Equity Interests: THE INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO PURCHASE IN FAVOR OF BALANCED CARE CORPORATION AND ITS SUCCESSORS AND ASSIGNS, AS MORE FULLY SET FORTH IN THAT CERTAIN OPTION AGREEMENT DATED AS OF JUNE 15, 1998. (c) To secure the obligations of Optionors hereunder, Optionors hereby grant and pledges to BCC a first priority lien and security interest in the Equity Interests. Such pledge shall be further memorialized by the Equity Pledge Agreement. For purposes of perfecting the security interest in the Equity Interests, Optionors shall deliver herewith to BCC possession of all certificates, instruments, documents and other evidence of Optionors' ownership of the Equity Interests accompanied by undated powers of attorney or other appropriate duly executed blank transfer powers. Optionors shall take such further actions, and execute such further documents, as may be requested by BCC to effect the pledge and grant of a security interest in the Equity Interests. (d) In addition to the other covenants stated herein, each Optionor covenants and agrees that each Optionor shall not cause the Company to, without the prior written consent of BCC: (i) except as otherwise expressly permitted under the Transaction Documents or the Lease Documents, create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of the properties of the Company, whether now owned or hereafter acquired, or assign any right to receive income, (ii) make any distribution of cash or other property or declare or pay any dividend or distribution on any securities issued by the Company (provided, however, this restriction shall not be construed to prohibit Optionors from receiving Option Payments in accordance with the terms and conditions of this Agreement), (iii) engage in 3 4 any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents and the Lease Documents with respect to the Facility, (iv) except as otherwise expressly permitted under the Transaction Documents and the Lease Documents, convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of the assets of the Company (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity, (v) create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except as expressly provided in the Lease Documents or the Transaction Documents, (vi) form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity, (vii) amend, supplement or otherwise modify the terms of the Articles of Organization, any other governance documents or the Operating Agreement of the Company in any way, (viii) enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and the Lease Documents, (ix) merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity, (x) issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing, other than in favor of BCC in accordance with the Transaction Documents or (xi) enter into any administrative or other similar agreement with any party relating to the provision of administrative or management service for the benefit of either Optionor or the Company. 4. REPRESENTATIONS AND WARRANTIES. Optionors represent and warrant to BCC that (i) Optionors are the sole and exclusive owners of the Equity Interests free and clear of all Liens and restrictions (except Permitted Liens), and Optionors' ownership interest in the Equity Interests is appropriately noted and documented on the books and records of the Company, (ii) Optionors are accredited investors as that term is defined in Regulation D promulgated under the 1933 Act, (iii) this Agreement and the other Transaction Documents to which each Optionor is a party constitute the legal, valid and binding obligation of each Optionor, subject only to bankruptcy and creditor's rights laws, (iv) no Person or Entity holds any equity or ownership interests in the Company, other than the Optionors, (v) the Equity Interests have been duly issued to Optionors, are fully paid and nonassessable, (vi) Optionors have the full right and power to transfer and convey the Equity Interests, enter into this Option Agreement and sell the Equity Interests to BCC without the need to obtain the consent or joinder of any Person or Entity, (vii) Optionors have had the opportunity to ask all questions of BCC, the Company and any other person or entity necessary or desirable concerning Optionors' investment in the Equity Interests, (viii) Optionors have the requisite knowledge and sophistication to make informed decisions regarding the risks and merits of an investment in the Company, and have not relied on any oral or written statements of BCC or any BCC Affiliate in connection with Optionors' investment in the Company and (ix) Optionors understand that the Equity Interests will be deemed restricted securities within the meaning of the 1933 Act (and state securities laws), the Equity Interests are non-transferable and Optionors must be able to bear the economic risks of ownership of the Equity Interests for an indefinite period of time. The provisions of this Section shall survive the Closing and purchase of the Equity Interests. 5. BINDING EFFECT. The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 6. ASSIGNMENT. Optionors may not assign, pledge, hypothecate or otherwise transfer their rights, obligations and duties hereunder without the prior written consent of BCC. 4 5 BCC shall have the right to transfer and assign its rights, obligations and duties hereunder to any affiliate or third party without the consent of Optionors; provided, however, BCC shall nonetheless remain primarily liable to Optionors for all obligations hereunder. 7. DEFAULT. (a) In the case of default by Optionors hereunder, BCC shall be entitled, after ten (10) days prior written notice to Optionors, to (a) seek an action in specific performance and/or (b) seek such other relief, including without limitation an action at law for damages, as may be available. Optionors shall pay all reasonable counsel fees of BCC in connection with enforcing any rights or benefits of BCC hereunder or under the other Transaction Documents. The rights and remedies of BCC under this Option Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. (b) In the case of default by BCC hereunder, Optionors shall be entitled, after ten (10) days prior written notice to BCC, to seek such relief, including without limitation an action at law for damages, as may be available to Optionors. Without limiting the foregoing, in the case of a default by BCC hereunder, after applicable notice, BCC shall not be permitted to exercise the Option. BCC shall pay all reasonable counsel fees of Optionors in connection with enforcing any rights or benefits of Optionors hereunder. The rights and remedies of Optionors under this Option Agreement are cumulative and not exclusive of any rights or remedies which they may otherwise have. (c) Notwithstanding the provisions of Section 7(b) and so long as no Event of Default has occurred under any Transaction Document or Lease Document which was caused by either Optionors or the Company, in the event that BCC fails to make Option Payments as provided hereunder, after ten (10) days prior written notice of such failure sent by Optionor to BCC, BCC shall no longer have any right to exercise the Option, which remedy shall be the sole and exclusive remedy of Optionor in the case of such failure. 8. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Optionors, at: ALCO __, L.L.C. 46 Third Street, NW Hickory, NC 28601 (ii) If to BCC at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. 5 6 9. DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. 6 EX-10.61 57 BALANCED CARE CORPORATION 1 Exhibit 10.61 SCHEDULE TO FORM OF CAPSTONE OPTION AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Management Firm - ----------------- ------------------ Danville, VA BCC at Danville, Inc. Harrisonburg, VA BCC at Harrisonburg, Inc. Roanoke, VA BCC at Roanoke, Inc.
EX-10.62 58 BALANCED CARE CORPORATION 1 Exhibit 10.62 FORM OF SHORTFALL FUNDING AGREEMENT THIS SHORTFALL FUNDING AGREEMENT ("AGREEMENT") is made as of the Documentation Date by and among ALCO __, L.L.C., a North Carolina limited liability company (the "LESSEE"), the members of Lessee listed on Schedule A attached hereto (collectively, the "MEMBERS") and Balanced Care Corporation, a Delaware corporation ("BCC"). W I T N E S S E T H WHEREAS, Capstone Capital of Virginia, Inc., an Alabama corporation ("LESSOR") entered into that certain Lease dated as of the Documentation Date (the "LEASE") with Lessee pursuant to which Lessor leased certain property, together with all improvements now or hereafter located thereon, as more fully described therein (the "PROPERTY") to Lessee on the terms and conditions provided therein; and WHEREAS, the Members constitute the holders of all equity interests in the Lessee; and WHEREAS, the Lessee and , a Delaware corporation (the "MANAGEMENT Firm") have entered into that certain Management Agreement dated as of the Documentation Date (the "MANAGEMENT AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive manager and operator of the Facility; and WHEREAS, Lessee has granted to Lessor that certain Line of Credit Leasehold Deed of Trust dated as of the Documentation Date (the "FIRST LEASEHOLD MORTGAGE") whereby Lessee has granted to Lessor a first priority security interest in Lessee's leasehold interest in the Lease as more fully provided in the First Leasehold Mortgage; and WHEREAS, pursuant to the terms of that certain Promissory Note dated as of the Documentation Date by and between Lessee and CAPSTONE CAPITAL CORPORATION, a Maryland corporation ("LENDER"), (the "PROMISSORY NOTE"), Lender has agreed to advance to Lessee certain amounts to fund certain operational losses anticipated in connection with the Facility, as more particularly set forth in the Promissory Note, and the maximum aggregate amount of such funds to be advanced under the Promissory Note shall equal the Working Capital Reserve (as defined in the Promissory Note); and WHEREAS, upon depletion of the Working Capital Reserve, BCC intends to make Advances to the Lessee, on the terms and conditions herein stated, to fund continuing Shortfalls; WHEREAS, BCC is willing to fund loans to Lessee covering Shortfalls upon depletion of the Working Capital Reserve only on the terms and conditions provided in this Agreement; 2 NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I FUNDING SHORTFALLS SECTION 1.01 FUNDING; WORKING CAPITAL RESERVE. (a) Lessee hereby permits BCC and the Management Firm to request Fundings (as defined in the Promissory Note) from the Lender in accordance with the terms of the Promissory Note to fund operating deficits with respect to the Facility. (b) In the event that Lender defaults in the timely payment of Fundings into the Working Capital Reserve as provided in Section 1.01(a), Member agrees that BCC shall have the right at any time thereafter, but not the obligation, to require that the Member sell all of the Equity Interests to BCC or its designee in the manner provided for in the Option Agreement; provided, however, the purchase price for the Equity Interests shall be the amount of Fundings actually deposited into the Cash Collateral Account. In such event, all terms and conditions of the sale applicable to the Option shall be equally applicable to the sale under this Section 1.01(c), and the failure by the Member to close on such sale within 3 days after written notice from BCC (time being of the essence) shall constitute an Event of Default. (c) The Member and the Lessee acknowledge and agree that (i) each Funding is not in any way evidence of a loan from any Member to Lessee, (ii) Management Firm may request from Lender Fundings under the Promissory Note at any time Management Firm believes, in its sole discretion, such Fundings are required to pay Shortfalls, (iii) any Indebtedness incurred by Lessee under the Promissory Note shall be fully guaranteed at all times individually by the Members, and (iv) Lessor and Management Firm may withdraw funds from the Working Capital Reserve to fund Shortfalls with respect to the Facility as provided in the Transaction Documents and the Lease Documents. SECTION 1.02 ADVANCES. Upon complete depletion of the Working Capital Reserve after all Fundings have been advanced by Lender pursuant to the terms and conditions of the Promissory Note up to the principal amount of the Promissory Note, and to the extent thereafter of any Shortfall, BCC hereby agrees to advance from time to time funds to the Lessee or the Lessor on behalf of the Lessee, as the case may be, upon no less than three (3) days prior written notice, upon the terms and conditions provided herein (each advance being an "ADVANCE" and collectively, the "ADVANCES"). Advances shall be evidenced by one or more promissory notes issued by the Lessee in the form attached hereto as Exhibit A (the "NOTES"). The Notes shall be payable upon demand. Interest shall accrue on the Notes at the rate of 2% over the Prime Rate as announced from time to time in the Wall Street Journal (or, in the event of the discontinuance of the publishing of the Prime Rate in the Wall Street Journal, such other source as the parties may agree), and shall be payable in arrears on the first day of each calendar quarter. All sums owed under the Notes and hereunder to BCC, and all other obligations and covenants under the Transaction Documents applicable to Lessee and the Member (including the obligations of each Member under the Option Agreement), together with all interest payable under the 2 3 Transaction Documents and all other costs and expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC Affiliate (including indemnification and defense obligations) are referred to herein as the "OBLIGATIONS". SECTION 1.03 ASSET PURCHASE OPTION. The Lessee and the Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase all of the assets of the Lessee (including the option to take an assignment of the Lease) for the Asset Purchase Price. The Asset Purchase Option may be exercised by BCC by providing written notice to the Lessee at any time during the term of the Lease. The closing of the purchase of the assets of the Lessee shall take place within 30 days after BCC exercises the Asset Purchase Option at such location in Pennsylvania as BCC may designate. At the closing of the asset purchase, the Lessee shall transfer, assign and convey to BCC (or its designee) all assets of Lessee, free and clear of all Liens and restrictions of any kind or nature, except for Liens or restrictions in favor of the Lessor pursuant to the Lease Documents or in favor of BCC pursuant to the Transaction Documents (provided, however, Liens in favor of BCC securing Advances or other Obligations shall be paid in full by Lessee and the Member at the closing of the asset purchase). The Lessee (and the Member if requested by BCC) shall execute and deliver at the closing of the asset purchase an assignment of lease (assigning the Lease to the purchaser), a bill of sale conveying all other assets of the Lessee and such other documents and instruments as BCC may reasonably request, all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE PRICE" as used herein shall mean (i) all amounts due under the Promissory Note and the other Loan Documents including the Working Capital Reserve, plus (ii) an amount which, when combined with all Option Payments made pursuant to Section 2(b) of the Option Agreement equals $250,000, plus (iii) the aggregate amount of all Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date (exclusive of the Management Fee). All Advances and all other Obligations due and payable by Lessee or the Member to BCC or a BCC Affiliate through the closing date of the asset purchase shall be payable from the Asset Purchase Price to BCC or the BCC Affiliate, as appropriate. Lessee and Member agree that if the Asset Purchase Option is exercised, at the time of the closing of the Asset Purchase Option, any amounts due under the Promissory Note, and all other sums due Lender in connection therewith, shall be paid to Lender from the Purchase Price. SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes, and to better secure the performance of Lessee and Member hereunder and under the other Transaction Documents, Lessee and the Member (as applicable) have executed and delivered the following: (i) the Lease and the other Lease Documents to which either is a party; (ii) The Loan Documents; (iii) Line of Credit Leasehold Deed of Trust and Security Agreement in the form attached hereto as Exhibit B encumbering the Property in favor of BCC (the "SECOND LEASEHOLD MORTGAGE"); (iv) the Deposit Pledge Agreement and the Equity Pledge Agreement; and 3 4 (v) such other documents, certificates, powers, affidavits and instruments as BCC may reasonably request. In addition to the foregoing documents, Member has executed and delivered to BCC the Option Agreement (the "OPTION AGREEMENT") substantially in the form attached hereto as Exhibit C, whereby Member has agreed that BCC shall have an option to purchase the Equity Interests of each Member in Lessee, on the terms and conditions provided therein. SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount of interest due or payable pursuant to any Transaction Document exceed the maximum rate of interest allowed by Law and, in the event any such payment is inadvertently paid by the Lessee or the Member or inadvertently received by BCC or any BCC Affiliate, then such excess sum shall be credited as a payment of principal due to BCC or any BCC Affiliate. It is the express intention of the parties hereto that neither the Lessee nor the Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Lessee. SECTION 1.06 INTENTION. It is the intention of BCC, the Member and Lessee that (i) the Management Firm operate the Facility pursuant to the Management Agreement, (ii) Lessee include on its financial statements all revenues, expenses and losses with respect to the Facility during the term of this Agreement for accounting purposes, and (iii) Advances made hereunder and all other obligations of Lessee and the Member under the Transaction Documents be secured by the assets of Lessee (including without limitation the Second Leasehold Mortgage), but subject to the rights of Lessor under the Lease, regardless of any bankruptcy, insolvency, receivership or similar proceedings instituted by or against Lessee. BCC, each Member and Lessee agree to take no position inconsistent with the intention of the parties as herein stated. ARTICLE II CONDITIONS TO ADVANCES SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations of BCC to accept delivery of the Transaction Documents and make Advances are subject to the condition precedent that BCC receives the following five days prior to the making of any Advance, in form and substance satisfactory to BCC: (a) the Note(s); (b) the Second Leasehold Mortgage; (c) the Option Agreement; (d) the Management Agreement; 4 5 (e) a certificate of the Secretary of State of the State of North Carolina stating that the Lessee is duly organized, validly existing and in good standing in such state; (f) a certified copy of the Operating Agreement of the Lessee, together with certified resolutions or authorizations of the Lessee granting the power to Lessee to enter into and perform the Transaction Documents; (g) all other Transaction Documents; (h) the Lease and all other Lease Documents; (i) the Loan Documents; and (j) such other affidavits, documents, certificates, statements and instruments as BCC may reasonably request. SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The obligation of BCC to accept delivery of the Transaction Documents and consummate this transaction, and to make any Advance, shall be further subject to the condition precedent that: (a) the following statements shall be true and correct (and the delivery by the Lessee and the Member of the Transaction Documents shall be deemed to constitute a representation and warranty by the Lessee and the Member that such statements are true on such date): (i) The representations and warranties contained in Article III of this Agreement and the other Transaction Documents are true and correct in all material respects on and as of the date of the execution and delivery of this Agreement, at the time of each Advance, and as of each date until the Obligations are satisfied in full; and (ii) No event has occurred and is continuing which constitutes a Default or an Event of Default under any of the Transaction Documents; and (b) BCC shall have received such other opinions or documents as BCC may request in BCC's reasonable discretion. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The Lessee and each Member represent and warrant as follows: 5 6 (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited liability company duly formed, validly existing and in good standing under the laws of the State of North Carolina, has qualified to do business in the State in which the Facility is located, and has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. (b) POWER; AUTHORITY. The execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party are within the Lessee's power and have been duly authorized by all necessary action, and this Agreement and the other Transaction Documents to which Lessee is a party have been duly executed and delivered by the duly authorized Manager of the Lessee. (c) APPROVAL OR CONSENTS. No approval or consent of any foreign, domestic, federal, state or local authority is required for the due execution, delivery and performance by the Lessee of this Agreement or any other Transaction Document to which it is a party and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party do not conflict with, and will not result in the breach of or default under, any contract, agreement or other document or instrument to which the Lessee is a party or by which its properties are bound. (d) BINDING OBLIGATIONS. This Agreement and the other Transaction Documents to which the Lessee or any Member, as the case may be, is a party are legal, valid and binding obligations of the Lessee and such Member enforceable against the Lessee and the Member in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (e) LITIGATION. There is no pending or, to the best of Lessee's any Member's knowledge, threatened action, suit or proceeding against or affecting the Lessee before any court, governmental agency or arbitrator. (f) APPLICABLE LAW. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Lessee and any Member, as the case may be, is a party, and the borrowings hereunder, do not and will not, by the passage of time, the giving of notice or otherwise, violate any Law applicable to the Lessee or such Member. (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's and Lessor's leasehold interest in the Lease, the Lessee has good, marketable and legal title to its properties and assets. The Lessee has a good and valid leasehold interest in the Lease. (h) LIENS. None of the properties and assets of the Lessee are subject to any Lien or other charge other than Liens in favor of BCC as provided herein, a BCC Affiliate or the Lessor ("PERMITTED LIENS"), and the execution, delivery and performance by the Lessee of this Agreement and the other Transaction Documents to which it is a party will neither result in the creation of any Lien or other charge upon any of the Lessee's properties or assets, nor cause a default under any agreements to which Lessee is a party. 6 7 (i) SECURITY. Upon the consummation of this transaction, BCC will have a valid and perfected (a) mortgage lien in the Lease and (b) lien in the Equity Interests. (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax returns of the Lessee required by Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Lessee and its properties, income, profits and assets which are due and payable have been paid. (k) NO EMPLOYEES. The Lessee has no employees for which it is required to comply with the Employment Retirement Income Security Act of 1974. (l) ABSENCE OF DEFAULTS. No event has occurred, which has not been remedied, cured or waived, which constitutes, or with the passage of time or giving of notice or both would constitute, a Default or an Event of Default under any Transaction Document, Lease Document or Loan Document which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Lessee under any agreement or judgment, decree or order, to which the Lessee is a party or by which the Lessee or any of its properties may be bound. (m) ACCURACY AND COMPLETENESS OF INFORMATION. All written information, reports and other papers and data furnished to BCC were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give BCC a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the persons involved as at the date thereof and the results of operations for such periods. No document furnished or written statement made to BCC by Lessee or any Member in connection with the execution of this Agreement or any of the other Transaction Documents (or in connection with the organization or capitalization of Lessee by the Members) contains or will contain any untrue statement of a material fact or fails to state a material fact necessary in order to make the statements contained therein not materially misleading. (n) SUBSIDIARIES. The Lessee does not own, directly or indirectly, of record or beneficially, any of the voting stock of any class or classes of, or any other voting interests of, any Entity. (o) INVESTMENT COMPANY. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company", within the meaning of the Public Holding Company Act of 1935, as amended. 7 8 (q) SECURITIES REPRESENTATIONS. Neither Lessee nor any agent, broker, dealer or other person or entity has offered or sold any equity interests in Lessee in violation of the 1933 Act or any state securities laws. (r) CAPITAL CONTRIBUTIONS. All Indebtedness incurred by Lessee to fund the Working Capital Reserve (including Indebtedness used to make Fundings) constitutes full recourse Indebtedness against Lessee and Members, and such Indebtedness is not limited in collection to any particular asset of the person or Entity incurring such Indebtedness. Each Member has fully guaranteed in his individual capacity all such Indebtedness. ARTICLE IV COVENANTS OF THE LESSEE SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC Affiliate shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, the Lessee will and the Member shall cause the Lessee to: (a) COMPLIANCE WITH LAWS; ETC. Comply, in all material respects with all applicable Laws, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. (b) MAINTENANCE OF INSURANCE. Maintain or contract to be maintained, with premiums fully paid, with responsible and reputable insurance companies or associations, such insurance in such amounts and covering such risks as is required to be carried under the Lease, and all such policies evidencing such insurance shall name BCC and Lessor as additional insureds thereunder. Lessee shall also maintain insurance of sufficient types and amounts to comply with all other Laws of any government entity exercising jurisdiction over Lessee. All insurance policies shall provide for notice of nonrenewal and notice of extension to BCC and Lessor, and shall not be terminated, canceled, amended or modified without 30 days prior written notice to BCC and Lessor. Lessee shall provide BCC with evidence of all insurance, including renewals or extensions of such insurance, promptly after receiving such insurance. Insurance policies and proceeds thereof shall at all times during the term of the Lease be subject to the Lessor's rights as provided in the Lease Documents. (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give notice to BCC of the following: (i) any actions, suits or proceedings instituted against the Lessee; (ii) any change in the chief executive office, principal place of business or location of the books and records of the Lessee and (iii) the occurrence of a Default or an Event of Default. (d) MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of any of the other Transaction Documents, (i) protect and preserve all of its properties, (ii) maintain in good repair, working order and condition all of its tangible properties, and (iii) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties so that the business carried on in connection 8 9 therewith may be properly and advantageously conducted at all times, as reasonably may be determined by BCC. (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its existence under the Laws of the state of its formation, and preserve and maintain its rights, franchises, licenses and privileges in such state as a limited liability company, and qualify and remain qualified and authorized to do business in such state. (f) BUSINESS. At all times endeavor to carry on its business in the most efficient manner possible under the circumstances and engage only in the Primary Intended Use (as defined in the Lease). (g) FURTHER ASSURANCES. At BCC's request, from time to time, execute, acknowledge or take such further action as BCC may reasonably require to effectuate the purposes of this Agreement and the purposes of the other Transaction Documents. Provided, however, notwithstanding anything to the contrary contained in this Section 4.01, Lessee shall not be in default hereunder to the extent that the obligations described in this Section 4.01 are required to be performed by the Management Firm under the Management Agreement. SECTION 4.02 NEGATIVE COVENANTS. So long as BCC shall have any commitment or Obligation hereunder or under the other Transaction Documents owed to it, neither the Lessee nor the Member will cause the Lessee to, without the prior written consent of BCC: (a) LIENS CREATED BY LESSEE. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, other than Permitted Liens. (b) DISTRIBUTIONS. Make any distribution of cash or other property to the Member or declare or pay any dividend or distribution on any securities of Lessee. (c) OTHER BUSINESS. Engage in any business venture or enter into any agreement with respect to any business venture, except as expressly provided in the Transaction Documents with respect to the Facility. (d) TRANSFER OF ASSETS. Convey, transfer, lease, sublease, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any person or Entity. The restrictions of this Subsection shall include a prohibition on any assignment, pledge, hypothecation or other transfer of the Lease or sublease or license of the Facility, except to Lessor, Lender, BCC or a BCC Affiliate in accordance with the terms and conditions of the Transaction Documents, Loan Documents and Lease Documents and except to sublessees as expressly permitted under the Lease. 9 10 (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the Transaction Documents, Indebtedness incurred to Lessor as expressly provided in the Lease Documents or Indebtedness incurred to Lender under the Loan Documents. (f) CREATION OF AFFILIATES. Form, organize or participate in the formation or organization of any Entity, or make any investment in any newly formed or existing Entity. (g) LOANS. Extend credit to or make any advance, loan, contribution or payment of money or goods to any person or Entity. (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise modify the terms of the Articles of Organization, the Operating Agreement or any other governance documents of the Lessee in any way. (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction with Lessor or any affiliate or related party to or with Lessor, other than pursuant to the Transaction Documents and Loan Documents. (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to transfer all or any portion of the Member's Equity Interests in Lessee to a party that does not as of the date hereof hold an equity interest in the Lessee. (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate, supplement or otherwise modify any Transaction Document, (ii) waive any default or potential event of default by Lessor under any Transaction Document, (iii) declare a default or event of default under any Transaction Document, (iv) exercise any right to extend the term of the Lease, (v) exercise any right to purchase the Facility or exercise a right of refusal with respect thereto or (vi) exercise any right to cancel the Lease as a result of a casualty or condemnation with respect to the Facility, or otherwise. (l) MERGERS AND CONSOLIDATIONS. Merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any Entity. (m) ISSUANCE OF SECURITIES. Except for the equity interests of the Lessee that have been issued to the Member and are outstanding as of the date hereof, issue any equity interests or options, warrants or other rights to purchase any equity interests or any securities convertible or exchangeable for equity interests, or commit to do any of the foregoing. (n) CAPITAL ADDITIONS. Construct or install any Capital Addition (as defined in the Lease) regardless of the cost of such Capital Addition or request or obtain financing for any Capital Addition, whether from Lessor or otherwise, pursuant to Section 9 of the Lease. 10 11 (o) SUBSTITUTION OF PROPERTY. Offer to substitute a new property or properties for the Property under Article XIII, Article XIV, or Article XIX of the Lease. Provided, however, notwithstanding anything to the contrary contained in this Section 4.02, Lessee shall not be in default hereunder to the extent that the events described in this Section 4.02 are caused by the Management Firm. ARTICLE V EVENTS OF DEFAULT SECTION 5.01 EVENTS OF DEFAULT. Each of the following events shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"), whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) The Lessee shall fail to make any payment of principal or interest, as stated in the Notes, when due, or the Member shall fail to make payments in connection with Fundings (as provided in Section 1.01 hereof) when due (each a "MONETARY DEFAULT"); or (b) Any representation or warranty made by the Lessee or the Member under or in connection with any Transaction Document shall prove to have been incorrect or misleading in any material respect when made; or (c) The Lessee or the Member shall fail to perform or observe any term, covenant or agreement contained in this Agreement, or in any other Transaction Document, on its or their part to be performed or observed beyond the applicable cure period; or (d) The Lessee or any Member shall generally not pay any debts of the Lessee when due; or (e) The Lessee or any Member shall admit in writing its inability to pay any debts of the Lessee generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Lessee or any Member seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of the Lessee or any Member of any of its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for the Lessee or any Member or for any substantial part of its property; or the Lessee or any Member shall take any action to authorize any of the actions set forth above in this subsection; or (f) Any nonappealable judgment or order for the payment of money in excess of $50,000 shall be rendered against the Lessee and the same shall not be discharged within 30 days after entry; or 11 12 (g) A warrant or writ of attachment or execution or similar process shall be issued against any property of the Lessee which exceeds $50,000 in value and such warrant or process shall continue undischarged or unstayed for ten consecutive days; or (h) Any material provision of any Transaction Document to which the Lessee or the Member is a party shall for any reason cease to be valid and binding on the Lessee or the Member, or the Lessee or the Member shall so state in writing; or (i) The Second Leasehold Mortgage shall for any reason cease to create a valid and perfected security interest in any of the collateral covered thereby, subject in priority only to the Permitted Liens; or (j) an Option Agreement Event of Default, a Mortgage Event of Default, a Lease Event of Default, a Deposit Pledge Event of Default, an Other Transaction Event of Default or a Management Agreement Event of Default shall occur and be continuing. ARTICLE VI REMEDIES SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following provisions shall apply: (a) ACCELERATOR AND TERMINATION: (i) Automatic. Upon the occurrence of a Shortfall Event of Default specified in Section 5.01(e), the principal of, and the interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and any of the other Transaction Documents, shall become automatically due and payable without presentment, demand, protest, or other notice of any kind all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. (ii) Optional. If any other Shortfall Event of Default shall have occurred, and in every such event, BCC may do the following: declare the principal of, and interest on, the Notes at the time outstanding, and all other amounts owed to BCC under this Agreement and the other Transaction Documents, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Transaction Documents to the contrary notwithstanding. 12 13 (b) BCC'S RIGHT TO ENTER PROPERTY. BCC may enter upon the Property and any premises on which collateral may be located and, without resistance or interference by the Lessee, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as BCC shall choose, without being liable to the Lessee on account of any loss, damage or depreciation that may occur as a result thereof, in accordance with and subject to the terms of the Lease and the other Lease Documents. (c) USE OF PREMISES. BCC may, without payment of any rent or any other charge to Lessee, enter the Property and, without breach of peace, take possession of the Property or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Lessee's equipment, for the purpose of (i) operating the Facility and (ii) collecting any accounts receivable. (d) OTHER RIGHTS. BCC may exercise any and all of its rights and remedies available under the other Transaction Documents, as well as those available in Law or in equity. (e) RIGHT TO FORECLOSE. BCC may foreclose upon the Lease, take immediate possession of the Facility and Property and operate the Property, all in accordance with the terms and conditions of the Leasehold Mortgage, the Lease and the other Lease Documents. SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following a Shortfall Event of Default shall be applied or paid over as follows: (a) First: to the payment of all costs and expenses incurred in connection with such sale or other realization, including, without limitation, the expenses for indemnification as provided herein; (b) Second: to the payment of the interest due upon the Notes; (c) Third: to the payment of the principal due upon the Notes or any other payments owed to BCC under the Transaction Documents; and (d) Fourth: the balance (if any) of such proceeds shall be paid to the Lessee subject to any duty imposed by law or otherwise to the holder of any subordinate lien in the Collateral known to BCC and subject to the direction of a court of competent jurisdiction. The Lessee shall remain liable and will pay, on demand, any deficiency remaining in respect of the Obligations owing by the Lessee to BCC after the application of proceeds set forth above together with interest thereon at a rate per annum equal to the highest rate then payable hereunder. SECTION 6.03 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. 13 14 (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under this Agreement and each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising its rights and remedies BCC may be selective and no failure or delay by BCC in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise of any other power or right. (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right to require any marshalling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this Article VI or elsewhere in this Agreement or in any other Transaction Documents shall be construed as requiring or obligating BCC or any agent or designee thereof to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any account or any other Collateral or the moneys due or to become due under the Notes or any other Transaction Documents or in connection therewith, or to take any steps necessary to preserve any rights against prior parties and neither BCC nor any of its agents or designees shall have any liability to the Lessee for actions taken pursuant to this Article VI, any other provision of this Agreement or any other Transaction Documents, except as otherwise provided by Law. (d) WAIVER OF DEFENSES. Lessee hereby waives any and all defenses, either by way of set-off as to matters arising prior to the date hereof or any other defenses, which Lessee presently believes it has or which Lessee may have in the future relating to monetary defaults under this Agreement or any other Transaction Document. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of default under any Transaction Document received from Lessor. BCC shall have the right, but not the obligation, to cure such default or event of default. To the extent that BCC shall expend sums to cure any such default or event of default, such sums shall be deemed Advances hereunder, payable upon demand; provided, however, that in the event that such default or event of default is due to a default or event of default on the part of the Management Firm, such sums shall not be deemed Advances. SECTION 7.02 POOLING OF FACILITIES. BCC covenants and agrees that upon the exercise by BCC of either the Option to acquire the Equity Interests of the Members pursuant to the Option Agreement or the Asset Purchase Option to acquire all of the assets of Lessee hereunder, BCC or a BCC Affiliate shall (so long as no Other Transaction Event of Default shall have occurred), within eighteen (18) months after the closing of such acquisition, acquire either the assets or equity of both (i) ALCO X, L.L.C., a North Carolina limited liability company ("ALCO X") pursuant to that certain Shortfall Funding Agreement dated as of the Documentation Date by and among ALCO X, the members of ALCO X and BCC or that certain 14 15 Option Agreement dated as of the Documentation Date by and between the members of ALCO X and BCC, respectively, and (ii) ALCO XI, L.L.C., a North Carolina limited liability company ("ALCO XI") pursuant to that certain Shortfall Funding Agreement dated as of the Documentation Date by and among ALCO XI, the members of ALCO XI and BCC or that certain Option Agreement dated as of the Documentation Date by and between the members of ALCO XI and BCC, respectively. ARTICLE VIII MISCELLANEOUS SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS. Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in Appendix 1 hereto; the rules of interpretation and other provisions set forth in Appendix 1 hereto shall apply to this Agreement. SECTION 8.02 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, Federal Express or other recognized overnight courier or sent by registered or certified U.S. mail, return receipt requested or sent by facsimile or telecopy transmission and addressed: (i) If to the Lessee or any Member, at: ALCO IX, L.L.C. 46 Third Street, N.W. Hickory, North Carolina 28601 (ii) If to BCC, at c/o BCC Development and Management Co. 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 or to such other address or facsimile number as a party may designate by notice to the other parties hereto. SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY 15 16 WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY (OR THE MEMBER OR THE MEMBER'S PROPERTY) IN THE COURTS OF OTHER JURISDICTIONS. SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's obligations, and the obligation of the Member, under this Agreement and the other Transaction Documents shall be performed by the Lessee and the Member at their sole cost and expense. If the Lessee or the Member shall fail to do any act or thing which it or they have covenanted to do under this Agreement or any of the other Transaction Documents, BCC may, but shall not be obligated to, do the same or cause it to be done either in the name of BCC or in the name and on behalf of the Lessee or the Member, and the Lessee and the Member hereby irrevocably authorizes BCC so to act. SECTION 8.05 INDEMNIFICATION. The Lessee agrees to reimburse BCC for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold BCC harmless from and against all losses suffered by BCC in connection with: (a) any breach by Lessee or any Member of any covenant, agreement, representation or warranty under any Transaction Document, (b) any and all uncollected items, including all checks or other negotiable instruments returned to BCC for insufficient funds, and (c) any claim, debt, demand, loss, damage, action, cause of action, liability, cost and expense or suit of any kind or nature whatsoever, brought against or incurred by BCC, in any manner arising out of or, directly or indirectly, related to or connected with the operation of the Lessee's business or sale thereto, which claim, debt, demand, loss, damage, action , cause of action, liability, cost or expense was not caused by the acts or omissions of BCC or a BCC Affiliate. The Lessee shall indemnify BCC as provided herein upon demand and in immediately available funds. 16 17 SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member recognize that, in the event the Lessee or any Member fails to perform, observe or discharge any of its or their obligations or liabilities under this Agreement or any of the other Transaction Documents, any remedy of Law may prove to be inadequate relief to BCC; therefore, the Lessee and each Member agree that BCC shall be entitled to temporary and permanent equitable relief in any such case without the necessity of proving actual damages. SECTION 8.07 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lessee, the Member and BCC and their respective personal representatives, heirs, successors and assigns, except that Lessee shall have no right to assign its rights hereunder or any interest herein. SECTION 8.08 WAIVERS. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE LESSEE, THE MEMBER AND BCC OF ANY KIND OR NATURE, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. 17 18 SECTION 8.09 CONFLICT WITH LEASE DOCUMENTS This Agreement is subject to the covenants and agreements contained in the Lease and other Lease Documents. In the event of any conflict between the provisions of this Agreement and the Lease Documents, the provisions of the Lease Documents shall control, and nothing contained in this Agreement shall alter or amend or be deemed to alter or amend any provision of the Lease or any other Lease Document. 18 19 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Shortfall Funding Agreement to be executed by their respective officers or authorized agents as of the date first above written. S-1 Shortfall Funding Agreement 20 OMITTED EXHIBITS/SCHEDULES SCHEDULE A MEMBERS OF LESSEE EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF LEASEHOLD MORTGAGE EXHIBIT C FORM OF OPTION AGREEMENT EX-10.63 59 BALANCED CARE CORPORATION 1 Exhibit 10.63 SCHEDULE TO FORM OF CAPSTONE SHORTFALL FUNDING AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K Facility Location Management Firm - ----------------- --------------- Danville, VA BCC at Danville, Inc. Harrisonburg, VA BCC at Harrisonburg, Inc. Roanoke, VA BCC at Roanoke, Inc. EX-10.64 60 BALANCED CARE CORPORATION 1 Exhibit 10.64 FORM OF WORKING CAPITAL ASSURANCE AGREEMENT --------------- THIS WORKING CAPITAL ASSURANCE AGREEMENT ("AGREEMENT") is made as of June 15, 1998, by and between Balanced Care Corporation, a Delaware corporation, with a principal place of business at c/o BCC Development and Management Co., 5021 Louise Drive, Suite 200, Mechanicsburg, PA 17055 ("BCC") and Capstone Capital of Virginia, an Alabama corporation (the "LESSOR") and for the benefit of Capstone Capital Corporation, a Maryland corporation ("LENDER"), both with a principal place of business at 1000 Urban Center Drive, Suite 630, Birmingham, Alabama 35242. W I T N E S S E T H: WHEREAS, ALCO __, L.L.C., a North Carolina limited liability company (the "LESSEE"), executed and delivered that certain Lease dated as of the date hereof (the "LEASE") whereby Lessee leased from Lessor property, together with all improvements now or hereafter located thereon, as more fully described in the Lease (the "PROPERTY"); and WHEREAS, BCC and Lessee have entered into that certain Shortfall Funding Agreement dated as of the date hereof (the "SHORTFALL AGREEMENT") whereby, among other matters, BCC will make certain loans to the Lessee as more fully described therein; and WHEREAS, pursuant to the terms of that certain Promissory Note dated as of the date hereof by and between Lessee and Lender (the "PROMISSORY NOTE"), Lender has agreed to make advances ("FUNDINGS") to Lessee of up to $600,000 to fund certain operational losses anticipated in connection with the Facility, on the terms and conditions set forth in the Promissory Note; and WHEREAS, because Charles E. Trefzger, John K. Earl, James R. Hodges, W. Lee Young, III, and William C. Thompson, individuals resident of the State of North Carolina (collectively, the "MEMBERS"), as the sole members of Lessee, shall receive a direct benefit from the advances made under the Promissory Note, have executed and delivered to the Lender that certain Guaranty dated as of the date hereof, guarantying the obligations of Lessee under the Promissory Note (the "GUARANTY"); and WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed to such terms in the Lease; and WHEREAS, as additional security for (i) Lessee's obligations to Lender under the Promissory Note (securing payment of principal and interest thereunder when due, whether by regularly scheduled payments, at maturity, or acceleration or otherwise) and the First Leasehold Mortgage and Members' obligations to Lender under the Guaranty (collectively, the "LOAN 2 OBLIGATIONS") and (ii) Lessee's obligations to Lessor under the Lease and the other Lease Documents (as defined in Appendix 1 attached to the Shortfall Agreement ("APPENDIX 1")) (the "LEASE OBLIGATIONS"), the Lessor and the Lender have requested the execution and delivery of this Agreement. NOW THEREFORE, for good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which is hereby acknowledged and in consideration of the covenants and agreements set forth herein, the parties hereto agree as follows: 1. Subject to the terms of Section 4 hereof, from the date hereof until the complete payment and performance of the Lease Obligations and Loan Obligations, BCC unconditionally agrees to loan to the Lessee by means of working capital loans (collectively, the "WORKING CAPITAL LOANS") sufficient funds to pay and satisfy Shortfalls (as defined in Appendix 1) due and payable during any month. Such Working Capital Loans shall be made pursuant to the Shortfall Agreement. 2. Subject to the terms of Section 4 hereof, without regard to any bankruptcy of Lessee or any default, breach of condition or failure to satisfy any condition to the making of Working Capital Loans under the Shortfall Agreement, BCC shall, without further direction, advance to the Lessee the amount equal to the Shortfall in a timely fashion so that the Lessee is able to meet all of its working capital obligations (including, without limitation, the Lease Obligations and Loan Obligations) when due and so that the payments due under the Lease and the Promissory Note are made in a timely fashion. 3. BCC acknowledges that the covenants and agreements made hereunder by BCC are being made to (a) induce the Lessor to enter into and accept the Lease, (b) enable the Lessee, subject to the terms of Section 4 hereof, to fulfill its working capital obligations, including, without limitation, the Lease Obligations and Loan Obligations, and (c) induce the Lender to accept the Promissory Note, the Guaranty and the First Leasehold Mortgage and to lend to Lessee the sums to be advanced under the Promissory Note in accordance with the terms thereof. Accordingly, it is expressly intended by BCC that the covenants and agreements by BCC hereunder may be relied upon and enforced by the Lessor and the Lender, as applicable. 4. Notwithstanding anything to the contrary set forth herein, BCC's obligation to provide the Working Capital Loans and advance Shortfalls to the Lessee shall not commence until such time as the full amount of the Working Capital Reserve required to be funded pursuant to the Promissory Note has actually been funded and depleted. 5. The obligations of BCC hereunder shall not be affected by the termination, discontinuance, release or modification of any agreement from any maker, endorser, surety or guarantor of the Lease Obligations or the Loan Obligations. 6. Notwithstanding anything to the contrary contained herein or in the Lease, the Lessor hereby covenants and agrees with BCC that the Lessor shall not amend, modify or - 2 - 3 otherwise alter the Lease or any other document executed in connection therewith (collectively, the "LEASE DOCUMENTS") without BCC's prior written consent, in each instance, which consent, shall not be unreasonably withheld, conditioned or delayed. In addition, the Lessor hereby covenants and agrees with BCC that, except in connection with the exercise of any of its rights and/or remedies under the Lease Documents, the Lessor shall not terminate the Lease without the prior written consent of BCC, which consent shall not be unreasonably withheld, conditioned or delayed. 7. The obligations of BCC hereunder shall not be affected by any change in the beneficial ownership of the Lessee or by reason of any disability of the Lessee. This Agreement shall be in addition to any guaranty or other security for the Lease Obligations and the Loan Obligations, and shall not be prejudiced or rendered unenforceable by the invalidity of any such guaranty or security. This Agreement shall continue to be effective or be reinstated, as the case may be, if, at any time, any payment of the Lease Obligations or the Loan Obligations is rescinded or must otherwise be returned by the Lessor or Lender, as the case may be, upon the insolvency, bankruptcy or reorganization of the Lessee or otherwise, all as though such payment had not been made. 8. (a) Without limiting BCC's obligation to provide the Working Capital Loans, upon the occurrence of any default under any of the Lease Documents, BCC shall have the right, but not the obligation, to cure such default within any applicable notice and grace periods (or in the event of no grace period, within 3 days after receipt by BCC of notice of such default) and, to the extent permitted by law, enter upon the Property, if necessary, for such purpose and take all such actions as BCC may deem necessary or appropriate to remedy such default. The Lessor agrees to give written notice to BCC of any default by Lessee under the Lease or any other Lease Document of which Lessor becomes aware. The Lessor agrees to accept any remedy performed by BCC as if the same had been performed by the Lessee. (b) Lessor acknowledges that BCC has the right to acquire all of the assets of Lessee pursuant to the Shortfall Agreement or all of the Equity Interests (as defined in the Shortfall Agreement) pursuant to the Option Agreement (as defined in the Shortfall Agreement). In the event that BCC or a BCC Affiliate (as defined in Appendix 1) exercises its rights to acquire either the assets or the Equity Interests, (A) Lessor hereby consents to the transfer of the Lease to BCC or the BCC Affiliate, and shall recognize such purchaser as Lessee under the Lease and other Lease Documents so long as (i) such purchaser executes and delivers to Lessor such documents, instruments, affidavits and opinions as Lessor may reasonably request and (ii) in the event the purchaser is an affiliate of BCC, BCC shall provide a guaranty of the Lease Obligations in form and substance reasonably satisfactory to Lessor and (B) Lessor shall release Lessee and any guarantor of Lessee's obligations upon the consummation of such transfer; provided, however, that if an Event of Default (as defined in the Lease) under the Lease has occurred and is continuing at the time the Lease is transferred to BCC or a BCC Affiliate pursuant to this Section 8(b), such transfer shall not be deemed a waiver by Lessor of such Event of Default. - 3 - 4 9. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO BCC: Balanced Care Corporation c/o BCC Development and Management Co. 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: President WITH COPIES TO: Balanced Care Corporation c/o BCC Development and Management Co. 5021 Louise Drive, Suite 200 Mechanicsburg, PA 17055 Attn: General Counsel and Kirkpatrick & Lockhart LLP 1500 Oliver Building Pittsburgh, Pennsylvania 15222-2312 Attn: Steven J. Adelkoff, Esq. IF TO THE LESSOR: Capstone Capital of Virginia, Inc. 1000 Urban Center Drive, Suite 630 Birmingham, AL 35242 WITH COPIES TO: Sirote & Permutt 2222 Arlington Avenue Birmingham, AL 35205 Attn. Thomas A. Ansley, Esq. or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to BCC or the Lessee by the Lessor at any time shall not imply that such notice or any further or similar notice was or is required. 10. This Agreement shall be construed, and the rights and obligations of the Lessor and BCC shall be determined, in accordance with the laws of the State of Alabama. BCC hereby consents to the exclusive jurisdiction of any state or federal court located within the State of Alabama, and waives personal service of any and all process upon BCC. BCC consents that all such service of process may be made by registered mail directed to , a Delaware corporation. - 4 - 5 11. This Agreement and BCC's obligations hereunder shall automatically terminate upon the purchase by BCC or a BCC Affiliate of all of the issued and outstanding equity of the Lessee or substantially all of the assets of Lessee. 12. The Lessor covenants and agrees with BCC that the Lessor shall not consent to any assignment of the Lessee's interest under the Lease (except to BCC or BCC Affiliate, or as otherwise expressly provided in Section 8(b) of this Agreement) or any transfer of substantially all of the Lessee's assets or any transfer of the issued and outstanding equity of the Lessee without the prior written consent of BCC, which consent, BCC may withhold in its sole and absolute discretion. In addition, in the event that, in violation of the terms of the Lease, (a) the Lessee attempts to assign its interest in the Lease (or transfer substantially all of its assets), (b) the current holders of the issued and outstanding equity of the Lessee attempt to transfer any such equity or (c) if any of the events described in Section 15.1 of the Lease relating to the bankruptcy or insolvency of the Lessee occurs, the Lessor covenants and agrees with BCC that, at the request of BCC and subject to applicable law, the Lessor shall terminate the Lease (in accordance with the terms thereof) and shall enter into a new lease of the Property with BCC (or any of its wholly-owned subsidiaries ("SUBSIDIARIES"), provided, that, BCC executes and delivers a guaranty of any such lease, in form and substance acceptable to the Lessor), in form and substance acceptable to the Lessor; provided, however, that any such lease shall be substantially similar to the Lease. In connection with the execution and delivery of any such lease, (y) BCC and its Subsidiaries shall execute and deliver any additional documents that the Lessor may request, in form and substance similar to the Lease Documents and (z) BCC shall deliver to the Lessor such evidence as Lessor shall request, in form and substance acceptable to the Lessor, that the new lease and all other documents executed and delivered in connection therewith have been duly authorized, executed and delivered and are enforceable. BCC agrees to pay all of the costs and expenses reasonably incurred by the Lessor (including, without limitation, attorneys' fees and expenses) in connection with the performance of the Lessor's obligations under this Section 12. 13. (a) Entire Agreement . This Agreement contains the entire understanding among the parties hereto with respect to its subject matter and supersedes any prior understandings or agreements between the parties with respect to such subject matter. (b) Amendments. This Agreement may be modified or amended only by a written instrument executed by the Lessor and BCC. (c) Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. - 5 - 6 (d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute but a single instrument. (e) Future Cooperation. Each party covenants and agrees to take such further action and execute such further documents as may be necessary or appropriate to carry out the intention of this Agreement. (f) Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. (g) WAIVER OF JURY TRIAL. BCC HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY PERTAINING OR RELATING TO THIS AGREEMENT, (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED OR INCIDENTAL TO ANY DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS AGREEMENT, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR IN CONNECTION WITH THE TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, IN TORT OR OTHERWISE, BCC AGREES THAT THE LESSOR OR THE LENDER MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED AGREEMENT OF BCC IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY AS AN INDUCEMENT TO THE LESSEE TO ENTER INTO THE LEASE AND THE LENDER TO MAKE FUNDINGS, AND THAT ANY DISPUTE OR CONTROVERSY WHATSOEVER BETWEEN BCC, THE LESSOR AND THE LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. SIGNATURES ON FOLLOWING PAGE - 6 - 7 EXECUTED as a sealed instrument as of the date first written above. WITNESS: BCC: BALANCED CARE CORPORATION _____________________________________ By: _______________________________ Name: Name: Title: WITNESS: LESSOR: CAPSTONE CAPITAL OF VIRGINIA, INC. _____________________________________ By: _______________________________ Name: Name: Title: S-1 Working Capital Assurance Agreement EX-10.65 61 BALANCED CARE CORPORATION 1 Exhibit 10.65 SCHEDULE TO FORM OF CAPSTONE WORKING CAPITAL ASSURANCE AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
FACILITY LOCATION ENTITY - ----------------- ------------------------- Danville, VA BCC at Danville, Inc. Harrisonburg, VA BCC at Harrisonburg, Inc. Roanoke, VA BCC at Roanoke, Inc.
EX-10.66 62 BALANCED CARE CORPORATION 1 Exhibit 10.66 _____________ FORM OF ASSIGNMENT, ASSUMPTION AND AMENDMENT AGREEMENT This Assignment, Assumption and Amendment Agreement ("Agreement") is made and entered into as of June 15th, 1998, by and between ALCO II, a North Carolina limited liability Company ("Assignor"), CAPSTONE CAPITAL OF VIRGINIA, INC., an Alabama corporation ("Assignee"), and BCC DEVELOPMENT MANAGEMENT CO., a Delaware corporation ("BCC"), with reference to the following facts: Preliminary Statements WHEREAS, Assignor is the owner of the real property described on Exhibit "A" hereto (the "Property") located in Roanoke, Virginia; and WHEREAS, in order to construct improvements on the Property, Assignor entered into that certain Development Agreement with BCC dated as of June 30, 1997 (the "Development Agreement"), pursuant to which BCC has completed a substantial portion of such improvements; and WHEREAS, in connection with the Development Agreement, Assignor and BCC entered into that certain Construction Disbursement Agreement dated as of June 30, 1997 (the "Disbursement Agreement"), with respect to the procedures for making disbursements under that certain Building and Term Loan Agreement dated as of June 30, 1997, between Assignor and Capstone Capital Corporation ("Capstone"); and WHEREAS, pursuant to that certain Deed dated as of even date herewith made by Assignor to Assignee, ALCO has sold and transferred the Property to Assignee, subject to that certain Deed of Trust with Absolute Assignment of Rents (with License Back), Security Agreement and Fixture Filing dated as of May 30, 1997, made by ALCO to Capstone; and WHEREAS, in connection with such sale, Assignor has agreed to assign to Assignee, and Assignee has agreed to assume from Assignor, all of Assignor's rights and obligations under the Development Agreement and the Disbursement Agreement, including without limitation payment of all amounts owing to BCC thereunder; and WHEREAS, Assignee and BCC desire to amend the Development Agreement and the Disbursement Agreement (collectively, the "Construction Documents") as provided herein; NOW, THEREFORE, for $10 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor, Assignee and BCC hereby agree as follows: 1 2 Section 1. Outstanding Obligations of Assignor under the Development Agreement and the Disbursement Agreement. Assignor and BCC hereby represent and warrant that as of the date hereof, Assignor has performed all of its obligations under the Construction Documents and all amounts owing to BCC thereunder have been paid in full, except that $____________ (the "Indebtedness") is due and owing to BCC under the Development Agreement in respect of _____________________________________________. Assignor and BCC further represent and warrant that as of the date hereof there exists no Event of Default (as defined in the Development Agreement) or event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. Section 2. Assignment of Assignor's Rights under the Construction Documents. Assignor hereby assigns to Assignee all of Assignor's right, title and interest in, to and under the Construction Documents. Section 3. Assumption of Assignor's Obligations under the Construction Documents. Assignee hereby assumes all of the obligations of Assignor under the Construction Documents, including without limitation payment of the Indebtedness, and agrees that it shall be substituted in Assignor's name, place and stead thereunder as if it were the original party thereto. Assignee hereby agrees to assume, pay, perform and discharge the Indebtedness and the other obligations of Assignor under the Construction Documents in accordance with the terms thereof. Section 4. Indemnification. Assignee hereby agrees to indemnify and save and hold harmless Assignor and its members from and against any failure of Assignee to pay, perform and discharge the Indebtedness and the other obligations of Assignor under the Construction Documents in accordance with the terms thereof. Section 5. Amendment of Construction Documents. (a) Each reference in the Construction Documents to Assignor, to "ALCO" or to "Owner" shall hereafter mean and refer instead to Assignee. (b) All notices to Assignee under the Construction Documents shall be directed to: Capstone Capital of Virginia, Inc. c/o Capstone Capital Corporation 1000 Urban Center Drive, Suite 630 Birmingham, Alabama 35242 (c) The parties agree that the "Approved Budget" as referred to in the Construction Documents is the budget attached hereto as Exhibit "B". (d) In all other respects, the Construction Documents are confirmed and ratified. 2 3 The execution of this Agreement by the parties hereto shall be effective to modify and amend the Construction Documents as provided herein and to substitute Assignee for Assignor without further documentation; provided, however, that each of the parties hereto agrees to execute such other documents or instruments as any other party may reasonably request to evidence the amendment and substitution effected herein. Section 6. Reaffirmation of Covenants. BCC hereby reaffirms the representations set forth in Section 3.1 of the Development Agreement. Section 7. Consent and Release. BCC hereby consents to the assignment and assumption evidenced hereby and releases Assignor from all liabilities with respect to the Indebtedness and otherwise under the Construction Documents. Section 8. Capitalized Terms. All capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Construction Documents. Section 9. Miscellaneous. a. Waiver. No consent or waiver, express or implied, by any party to this Agreement to or of any breach or default by any other party to this Agreement in the performance by such other party of the obligations thereof under this Agreement shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other party of the same or any other obligations of such other party under this Agreement. Failure on the part of any party to this Agreement to complain of any act of failure to act of any other party to this Agreement or to declare such other party in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of the rights thereof under this Agreement. b. Severability, Complete Agreement. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to any other Person or circumstance shall not be affected thereby, and such provisions shall be enforced to the greatest extent permitted by law. This Agreement and the instruments executed in connection herewith constitute the full and complete agreement of the parties and supersedes all prior negotiations, correspondence, and memoranda relating to the subject matter hereof. c. Amendment. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. d. Headings; Number and Gender. The headings of the sections, paragraphs and subdivisions 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. e. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. 3 4 f. Binding Agreement. The provisions of this Agreement shall apply to, inure to the benefit of, and bind Lessee and Lessor and their respective successors and assigns thereof. g. Interpretations. No provisions of this Agreement shall be construed against or interpreted to the disadvantage of any party to this Agreement by any court or other governmental or judicial authority by reason of such party's having or being deemed to have structured or dictated such provision. h. Relationship of Parties. No express or implied term, provision or condition of this Agreement, considered without reference to any other or external agreement, shall or shall be deemed to constitute the parties of this Agreement as partners or joint ventures. i. Controlling Law. The validity, interpretation, enforcement and effect of this Agreement shall be governed by, and construed in accordance with, the laws of the State of Alabama. 4 5 IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written. Assignor: ALCO II, L.L.C., a North Carolina limited liability company By: Title: Assignee: CAPSTONE CAPITAL OF VIRGINIA, INC., an Alabama corporation By:___________________________ Title:________________________ BCC: BCC DEVELOPMENT MANAGEMENT CO., a Delaware corporation By:___________________________ Title:________________________ 5 EX-10.67 63 BALANCED CARE CORPORATION 1 Exhibit 10.67 SCHEDULE TO FORM OF CAPSTONE ASSIGNMENT, ASSUMPTION AND AMENDMENT AGREEMENT FILED PURSUANT TO INSTRUCTION 2 TO ITEM 601(a) OF REGULATION S-K
Facility Location Management Company - ----------------- ------------------ Danville, VA BCC at Danville, Inc. Harrisonburg, VA BCC at Harrisonburg, Inc. Roanoke, VA BCC at Roanoke, Inc.
EX-10.79 64 BALANCED CARE CORPORATION 1 Exhibit 10.79 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment made as of the 1st day of July, 1998 by and between Balanced Care Corporation (the "Employer") and Brian L. Barth (the "Employee"). WITNESSETH: WHEREAS Employer and Employee entered into that certain Employment Agreement dated as of September 20, 1995, (the "Agreement"), and WHEREAS, Employer and Employee desire to amend the Agreement. Now, Therefore, in consideration of the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows: 1. Paragraph 2 of the Agreement is deleted in its entirety and replaced with the following language: "2. CAPACITY. Employee shall serve as Chief Development Officer." 2. Paragraph 4 is deleted in its entirety and replaced with the following language: "4. TERM OF EMPLOYMENT. Unless earlier terminated as hereafter provided, this Agreement shall commence on July 1, 1998 and shall expire on June 30, 2001, provided however, that upon expiration of such term, this Agreement shall be extended from year to year without further action on the part of the parties hereto, unless either party gives written notice of termination to the other party at least ninety (90) days prior to the expiration of the then current terms. 3. Paragraph 6 (a) of the Agreement is amended by deleting the first sentence thereof and replacing it with the following language: "6. COMPENSATION: (a) CASH COMPENSATION. During the term of this Agreement or any extension thereof, as compensation for services to the Employer, Employer shall pay to Employee a base salary of $170,000.00 per year in semi-monthly installments." The remainder of paragraph 6 (a) remains unchanged. 2 4. Paragraph 6 (b) is amended by deleting the first sentence thereof and replacing it with the following language: (b) ANNUAL BONUS. During the term of this Agreement, Employee shall be entitled to receive a bonus with respect to each fiscal year of Employer during the term of his employment in an amount not less than 50% of Employee's base salary upon achievement of the annual operating budget as approved by the Board of Directors of the Employer." The remainder of paragraph 6 (b) remains unchanged. 5. Paragraph 9 of the Agreement is deleted in its entirety. Except as amended as set forth in this Amendment, the Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Attest: Balanced Care Corporation - ------------------------ By: /s/ Stephen G. Marcus ------------------------------- Stephen G. Marcus Witness Employee - ------------------------ /s/ Brian L. Barth -------------------------------- Brian L. Barth EX-13.1 65 BALANCED CARE CORPORATION 1 Exhibit 13.1
SELECTED FINANCIAL DATA - ----------------------------------------------------------------------------------- (In thousands, except per share data) Years Ended June 30 ------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Revenues $ 90,681 $ 49,480 $ 811 Operating Income (Loss) $ 2,480 $ (3,787) $ (814) Net Income (Loss) $ 3,575 $ (4,492) $ (909) Net Income (Loss) Per Diluted Share $ 0.28 $ (0.66) $ (0.34) Weighted Average Shares-Diluted 12,928 6,763 2,696 Cash & Cash Equivalents $ 15,481 $ 7,908 $ 567 Total Assets $ 85,972 $ 33,017 $ 7,292 Long-term Obligations $ 8,847 $ 12,117 $ 5,121 Redeemable Preferred Stock -- $ 13,249 -- Stockholders' Equity (Deficit) $ 61,859 $ (1,444) $ 1,124
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis addresses the Company's results of operations on a historical basis for the years ended June 30, 1998, 1997 and 1996, and liquidity and capital resources of the Company. This information should be read in conjunction with the Company's consolidated financial statements, and related notes thereto, contained elsewhere in this report. This report contains, in addition to historical information, forward looking statements that involve risks and uncertainties. The Company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those disclosed in "Risk Factors," in the Company's Annual Report on Form 10-K for the year ended June 30, 1998. OVERVIEW The Company was formed in April 1995 to develop senior care continuums which meet the needs of upper middle, middle and moderate income populations in non-urban, secondary markets. The Company intends to utilize assisted living facilities in selected markets as the primary entry point and service platform to develop the balanced care continuums consisting of various health care and hospitality services, including, where appropriate, rehabilitation therapies, physical, occupational and speech therapy, home health care services on an intermittent basis, dementia and Alzheimer's services and skilled/subacute care delivered in a skilled nursing setting. On February 18, 1998, the Company completed its initial public offering for 7,000,000 shares of its common stock, par value $.001 per share ("Common Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the Offering, the 5,009,750 shares of Series B Preferred Stock and the 1,150,958 shares of Series A Preferred Stock were converted into 4,620,532 shares of Common Stock (reflective of the three-for-four reverse split of Common Stock effective October 14, 1997). In connection with the Offering, the Company granted the underwriters an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The closing for this option was on March 17, 1998. After the Offering, the conversion of the preferred stock and the exercise of the underwriters' option, the Company has 16,695,343 shares of Common Stock outstanding. The Offering, including the exercise of the underwriters' option, generated proceeds to the Company of approximately $46,357,000, net of costs and underwriting discounts and commissions. The proceeds were used to repay indebtedness of approximately $29,675,000 incurred to fund the purchase of four acquisitions (seven facilities) completed from October 1997 through January 1998, and to pay off indebtedness of $5,019,000 related to the Company's Wisconsin assisted living facilities in anticipation of their sale. The balance of the Offering will be used for general corporate purposes, and possible future acquisitions. The Company has grown primarily through acquisitions and by designing, developing and opening its Outlook Pointe signature assisted living facilities. As of June 30, 1998, the Company had 12 of its Outlook Pointe facilities in operation, of which one is leased and 11 are managed. As of that date, the Company operated a total of 37 assisted living facilities, 13 skilled nursing facilities and four independent living facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Ohio, Virginia and Wisconsin, as well as a home health care agency in Missouri and rehabilitation therapy operations in Pennsylvania and Arkansas. Assuming completion of the planned divestiture of the Company's seven owned assisted living facilities in Wisconsin, at June 30, 1998 the Company owned nine, leased 27 and managed 11 senior living and health care facilities with a capacity for 1,729 assisted living residents, 1,294 skilled nursing patients and 120 independent living residents. In addition to the 12 Outlook Pointe facilities opened as of June 30, 1998, the Company has signed agreements to develop and manage 36 assisted living facilities currently under construction, which are scheduled to open from July 1998 through August 1999. The following table summarizes the Company's operating facilities:
FACILITY COUNT June 30 1998 1997 - ------------------------------------------------------------ Developed Assisted Living Facilities 12 1 Acquired Assisted Living Facilities 25 17 Skilled Nursing Facilities 13 12 Independent Living Facilities 4 4 - ------------------------------------------------------------ 54 34 - ------------------------------------------------------------
Historically, the Company has generated revenues from three primary sources: patient services, resident services and other revenues. Patient services revenues include charges for room and board, rehabilitation therapies, pharmacy, medical supplies, subacute care and other programs provided to patients in skilled nursing facilities as well as rehabilitation services provided to assisted living facility residents. Resident services include all revenues earned from services provided to assisted living facility residents except for therapies and home health care services provided by the Company's licensed agencies which are included in patient services revenues. Other revenues include development fees, management fees and miscellaneous other revenues. Development fees and management fees are earned for developing and managing assisted living facilities for real estate investment trusts ("REIT"), and other owners or lessees. As the Company implements its business plan, management believes that the mix of the Company's revenues may change and that revenues from assisted living resident services, development and management activities will increase as a percentage of total revenues. The Company classifies its operating expenses into the following categories: (i) facility operating expenses which include labor, food, marketing, rehabilitation therapy costs and other direct facility expenses; (ii) development, general and administrative expenses, which primarily include BALANCED CARE CORPORATION PAGE 13 3 BALANCED CARE CORPORATION 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS continued corporate office expenses, regional office expenses, development expenses and other overhead costs; (iii) lease expense, which includes rent for the facilities operated by the Company as well as corporate office and other rent; and (iv) depreciation and amortization. In anticipation of its planned growth, the Company has made significant investments in its infrastructure during fiscal 1997 and 1998. These investments include attracting management and regional personnel and installing information systems to support and manage growth. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain data as a percentage of total revenue:
1998 1997 1996 - -------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total revenue 100.0% 100.0% 100.0% Operating expenses: Facility operating expenses 71.4 80.8 61.5 Development, general and administrative expenses 13.1 11.4 123.4 Lease expense 10.4 10.9 9.5 Depreciation and amortization 2.4 1.4 6.0 Write-down of long-lived assets -- 3.2 -- - -------------------------------------------------------------------- Income (loss) from operations 2.7 (7.7) (100.4) Other income (expense): Interest and other income 0.8 0.5 1.6 Interest expense (2.0) (1.8) (12.5) Gain on sale of assets 3.2 -- -- - -------------------------------------------------------------------- Income (loss) before income taxes 4.7 (9.0) (111.3) Provision for income taxes 0.8 0.1 0.8 - -------------------------------------------------------------------- Net income (loss) 3.9 (9.1) (112.1) ====================================================================
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997 Total Revenue. Total revenue for fiscal 1998 increased by $41,201,000 to $90,681,000 compared to $49,480,000 for fiscal 1997. This increase was the result of: (i) patient and resident service revenues of $28,039,000 primarily from facilities acquired or opened, during or subsequent to the 1997 fiscal year; and (ii) increased development and management fee revenues of $12,944,000 due to the Company's expanded development and management efforts. Patient services comprised 64% and 84% of total revenues for fiscal 1998 and fiscal 1997, respectively. The decrease in the percentage of total revenues was due to the Company's focus on assisted living operations and development. The high percentage of patient services revenues to total revenues in relation to the number of skilled nursing facilities to total facilities is due to the significantly higher rate and cost structures of the skilled nursing facilities. Operating Expenses. Total operating expenses increased by $34,934,000 to $88,201,000 for fiscal 1998 from $53,267,000 for fiscal 1997. The increase in total operating expenses in 1998 is attributable primarily to: (i) increases in facility operating expenses as a result of new facilities which were developed and acquired; and (ii) increases in development, general and administrative expenditures related to building the Company's infrastructure to support and manage its development and growth. Facility operating expenses for fiscal 1998 increased by $24,800,000 to $64,713,000 from $39,913,000 for fiscal 1997. The increase in 1998 is the result of new facilities which were developed or acquired, during or after the 1997 fiscal year. As a percentage of total revenue, facility operating expenses were 71.4% for 1998 and 80.8% for 1997. The percentage decreased due to the change in the revenue mix including the increase in development and management fees. Development, general and administrative expenses increased by $6,224,000 to $11,877,000 for fiscal 1998 from $5,653,000 for fiscal 1997. As a percentage of total revenue, these expenses increased to 13.1% for 1998 from 11.4% for 1997. Of the $6,224,000 increase in 1998, approximately $3,629,000 resulted from labor costs relating to the addition of new corporate and regional office staff to plan and manage the Company's actual and anticipated development and growth. The remaining $2,595,000 was attributable to other marketing, consulting, development, travel and other general expenses related to the Company's growth. Lease expense increased to $9,442,000 for fiscal 1998 from $5,417,000 for fiscal 1997, an increase of $4,025,000. This increase is the result of new facilities which were developed or acquired, during or after the 1997 fiscal year. As a percentage of total revenue, these expenses totaled 10.4% for 1998 and 10.9% for 1997. Depreciation and amortization increased by $1,476,000 to $2,169,000 for fiscal 1998 from $693,000 for fiscal 1997. This increase resulted from the additional depreciation and amortization on assets acquired and goodwill recorded as a result of acquisitions. In June 1997, management determined that the Wisconsin market did not provide adequate opportunity to achieve the operational efficiencies necessary to operate profitably. At June 30, 1997, the Company committed to a plan for the disposal of its Wisconsin assisted living facilities. A non-recurring non-cash charge of $1,591,000 was recorded in fiscal 1997 to write these assets down to their estimated fair value. In July 1998 the Company entered into a letter of intent to sell the assets of the Wisconsin facilities to an unrelated third party for $2,900,000, which approximates book value. The transaction is expected to close by October 31, 1998. Management does not expect this transaction to have a material effect on the Company's financial statements. PAGE 14 BALANCED CARE CORPORATION 4 Other Income (Expense). Interest and other income for fiscal 1998 increased by $450,000 to $715,000 from $265,000 in fiscal 1997. The increase is attributable to the higher level of invested funds due to receipt of proceeds from the sale of shares of Series B Convertible Preferred Stock in fiscal 1997 and the Offering in fiscal 1998. Interest expense for fiscal 1998 increased by $881,000 to $1,798,000 from $917,000 in fiscal 1997. This was primarily due to the interest on the $29,675,000 of bridge financing borrowed for the purchase of six assisted living facilities and one skilled nursing facility from October 1997 through January 1998. The acquisition bridge financing was repaid on February 26, 1998 with proceeds of the Offering. The gain on sale of assets in fiscal 1998 was the result of the Company's sale of the principal assets and the operations of a pharmacy in October 1997 for approximately $4,700,000, net of transaction costs. This resulted in a non-recurring gain of $2,858,000. Provision for Income Taxes. Income tax expense of $680,000 for 1998 is based on the Company's estimated effective tax rate of 16% for the 1998 fiscal year. The effective rate is lower than the statutory rate due to the reversal of a valuation allowance on deferred tax assets from net operating losses. The effective tax rate after the 1998 fiscal year is expected to approximate 40%. Income tax expense of $53,000 for fiscal 1997 resulted from taxable income reported on individual state corporate tax returns in states that do not permit consolidated filings. Net Income (Loss). The Company's net income increased to $3,575,000 for fiscal 1998 from a net loss of $(4,492,000) for fiscal 1997, an increase of $8,067,000. This increase in net income resulted primarily from: (i) the pretax contribution of $6,530,000 from increased development activities; (ii) the pharmacy gain of $2,858,000; (iii) the pretax contribution of the 11 assisted living and three skilled nursing facilities acquired in Pennsylvania from May 1996 through January 1998 of $782,000; and (iv) the writedown of the Wisconsin facilities in the 1997 fiscal year of $1,591,000. These amounts were partially offset by (i) start-up operating losses of $1,376,000 from the Company's Outlook Pointe facilities prior to the sale of the leasehold interests to an operator/lessee on January 1, 1998; (ii) reduced profitability at the Company's Missouri skilled nursing facilities of $1,098,000; (iii) increased losses at the Wisconsin assisted living facilities held for sale of $318,000; and (iv) increased income tax expense of $627,000. Medicare Reimbursement Changes. The Balanced Budget Act of 1997 (the "Budget Act") enacted sweeping changes in reimbursement methodology for skilled nursing facilities. Beginning July 1, 1998, skilled nursing providers with year ends of June 30, will be reimbursed under a fixed payment methodology based upon the patient's level of care as opposed to a cost-based methodology. The new methodology assigns patients into Resource Utilization Groupings ("RUG") that have corresponding fixed per diems rates. The new methodology has a three (3) year phase-in program whereby providers will receive a blending of historical facility-specific cost and national average rates. The facility-specific costs are based on 1995 audited cost reports. The national average rates are the Health Care Financing Administration's ("HCFA's) compilation of all skilled nursing cost reports with adjustments made to reduce or eliminate certain data. The Company's skilled nursing facilities began utilizing this new rate methodology on July 1, 1998. The Company estimates the new Medicare reimbursement rates will reduce Medicare revenues at the skilled nursing facilities by approximately $8,000,000 from fiscal 1998 levels. To maximize operating results under the new regulations the Company has embarked upon a program to reduce costs and manage acuity levels. These steps included: (i) a renegotiation of therapy service contracts; (ii) a reduction of nursing costs through managing hours worked to patient acuity; (iii) evaluation of the need for high-cost programs; and (iv) consolidating and eliminating certain non-patient related services. These operational changes are expected to reduce operating costs by approximately $6,500,000 in fiscal 1999 from fiscal 1998 levels. The net result of these changes is an expected decline of $1,500,000 in operating and pre-tax income in fiscal 1999 compared to fiscal 1998. These are estimates based on the volume of Medicare business and the acuity of patients experienced during fiscal 1998. Actual results in fiscal 1999 could vary depending upon, among other things, the number and acuity of Medicare patients admitted, and the Company's experience with programmatic management and cost control. The Company continues to evaluate the impact of the Budget Act upon future operating results. While the Budget Act was passed in August 1997 specifics relating to each business line will continue to be released until the year 2000. The assumptions used by the Company to evaluate the Budget Act are based upon the most accurate information available at this time. At present the Company believes it is reacting to all of the known changes created by the Budget Act; however, it cannot predict the impact of unforeseen reductions in anticipated rates issued by the government. YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996 Total Revenue. Total revenue for fiscal 1997 increased by $48,669,000 to $49,480,000 from $811,000 in fiscal 1996 due mainly to the significant acquisitions made during fiscal 1997. Patient service revenues were $41,616,000 in fiscal 1997 due to the increase in skilled nursing bed capacity from zero to 1,228 resulting from the Foster and Keystone acquisitions. Resident services revenue increased by $6,041,000 due to the increase in assisted and independent living resident capacity from 213 to 287 at June 30, 1996 and 1997, respectively. Development fees and other revenues grew from $74,000 in fiscal 1996 to $1,086,000 in fiscal 1997 due primarily to development fees of $1,015,000 earned on 14 facilities under construction for health care REITs. BALANCED CARE CORPORATION PAGE 15 5 BALANCED CARE CORPORATION 1998 ANNUAL REPORT MANAGEMENTS DISCUSSION AND ANALYSIS continued Operating Expenses. Total operating expenses for fiscal 1997 increased by $51,642,000 to $53,267,000 from $1,625,000 in fiscal 1996. As a percentage of total revenue, total operating expenses decreased to 107.7% in fiscal 1997 from 200.4% in fiscal 1996. The increase in total operating expenses in fiscal 1997 is attributable primarily to the growth in facility operating expenses, the administrative expenditures related to building the Company's infrastructure to support and manage its growth, lease expense, depreciation and the write-down of long-lived assets. Facility operating expenses for fiscal 1997 increased by $39,414,000 to $39,913,000 (including $19,186,000 of salaries, wages and benefits) from $499,000 in fiscal 1996. As a percentage of total revenue, facility operating expenses increased to 80.8% in fiscal 1997 from 61.5% in fiscal 1996. Facility operating expenses related to existing operations increased by $2,708,000 from fiscal 1996 as these operations were owned by the Company for a full year in fiscal 1997. The remainder of the facility operating expenses increase was attributable to the operations acquired during fiscal 1997. Development, general and administrative expenses for fiscal 1997 increased by $4,653,000 to $5,653,000 from $1,000,000 in fiscal 1996. As a percentage of total revenue, these expenses decreased to 11.4% in fiscal 1997 from 123.4% in fiscal 1996 as a result of the Company's minimal total revenues in fiscal 1996. Of the $4,653,000 increase in development, general and administrative expenses in fiscal 1997, approximately $3,164,000 resulted from labor and travel costs relating to the addition of new corporate and regional office staff to plan and manage the Company's actual and anticipated growth and $1,489,000 was attributable to marketing, consulting, development, pre-opening, accounting and rent due to expansion of existing corporate office space and other general expenses related to the Company's growth. Lease expense for fiscal 1997 increased by $5,340,000 to $5,417,000 from $77,000 in fiscal 1996 as a result of the facility operating leases related to the acquisitions made during fiscal 1997. As a percentage of total revenue, these expenses increased to 10.9% in fiscal 1997 from 9.5% in fiscal 1996. Depreciation and amortization for fiscal 1997 increased by $644,000 to $693,000 from $49,000 in fiscal 1996. Of this increase, $413,000 resulted from a full year of depreciation on the seven owned Wisconsin assisted living facilities acquired in May 1996 and the two owned Missouri skilled nursing facilities acquired in August 1996 while $231,000 was due to goodwill amortization and amortization of deferred financing and leasing cost relating primarily to the Foster and Keystone acquisitions. The year ended June 30, 1997 contains a non-cash charge of $1,591,000 as a result of a write-down on the Wisconsin assisted living facilities held for sale. Other Income (Expense). Interest income for fiscal 1997 increased by $252,000 to $265,000 from $13,000 in fiscal 1996. The increase is attributable to the higher level of invested funds due to receipt of proceeds from the sale of shares of Series B Convertible Preferred Stock in fiscal 1997. Interest expense for fiscal 1997 increased by $815,000 to $917,000 from $102,000 in fiscal 1996 due primarily to mortgage financing of $5,046,000 incurred in connection with the acquisition of assisted living facilities in Wisconsin and $3,115,000 incurred in connection with the acquisition of two skilled nursing facilities in Missouri. Provision for Income Taxes. Income tax expense in fiscal 1997 of $53,000 resulted from taxable income reported on individual state corporate tax returns in states that do not permit consolidated filings. Net Loss. Net loss for fiscal 1997 increased by $3,583,000 to $4,492,000 from $909,000 in fiscal 1996. This increase is primarily attributable to the write-down of long-lived assets of $1,591,000 in respect of the Company's Wisconsin assisted living facilities and the increased development, general and administrative expenses incurred to plan and manage the Company's actual and anticipated growth. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company has been able to achieve its development objectives in targeted secondary markets more quickly than originally planned. The Company plans to develop more than 40 additional Outlook Pointe facilities by June 30, 1999. The estimated construction costs to complete these facilities is estimated to be $350 to $400 million. The Company expects to continue its internal development program in future years. The Company has entered into non-binding letters of intent aggregating $465 million with six health care REITs and one other financial institution (combined the "Owners"). These letters of intent represent arrangements whereby the Owners will fund development projects or acquisitions and the Company will develop assisted living facilities, or the Owners will acquire existing facilities identified by the Company and lease them to the Company. Initial lease rates under these arrangements are expected to range from 3.2% to 3.4% over the 10-year Treasury rate. Specific development projects and acquisitions require approval of the Owners prior to the closing of a transaction. At June 30, 1998 approximately $235 million of the $465 million had not been utilized and remained available to fund project development. The Company currently estimates that its current resources and funding commitments will be sufficient to fund its development programs for projects scheduled to commence through March 31, 1999 and which will be completed by approximately March 31, 2000. Volatility in capital markets and specific transaction terms could affect the Company's ability to utilize these non-binding commitments. PAGE 16 BALANCED CARE CORPORATION 6 The Company's recent and future development projects involve or are expected to involve entering into development agreements with third party owners, which are, or are expected to be, health care REITs. An independent third-party company (the "Operator/Lessee") will lease the assisted living facility from the REIT when construction has been completed and provide funding for working capital during the initial occupancy period. The Company expects to manage the assisted living facility pursuant to management agreements with the Operator/Lessee which generally provide for terms of two to nine years. Each management agreement provides or is generally expected to provide for annual fees approximating 6.0% of net revenue of the facility. In exchange for an option payment the Company will have the option to purchase the stock or assets of the Operator/Lessee at an excercise price based on formulas set forth in the agreements at any time during the term of the management agreement. The Company estimates that the planned development projects for fiscal 1999 will require approximately $70 million of working capital commitments from Operator/Lessees during their initial occupancy period which is expected to occur during fiscal 2000 and 2001 (assuming a one year construction period and a one year initial occupancy period). In addition, the Company estimates that it will require approximately $100 - $200 million through fiscal 2001 if it exercises its option to purchase the stock or assets of the Operator/Lessees for all projects developed under this structure through and including the fiscal 1999 development projects. Effective January 1, 1998, the Company sold certain assets and assigned the leasehold interests of ten of its operating subsidiaries to Operator/Lessees for an aggregate price of approximately $2,645,000, net of transaction costs. In order to achieve its growth plans, the Company will be required to obtain substantial additional financing. The Company is currently exploring financing alternatives. The Company anticipates that it will use a combination of the net proceeds from the Offering, existing lease financing commitments and other arrangements with health care real estate investment trusts ("REITs"), joint venture leasing arrangements with third parties, a working capital line of credit, future equity and debt financing and cash generated from operations to fund its development and acquisition activities. The estimated costs over the next three years of the Company's planned development and expansion are significantly in excess of the Company's existing financing arrangements. There can be no assurance that any additional financing needed to fund the Company's growth plans will be available. These development plans could be curtailed or halted if the Company is not successful in securing financing beyond its current resources. The Company leases most of its facilities under long-term operating leases. Lease obligations for the next 12 months are approximately $9,800,000. The Company's financing documents contain financial covenants and other restrictions which: (i) require the Company to meet certain financial tests and maintain certain escrows of funds, (ii) limit, among other things, the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets and engage in mergers or other business combinations, (iii) prohibit the Company from operating competing facilities within a ten mile radius of the leased facilities. Management believes the Company is in compliance with these financial covenants. The Company's lease arrangements are generally for initial terms of 10 to 15 years with aggregate renewal option periods ranging from 15 to 25 years and provide for contractually fixed rent plus additional rent, subject to certain limits. The additional rent is capped at 2% or 3% of the prior year's total rent and is based on either the annual increase in revenues of the facility or the increase in the consumer price index. The Company's lease arrangements generally contain a purchase option at the end of the initial lease term and each renewal term to purchase the facility at its fair market value. Management believes that its current data systems are adequate for current operations and provide the flexibility to accommodate the planned growth of its operations without disruption or significant modification to existing systems through fiscal 1999. The Company plans to begin upgrading the existing financial system during fiscal 1999 to accommodate future growth. While cost estimates have not been finalized, the system upgrade will involve expansion of the Company's systems staff and a substantial financial commitment. The Company uses high quality hardware and operating systems from current and proven technologies to ensure reliability and optimum system performance. In an effort to evaluate these systems for year 2000 issues, the Company has formed an oversight committee. This committee has performed an inventory and risk assessment of the Company's internal operating systems, as well as an inventory of third party relationships and their impact on the Company. Based upon the committee's review, the Company has determined that third party relationships provide the highest risk related to year 2000 issues. The third party relationships deemed most critical are the Company's banking relationships and its relationships with third party intermediaries for skilled nursing facility reimbursement. The Company is in the process of developing contingency plans to address these critical relationships. The oversight committee will also oversee the testing of any internal information technology systems which do not contain embedded software. The testing of these systems and the timeframe for completion are in the planning stages. For those non-critical systems which cannot be readily tested, the Company will inquire of third party vendors as to the status of year 2000 compliance within these systems. Based upon the Company's progress to date in addressing year 2000 issues, management does not expect these issues to have a material impact on financial position, results of operations or cash flows in future periods, including the cost of remediation. BALANCED CARE CORPORATION PAGE 17 7 BALANCED CARE CORPORATION 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS continued OPERATING ACTIVITIES Cash used for operations increased by $5,477,000 to $6,092,000 for the year ended June 30, 1998 from $615,000 for the year ended June 30, 1997. The increase was the net result of increased receivables, partially offset by increased profitability and an increase in accounts payable and accrued expenses. INVESTING ACTIVITIES Cash used for investing activities increased by $20,396,000 to $27,595,000 for the year ended June 30, 1998 from $7,199,000 for the year ended June 30, 1997. The increase was primarily the result of acquisitions partially offset by the proceeds from sales of assets. FINANCING ACTIVITIES Cash provided by financing activities increased by $26,105,000 to $41,260,000 for the year ended June 30, 1998 from $15,155,000 for the year ended June 30, 1997. The increase was primarily the result of the Offering. FISCAL 1998 COMPLETED ACQUISITIONS In October 1997, the Company purchased the assets and business of Feltrop's Personal Care Home, a 92-bed assisted living facility, for approximately $5,875,000 including transaction costs. This acquisition has been accounted for using the purchase method of accounting, and the related goodwill of approximately $1,600,000 is being amortized over 40 years. In October 1997, the Company purchased the assets and business of Butler Senior Care which consists of three assisted living facilities with a capacity of 172 residents. The purchase price was approximately $10,369,000, including transaction costs. This acquisition has been accounted for using the purchase method of accounting, and the related goodwill of approximately $4,050,000 is being amortized over 40 years. The asset purchase agreement provides for additional purchase price payments of up to $4,100,000 contingent upon achieving certain future targeted operating results. Through June 30, 1998 contingent purchase price payments of approximately $766,000 have been earned and recorded. The Triangle Retirement Services, Inc. d/b/a Northridge Retirement Center acquisition, which occurred on December 1, 1997, involved the purchase of the assets and business of a 117-bed assisted living facility. The purchase price was approximately $8,600,000, including transaction costs. This acquisition has been accounted for using the purchase method of accounting, and the related goodwill of approximately $3,350,000 is being amortized over 40 years. The Gethsemane Affiliates acquisition, which occurred on January 2, 1998, involved the purchase of the assets of a 66-bed skilled nursing facility and a 51-bed assisted living facility which were accounted for using the purchase method of accounting. The purchase price was approximately $6,800,000 including transaction costs. Goodwill of approximately $1,825,000 was recorded for this acquisition and is being amortized over 40 years. The acquisitions that took place from October 1997 through January 1998 were financed with bridge financing from a REIT that was repaid with proceeds of the Offering. On June 29, 1998 the Company acquired the leasehold interest of Potomac Point, a 54-bed assisted living facility. The facility was acquired by a REIT. The Company has entered into a 9 year lease with three 5 year renewal options to lease the real estate from the REIT. Goodwill of approximately $41,000 was recorded for this acquisition which is being amortized over 24 years. PAGE 18 BALANCED CARE CORPORATION 8 CONSOLIDATED BALANCE SHEETS (In thousands except share data)
June 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $15,481 $ 7,908 Receivables (net of allowance for doubtful receivables of $916 in 1998 and $330 in 1997) (Note 4) 19,630 8,514 Development contracts in process (Note 3) 2,534 292 Prepaid expenses and other current assets 1,203 880 Assets held for sale 2,800 4,801 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 41,648 22,395 Restricted investments 1,596 1,825 Property and equipment, net (Note 6) 27,862 4,115 Goodwill, net (Note 2) 13,466 2,219 Other assets 1,400 2,463 - ------------------------------------------------------------------------------------------------------------------------- Total assets $85,972 $33,017 ========================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt (Note 7) $ 177 $ 97 Accounts payable 7,982 5,929 Accrued payroll 2,243 1,818 Accrued expenses 4,864 1,251 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 15,266 9,095 Deferred income taxes (Note 10) 638 -- Long-term debt, net of current portion (Note 7) 3,376 8,177 Straight-line lease liability 3,053 3,133 Deferred revenues and other liabilities 1,780 807 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 24,113 21,212 - ------------------------------------------------------------------------------------------------------------------------- Redeemable preferred stock (Note 8): Series B authorized 5,009,750 shares, issued and outstanding--0 and 5,009,750 shares at June 30, 1998 and 1997, respectively, at redemption value which includes accretion of $1,267 at June 30, 1997 -- 13,249 - ------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 2, 3, 11 and 14) Stockholders' equity (deficit) (Notes 9 and 12): Preferred stock, $.001 par value; 5,000,000 authorized; none outstanding -- -- Preferred stock, Series A authorized--1,150,958 shares, issued and outstanding--0 and 1,150,958 shares at June 30, 1998 and 1997, respectively 1 Common stock, $.001 par value--authorized--50,000,000 shares, issued and outstanding--16,695,343 and 4,024,812 shares at June 30, 1998 and 1997, respectively 17 5 Additional paid-in capital 63,678 3,961 Accumulated deficit (1,836) (5,411) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity (deficit) 61,859 (1,444) - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $85,972 $33,017 =========================================================================================================================
See accompanying notes to consolidated financial statements. BALANCED CARE CORPORATION PAGE 19 9 BALANCED CARE CORPORATION 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)
Year Ended June 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- REVENUES Patient services $58,194 $41,616 $ -- Resident services 18,239 6,778 737 Development fees 11,774 1,015 -- Management fees 2,185 -- -- Other revenues 289 71 74 - ------------------------------------------------------------------------------------------------------------------------- Total revenues 90,681 49,480 811 - ------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Facility operating expenses: Salaries, wages and benefits 32,549 19,186 320 Other operating expenses 32,164 20,727 179 Development, general and administrative expenses 11,877 5,653 1,000 Lease expense (including related parties of $5,042, $4,030 and $0 in 1998, 1997 and 1996, respectively) 9,442 5,417 77 Depreciation and amortization 2,169 693 49 Write-down of long-lived assets (Note 5) -- 1,591 -- - ------------------------------------------------------------------------------------------------------------------------- Total operating expenses 88,201 53,267 1,625 - ------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 2,480 (3,787) (814) Other income (expense): Interest and other income 715 265 13 Interest expense (1,798) (917) (102) Gain on sale of assets (Note 5) 2,858 -- -- - ------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 4,255 (4,439) (903) Provision for income taxes (Note 10) 680 53 6 - ------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,575 $ (4,492) $ (909) ========================================================================================================================= Accretion of redemption value attributable to redeemable preferred stock 1,253 1,267 -- - ------------------------------------------------------------------------------------------------------------------------- Net income (loss) allocable to common shareholders $ 2,322 $ (5,759) $ (909) ========================================================================================================================= Pro forma basic earnings per share $ 0.31 $ (0.66) $ (0.34) ========================================================================================================================= Pro forma diluted earnings per share $ 0.28 $ (0.66) $ (0.34) ========================================================================================================================= Weighted average shares--basic 11,616 6,763 2,696 ========================================================================================================================= Weighted average shares--diluted 12,928 6,763 2,696 =========================================================================================================================
See accompanying notes to consolidated financial statements. PAGE 20 BALANCED CARE CORPORATION 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended June 30, 1998, 1997 and 1996 (In thousands)
Preferred A Stock Common Stock ----------------------------- ------------------ Additional Issued Subscription Issued Paid-In Accumulated Shares Par Value Rights Shares Par Value Capital Deficit Total - ----------------------------------------------------------------------------------------------------------------------------- Balance at July 1, 1995 -- $-- $ -- 2,325 $ 3 $ 24 $ (10) $ 17 Sale of preferred stock 750 1 -- -- -- 1,499 -- 1,500 Preferred stock subscription rights 250 -- 451 -- -- -- -- 451 Sale of common stock -- -- -- 258 -- 3 -- 3 Issuance of common stock purchase warrants -- -- -- -- -- 62 -- 62 Net loss -- -- -- -- -- -- (909) (909) - ----------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 1,000 1 451 2,583 3 1,588 (919) 1,124 Stock dividend 151 -- -- -- -- -- -- -- Accretion of redemption value attributable to redeemable preferred stock -- -- -- -- -- (1,267) -- (1,267) Issuance of common stock -- -- -- 1,442 2 2,172 -- 2,174 Issuance of preferred stock -- -- (451) -- -- 451 -- -- Issuance of common stock purchase warrants -- -- -- -- -- 1,017 -- 1,017 Net loss -- -- -- -- -- -- (4,492) (4,492) - ----------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 1,151 1 -- 4,025 5 3,961 (5,411) (1,444) Issuance of common stock -- -- -- 8,050 8 46,349 -- 46,357 Conversion of series A preferred stock (1,151) (1) -- 863 1 -- -- -- Accretion of redemption value attributable to redeemable preferred stock -- -- -- -- -- (1,253) -- (1,253) Conversion of series B preferred stock -- -- -- 3,757 3 14,498 -- 14,501 Issuance of common stock purchase warrants -- -- -- -- -- 123 -- 123 Net income -- -- -- -- -- -- 3,575 3,575 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1998 -- $-- $ -- 16,695 $17 $63,678 $(1,836) $61,859 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. BALANCED CARE CORPORATION PAGE 21 11 BALANCED CARE CORPORATION 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended June 30, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,575 $ (4,492) $ (909) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 2,169 693 49 Deferred income taxes 638 -- -- Gain on sale of assets (2,858) -- -- Non-cash lease expense -- 1,454 -- Write-down of long-lived assets -- 1,591 -- Changes in operating assets and liabilities, excluding effects of acquisitions: Increase in receivables (11,175) (4,235) (65) Increase in development contacts in process (2,242) (292) (666) Increase in prepaid expenses and other current assets (516) (674) (25) Increase in accounts payable, accrued payroll and accrued expenses 4,317 5,340 1,052 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used for operating activities (6,092) (615) (564) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 7,364 -- -- Purchases of property and equipment (4,111) (1,822) (157) Decrease (increase) in restricted investments 229 (1,546) -- Increase in other assets (464) (1,544) 40 Business acquisitions (30,613) (2,287) (5,364) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (27,595) (7,199) (5,481) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 159 385 5,094 Payments on long-term debt (5,133) (142) (1) Proceeds from issuance of common stock 46,357 110 3 Proceeds from issuance of Series A preferred stock -- 451 1,500 Proceeds from issuance of Series B preferred stock -- 11,982 -- Issuance of notes payable 29,675 1,476 -- Payments on notes payable (29,675) (1,476) -- Increase (decrease) in straight-line lease liability (80) 1,679 -- Increase (decrease) in other liabilities (43) 690 -- - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 41,260 15,155 6,596 - --------------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 7,573 7,341 551 Cash and cash equivalents at beginning of period 7,908 567 16 - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 15,481 $ 7,908 567 ================================================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 1,843 $ 927 $ 47 ================================================================================================================================= Cash paid for income taxes $ 66 $ 35 $ -- ================================================================================================================================= SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets and lease obligations capitalized $ 253 $ 75 $ 40 ================================================================================================================================= Fair value of stock purchase warrants granted $ 123 $ 1,017 $ 62 ================================================================================================================================= Preferred stock subscriptions receivable $ -- $ -- $ 451 ================================================================================================================================= Accretion of redemption value of redeemable preferred stock $ 1,253 $ 1,267 $ -- ================================================================================================================================= Acquisitions: Fair value of assets acquired (32,328) (9,988) (5,408) Liabilities assumed 1,715 5,636 44 Fair value of stock issued -- 2,065 -- - --------------------------------------------------------------------------------------------------------------------------------- Consideration paid for acquisitions $(30,613) $ (2,287) $ (5,364) =================================================================================================================================
See accompanying notes to consolidated financial statements. PAGE 22 BALANCED CARE CORPORATION 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) ORGANIZATION AND BACKGROUND Balanced Care Corporation ("BCC" or the "Company") was incorporated in April 1995 and is engaged in the acquisition, development and operation of assisted living facilities and of other operations which facilitate implementation of the Company's balanced care continuum strategy, such as medical rehabilitation, home health care and skilled nursing. As of June 30, 1998, the Company owned, leased or managed 41 assisted and independent living communities and 13 skilled nursing facilities and had 35 assisted living communities under development contracts (see Note 3). The Company also operates a home health agency and rehabilitation agencies. The Company's operations are located in Pennsylvania, Missouri, Arkansas, Virginia, Ohio, North Carolina and Wisconsin. On February 18, 1998, the Company closed its initial public offering for 7,000,000 shares of its common stock, par value $.001 per share ("Common Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the Offering, 5,009,750 shares of Series B Preferred Stock and 1,150,958 shares of Series A Preferred Stock were converted into 4,620,532 shares of Common Stock (reflective of the three-for-four reverse split of Common Stock effective October 14, 1997). In connection with the Offering, the Company granted the underwriters an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The closing for this option was on March 17, 1998. After the consummation of the Offering, the conversion of the preferred stock and the exercise of the underwriters' option, the Company had 16,695,343 shares of Common Stock outstanding. The Company's stock is traded on the American Stock Exchange under the symbol BAL. (b) BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries from their respective acquisition dates. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. (c) CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with original maturities of three months or less. The Company maintains its cash and cash equivalents at financial institutions which management believes are of high credit quality. (d) FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, receivables, restricted investments and mortgage notes payable are reflected in the accompanying balance sheet at amounts considered by management to approximate fair value. Management generally estimates fair value of its long-term fixed rate notes payable using discounted cash flow analysis based upon the current borrowing rate for debt with similar maturities. (e) RESTRICTED INVESTMENTS Restricted investments consist of certificates of deposit that have been pledged as collateral for certain of the Company's lease commitments. The amounts are equivalent to three to six months' lease payments and are generally restricted through the initial lease term. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from 2-40 years. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations. Costs of additions and betterments are capitalized. (g) GOODWILL Goodwill resulting from business acquisitions accounted for as purchases is being amortized on a straight-line basis over lives ranging from 15 to 40 years. Goodwill is reviewed for impairment whenever events or circumstances provide evidence which suggests that the carrying amount of goodwill may not be recoverable. The Company evaluates the recoverability of goodwill by determining whether the amortization of the goodwill balance can be recovered through projected undiscounted cash flows. At June 30, 1998 and 1997, accumulated amortization of goodwill was $334,000 and $123,000, respectively. (h) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flow expected to be generated by the asset. This comparison is performed on a facility by facility basis. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) DEFERRED COSTS Financing and leasing costs have been deferred and are being amortized on a straight-line basis over the term of the related debt or lease. Accumulated amortization of deferred financing and leasing costs was $84,000 and $43,000 at June 30, 1998 and 1997, respectively. (j) REVENUE RECOGNITION Patient service revenues are recorded based on standard charges applicable to all patients, and include charges for room and board, rehabilitation therapies, pharmacy, medical supplies, sub-acute care and other programs provided to patients in skilled nursing facilities. Patient service revenues are adjusted for differences between such standard rates and BALANCED CARE CORPORATION PAGE 23 13 BALANCED CARE CORPORATION 1998 ANNUAL REPORT estimated amounts reimbursable by third-party payors when applicable. Estimated settlements under third-party payor retrospective rate setting programs (primarily Medicare) are accrued in the period the related services are rendered. Settlements receivable and related revenues under such programs are based on annual cost reports prepared in accordance with Federal and state regulations, which reports are subject to audit and retroactive adjustment in future periods. In the opinion of management, adequate provision has been made for such adjustments and final settlements will not have a material effect on financial position or results of operations. Resident service revenues are recognized when services are rendered and consist of resident fees and other ancillary services provided to residents of the Company's assisted living facilities. (k) DEVELOPMENT FEE INCOME RECOGNITION AND RELATED COSTS Development fees are received from facility owners under fixed-price development contracts, which are recognized on the percentage-of-completion method measured by the cost-to-cost method. Such contracts are for managing, supervising and coordinating the activities of other contractors on behalf of the owners of the assisted living facilities, and revenue is recognized only to the extent of the fee revenue. On projects where BCC is the lessee, development fees in excess of related development costs are recorded as deferred revenues and recognized over the lease term (see note 3). Contract costs include direct development salaries, wages and benefits and related direct costs of development activities, including such costs incurred prior to execution of the development agreement (precontract costs). Precontract costs are recorded as development in process until the contract is executed, whereupon such costs are charged to operations and related development fee revenues are recognized as described above. Precontract costs are reviewed by management to assess recoverability based on the progress of each development project and are charged to operations when a project is abandoned. Changes in project performance, conditions and estimated profitability may result in revisions to cost estimates, related revenue recognition and provisions for estimated losses on uncompleted contracts. Such changes in estimates are reported in the period in which the revisions are determined. Reimbursable costs due from facility owners under development contracts in process represent costs incurred on behalf of the owners of the assisted living facilities during the construction period, which are reimbursed on a monthly basis. Accounts payable include $4,285,000 at June 30, 1998 and $1,647,000 at June 30, 1997 related to such costs. (l) INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. (m) STRAIGHT-LINE LEASE LIABILITY Straight-line lease liabilities represent lease deposit funding received from REITs relating to lease transactions. The Company pays rent on these funds and amortizes the related straight-line lease liability over the initial lease term as a reduction of rent expense. (n) CLASSIFICATION OF EXPENSES All expenses associated with development, corporate or support functions are classified as development, general and administrative. (o) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (p) PRO FORMA EARNINGS (LOSS) PER SHARE ("EPS") Pro forma earnings (loss) per share is computed using the weighted average number of common shares and common equivalent shares outstanding (using the treasury stock method) assuming the pro forma conversion of preferred shares into common. For the years ended June 30, 1997 and 1996, common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive. In the computation of earnings (loss) per share, accretion of the redemption value attributable to redeemable preferred stock is not included as an increase to net loss. A reconciliation of the weighted average shares used in the computation of pro forma earnings per share follows (in thousands):
Year Ended June 30, 1998 1997 1996 - ---------------------------------------------------------- Weighted average common shares outstanding 6,996 3,758 2,474 Pro forma conversion of preferred shares 4,620 3,005 222 - ---------------------------------------------------------- Shares used for pro forma basic EPS 11,616 6,763 2,696 Stock options and warrants converted using the treasury stock method 1,312 -- -- - ---------------------------------------------------------- Shares used for pro forma diluted EPS 12,928 6,763 2,696 ==========================================================
(q) RECLASSIFICATIONS Certain amounts for 1996 and 1997 have been reclassified to conform to the presentation for 1998. PAGE 24 BALANCED CARE CORPORATION 14 2. BUSINESS ACQUISITIONS Acquisitions and the manner of payment are summarized as follows:
Transaction Leased Cash Month Description or Owned Business Location Paid - ------------------------------------------------------------------------------------------- Year ended June 30, 1996: - ------------------------------------------------------------------------------------------- March 1996 Operations of Allison Park Leased ALF PA $ 318 May 1996 Assets of Harmony Manor Owned ALF WI 5,046 - ------------------------------------------------------------------------------------------ $ 5,364 ==========================================================================================
Year ended June 30, 1997: - ------------------------------------------------------------------------------------------ August 1996 Operations/assets of Owned/ SNF MO $ 487 Foster Health Care Leased January 1997 Operations of Keystone (2) Leased ALF/ PA 1,800 SNF May 1997 Leasehold interests of Clark Leased ALF MO -- - ------------------------------------------------------------------------------------------ $ 2,287 ==========================================================================================
YEAR ENDED JUNE 30, 1998: - ------------------------------------------------------------------------------------------ AUGUST 1997 LEASEHOLD INTEREST OF CLARK LEASED ALF MO $ -- OCTOBER 1997 ASSETS OF FELTROP OWNED ALF PA 5,875 OCTOBER 1997 ASSETS OF BUTLER (3) OWNED ALF PA 9,997 DEC. 1997 ASSETS OF NORTHRIDGE OWNED ALF NC 8,600 JANUARY 1998 ASSETS OF GETHSEMANE OWNED ALF/ PA 5,600 SNF JUNE 1998 LEASEHOLD INTEREST OF LEASED ALF VA 41 POTOMAC POINT - ------------------------------------------------------------------------------------------ $30,113 (2) ==========================================================================================
Transaction Common Stock Liabilities Total Goodwill Month Description Issued (1) Incurred Cost Recorded - ------------------------------------------------------------------------------------------------------------ Year ended June 30, 1996: - ------------------------------------------------------------------------------------------------------------ March 1996 Operations of Allison Park $ -- $ -- $ 318 $ 318 May 1996 Assets of Harmony Manor -- -- 5,046 -- - ----------------------------------------------------------------------------------------------------------- $ -- $ -- $ 5,364 $ 318 ===========================================================================================================
Year ended June 30, 1997: - ----------------------------------------------------------------------------------------------------------- August 1996 Operations/assets of $1,600 $6,604 $ 8,691 $ 1,851 Foster Health Care January 1997 Operations of Keystone (2) 250 -- 2,050 1,800 May 1997 Leasehold interests of Clark -- -- -- -- - ----------------------------------------------------------------------------------------------------------- $1,850 $6,604 $10,741 $ 3,651 ===========================================================================================================
YEAR ENDED JUNE 30, 1998: - ----------------------------------------------------------------------------------------------------------- AUGUST 1997 LEASEHOLD INTEREST OF CLARK $ -- $ -- $ -- $ -- OCTOBER 1997 ASSETS OF FELTROP -- -- 5,875 1,597 OCTOBER 1997 ASSETS OF BUTLER (3) -- 372 10,369 4,046 DEC. 1997 ASSETS OF NORTHRIDGE -- -- 8,600 3,349 JANUARY 1998 ASSETS OF GETHSEMANE -- 1,200 6,800 1,824 JUNE 1998 LEASEHOLD INTEREST OF -- -- 41 41 POTOMAC POINT - ----------------------------------------------------------------------------------------------------------- $ -- $1,572 $31,685 $10,857 ===========================================================================================================
(1) Represents 1,200,000 shares of common stock for Foster and 187,500 shares of common stock for Keystone. (2) Purchase of the operations of Keystone included the rights to seven early stage development projects. Additional cash payments of $500,000 were paid in fiscal 1998 when the first five projects were financed and recorded as additional goodwill. (3) The agreement to purchase the assets of Butler Senior Care provided for additional payments in 1998 if an addition (opened in January 1998) attains occupancy of 90% occupied based upon a multiple of net operating income. A final payment, also based upon a multiple of Butler's annualized net operating income for the six months ending December 31, 1998, may be due in January 1999. If payable, these payments, estimated at a maximum of $3,334,000, will be recorded as additional goodwill. All acquisitions were accounted for under the purchase method. The acquisitions that took place from October 1997 through January 1998 were financed with $29,675,000 in bridge financing from a REIT that was repaid with proceeds of the offering. The following unaudited summary, prepared on a pro forma basis, combines the results of operations of the acquired businesses with those of the Company as if the acquisitions had been consummated as of the beginning of the respective periods after including the impact of certain adjustments such as: amortization of goodwill, depreciation on assets acquired, interest on acquisition financing and lease payments on the leased facility (in thousands except for EPS):
Year ended June 30 1998 1997 - ------------------------------------------------------------------- Revenue $96,668 $75,520 Expenses 93,262 80,838 - ------------------------------------------------------------------- Net income (loss) $ 3,406 $(5,318) - ------------------------------------------------------------------- Pro forma diluted EPS $ 0.26 $ (0.79) ===================================================================
The unaudited pro forma results are not necessarily indicative of what actually might have occurred if the acquisitions had been completed as of July 1, 1997 and 1996, respectively. In addition, they are not intended to be a projection of future results of operations. BALANCED CARE CORPORATION PAGE 25 15 BALANCED CARE CORPORATION 1998 ANNUAL REPORT 3. DEVELOPMENT ACTIVITIES The Company is a developer of assisted living facilities and receives development fees for services provided to the owners, which are typically real estate investment trusts (REITs). In certain cases, the Company leases the facilities from the REIT owner/lessor and is the operator/lessee of the facilities. In other cases, newly formed special purpose entities (which are owned by independent third parties) are the operator/lessees, and the Company manages the facilities pursuant to management agreements. Management agreements provide for terms ranging from 2 to 9 years, with fees approximating 6% of net revenues of the facility. These fees are subordinate to any rent payments made by the operator/lessee to the facility owner. Management fees for the year ended June 30, 1998 include reimbursements in the amount of $1,793,000 from the operator/lessees for employee salaries and benefits. The Company has the option (but not the obligation) to purchase the stock or assets of the operator/ lessee pursuant to a related option agreement (see note 14). The Company incurs substantial development costs prior to executing the development agreement (precontract costs). Such costs relate to market analysis and evaluation, site selection and land control, obtaining architectural and engineering reports, preparing development plans and obtaining zoning and other governmental approvals and permits relating to the building, sewer, water, roads, utilities, etc. Development contracts in process at June 30, 1998 and 1997 are summarized as follows:
1998 1997 - ------------------------------------------------------------------- Precontract costs $ 499 $292 - ------------------------------------------------------------------- Costs and estimated earnings of development contracts in process 11,470 -- Less billings to-date 9,435 -- - ------------------------------------------------------------------- 2,035 -- - ------------------------------------------------------------------- $ 2,534 $292 ===================================================================
With respect to 11 facilities which have been developed and then leased by the Company, development fees of $973,000 were deferred and amortized over the initial term of the lease as a reduction of rent expense. In January 1998, the Company sold certain assets and its leasehold rights related to these 11 facilities to newly formed special purpose entities for $2,645,000 and entered into management agreements with such entities. The Company has options to reacquire the leasehold interests in those facilities. The gain on such sale of $922,000 has also been deferred and is being amortized to operations over five years, the term of the management agreement. At June 30, 1998, the remaining unamortized development fees and gains with respect to these facilities were $1,702,000. The Company has entered into non-binding letters of intent aggregating $465 million with six health care REITs and one other financial institution (combined, the "Owners"). These letters of intent represent arrangements whereby the Owners will acquire existing facilities identified by the Company and lease them to special purpose entities or the Company. Initial lease rates under these arrangements are expected to range from 3.2% to 3.4% over the 10-year Treasury rate. Specific development projects and acquisitions require approval of the Owners prior to the financing of a transaction. At June 30, 1998, approximately $235 million of the $465 million had not been utilized and remained available to fund project development. The estimated total costs of the development contracts in process at June 30, 1998, primarily representing costs reimbursable from facility owners, were $170,000,000, of which $45,000,000 had been incurred through that date. Also, the Company had commitments of approximately $1,000,000 on projects in the pre-contract stage of development at June 30,1998. 4. RECEIVABLES Receivables consist of the following at June 30, 1998 and 1997:
1998 1997 - ------------------------------------------------------------------ Accounts receivable - patients and residents $ 9,015 $7,009 - ------------------------------------------------------------------ Contracts receivable: Development fees 2,198 6 Reimbursable costs due from facility owners 6,181 1,770 - ------------------------------------------------------------------ 8,379 1,776 - ------------------------------------------------------------------ Other receivables 3,152 59 - ------------------------------------------------------------------ Total receivables 20,546 8,844 Less allowance for doubtful receivables 916 330 - ------------------------------------------------------------------ Net receivables $19,630 $8,514 ==================================================================
5. ASSETS HELD FOR SALE/DIVESTITURES In June 1997, management determined that the Wisconsin market does not provide adequate opportunity to achieve the operational efficiencies necessary to operate profitably. As a result, the Company committed to a plan for the disposal of its Wisconsin assisted living facilities and recorded a non-cash charge of $1,591,000 to write those assets down to their estimated fair value. In July 1998, the Company entered into a letter of intent to sell the Wisconsin assisted living facilities to a midwestern-based company for $2,900,000, the closing of which is subject to the negotiation of a definitive asset purchase agreement. These facilities, have a carrying value of $2,800,000, at June 30, 1998. The transaction is expected to close by October 31, 1998. Facility operating losses of $699,000 and $381,000 are included with operations for the years ended June 30, 1998 and 1997, respectively. In October 1997, the Company completed the sale of its pharmacy operations for net proceeds of approximately $4,700,000. The pharmacy was classified as an asset held for sale at June 30, 1997. The sale resulted in a gain of $2,858,000. PAGE 26 BALANCED CARE CORPORATION 16 6. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following as of June 30 (dollars in thousands).
Estimated Useful Life 1998 1997 - ------------------------------------------------------------------ Land and land improvements 2-15 yrs $ 2,680 $ 418 Buildings and improvements 2-40 yrs 19,887 2,059 Fixed and moveable equipment 3-20 yrs 7,307 2,119 - ------------------------------------------------------------------ 29,874 4,596 Less: accumulated depreciation (2,012) (481) - ------------------------------------------------------------------ $27,862 $4,115 ==================================================================
Depreciation expense was $1,689,000, $477,000 and $47,000 the years, ended June 30, 1998, 1997 and 1996, respectively. 7. LONG-TERM DEBT Long-term debt consisted of the following as of June 30 (dollars in thousands):
1998 1997 - ---------------------------------------------------------------------------- Mortgage payable, interest at 10.7%; principal and interest due monthly through August 2006 based on 30-year amortization; unpaid principal and interest due August 2006 $3,103 $3,115 Mortgage payable, interest at 10.6%; principal and interest due monthly through 2006 based on 30-year amortization -- 5,044 Other (including capital lease obligations) 450 115 - ---------------------------------------------------------------------------- 3,553 8,274 Less: current portion 177 97 - ---------------------------------------------------------------------------- $3,376 $8,177 ============================================================================
In June 1998 the Company used proceeds remaining from the Offering to repay a $5,019,000 mortgage on the Wisconsin facilities. The remaining mortgage payable was incurred for the acquisition of two Missouri nursing homes. Commencing in the second year of the loan and thereafter, the Company will pay additional interest of up to 2.0% of the total principal and interest payments in the prior year based contingently on 20% of the increase in revenues of the facilities over the prior year. The mortgage note is collateralized by the facilities' property and equipment. In fiscal 1997 the Company issued a warrant to purchase approximately 460,000 shares of common stock exercisable at $.001 per share in connection with this financing. The value of the warrant of approximately $613,676 ($1.33 per share) has been recorded as deferred financing cost and a corresponding non-cash increase in additional paid-in capital. The interest cost and discount are being recognized as interest expense over the life of the mortgage using the effective interest method. At June 30, 1998, the aggregate maturities of long-term debt for the next five fiscal years ending June 30 are as follows (dollars in thousands): - -------------------------------- 1999 $ 177 2000 135 2001 105 2002 100 2003 35 Thereafter 3,001 - -------------------------------- $3,553 ================================
8. REDEEMABLE PREFERRED STOCK In September 1996 and March 1997, the Company completed a two-stage private offering of Series B Convertible Preferred Stock (Series B Stock) at $2.50 per share to a group of venture capital funds and certain other private investors who purchased 5,009,750 shares for proceeds of approximately $12.2 million, net of related transaction costs. Concurrent with the Offering, the Series B stock was converted into 3,757,312 shares of Common Stock (reflective of the three-for-four reverse split of Common Stock effective October 14, 1997). 9. STOCKHOLDERS' EQUITY The Company has outstanding warrants to purchase common shares as follows:
Number of Weighted-Average Shares Exercise Price - -------------------------------------------------------------------- Balance at July 1, 1995 -- -- Granted 45,928 $0.01 Exercised -- -- - -------------------------------------------------------------------- Balance at June 30, 1996 45,928 0.01 Granted 891,939 0.65 Exercised -- -- - -------------------------------------------------------------------- Balance at June 30, 1997 937,867 0.62 Granted 47,750 8.58 Exercised -- -- - -------------------------------------------------------------------- BALANCE AT JUNE 30, 1998 985,617 $1.00 ====================================================================
From September 1995 through September 1996 the Company completed a private offering of 1,150,958 shares of Series A Convertible Preferred stock to a single stockholder for proceeds of approximately $2,000,000. Concurrent with the Offering, these shares were converted into 863,218 shares of Common Stock (reflective of the three for four reverse split of Common Stock effective October 14, 1997). BALANCED CARE CORPORATION PAGE 27 17 BALANCED CARE CORPORATION 1998 ANNUAL REPORT 10. INCOME TAXES The provision for income tax expense for the years ended June 30, 1998, 1997 and 1996 consists of the following (dollars in thousands):
1998 1997 1996 - ------------------------------------------------------------------ Current Federal -- -- -- State $ 42 $53 $6 - ------------------------------------------------------------------ Total Current $ 42 $53 $6 - ------------------------------------------------------------------ Deferred Federal $557 -- -- State $ 81 -- -- - ------------------------------------------------------------------ Total Deferred $638 -- -- - ------------------------------------------------------------------ Total Income Tax Expense $680 $53 $6 ==================================================================
A reconciliation of income tax expense at the federal statutory rate of 34% to the Company's effective tax rate is as follows:
1998 1997 1996 - ------------------------------------------------------------------ Income taxes computed at statutory rate 34.0% (34.0)% (34.0)% State income taxes, net of federal benefit 6.0 (6.0) (6.6) Basis difference on assets sold 14.0 -- -- Other 11.2 1.3 2.0 Valuation allowance adjustment (49.2) 39.9 39.3 - ------------------------------------------------------------------ Effective tax rate 16.0% 1.2% 0.7% ==================================================================
Temporary differences giving rise to a significant amount of deferred tax assets and liabilities at June 30, 1998 and 1997 are as follows (dollars in thousands):
1998 1997 - ----------------------------------------------------------------------- Excess tax over book basis of fixed assets $ (125) $ (365) Development fee income 2,439 347 Lease proceeds (414) (146) Accrued expense (351) (99) Net operating loss (1,037) (1,721) Other 126 (108) - ----------------------------------------------------------------------- Net deferred tax liability (asset) 638 (2,092) Valuation allowance -- 2,092 - ----------------------------------------------------------------------- Deferred income tax liability (asset) $ 638 $ -- =======================================================================
The Company has net operating loss carryforwards at June 30, 1998 available to offset future federal and state taxable income, if any, of approximately $2,600,000 expiring through 2012 for federal tax purposes and $6,600,000 expiring through 2007 for state income tax purposes. The net operating losses are subject to limits on their future utilization under federal and state tax laws. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The change in the valuation allowance for deferred tax assets was an increase of $2,092,000 at June 30, 1997 and a decrease of $2,092,000 at June 30, 1998. 11. RETIREMENT PLAN On January 1, 1998 the Company formed a 401(k) savings plan which covers substantially all employees with one year and more than 1,000 hours of service. The plan allows employees to make tax deferred contributions to the plan. The Company makes matching contributions based on the amount of employee contributions; but in an amount that does not exceed 2% of wages. Matching contributions totaled approximately $64,000 for the year ended June 30, 1998. 12. STOCK OPTIONS The 1996 Stock Option Plan combines the features of an incentive and non-qualified stock option plan, a stock appreciation rights ("SAR") plan and a stock award plan (including restricted stock). The 1996 Plan is a long-term incentive compensation plan and is designed to provide a competitive and balanced incentive and reward program for participants. The Company has authorized 2,025,000 shares of common stock to be reserved for grants under the 1996 Plan. Options generally vest over a four-year period in cumulative increments of 25% each year beginning one year after the date of the grant and expire not later than five years from the date of grant. The options are granted at an exercise price at least equal to the fair market value of the common stock on the date of the grant. At June 30, 1998, the range of exercise prices, weighted-average remaining contractual life of outstanding options and shares exercisable were as follows:
Exercise Outstanding Weighted-Average Shares Price Options Contractual Life Exercisable - ------------------------------------------------------------------ $2.00 456,750 2.76 yrs. 286,412 $3.33 45,000 8.21 yrs. 45,000 $5.33 150,250 4.74 yrs. 60,065 $5.50 150,000 4.27 yrs. -- $6.50 185,550 4.49 yrs. -- $6.67 310,223 3.97 yrs. 78,641 $6.94-8.88 105,375 4.61 yrs. -- - ------------------------------------------------------------------ 1,403,148 470,118 ==================================================================
PAGE 28 BALANCED CARE CORPORATION 18
Stock option transactions are Number Weighted-Average summarized as follows: of Shares Exercise Price - ------------------------------------------------------------------ Granted in fiscal 1996 340,125 $2.00 - ------------------------------------------------------------------ Balance at June 30, 1996 340,125 2.00 Granted 673,300 5.16 Exercised (11,250) (2.00) Forfeited (15,000) (2.84) - ------------------------------------------------------------------ Balance at June 30, 1997 987,175 4.15 Granted 473,554 6.50 Exercised -- -- Forfeited (57,581) (6.15) - ------------------------------------------------------------------ BALANCE AT JUNE 30, 1998 1,403,148 $4.85 - ------------------------------------------------------------------
The Company applies APB Opinion No. 25 and related interpretations in accounting for its 1996 Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options as allowed under SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income (loss) and per share amounts would have changed to the pro forma amounts indicated below.
(In thousands except per share data) 1998 1997 1996 - -------------------------------------------------------------------------- NET INCOME (LOSS) As reported $3,575 $(4,492) $ (909) Pro forma $3,204 $(4,511) $ (910) - -------------------------------------------------------------------------- PRO FORMA BASIC EPS As reported $ 0.31 $ (0.66) $(0.34) Pro forma $ 0.28 $ (0.67) $(0.34) - -------------------------------------------------------------------------- PRO FORMA DILUTED EPS As reported $ 0.28 $ (0.66) $(0.34) Pro forma $ 0.25 $ (0.67) $(0.34) ==========================================================================
The fair value of the employee options for purposes of the above pro forma disclosure was estimated on the date of grant using the Black-Scholes Multiple Pricing Model. Assumptions used for options issued during the year ended June 30, 1998, and all prior options were as follows:
1998 1997 and 1996 - --------------------------------------------------------------------- Risk-free interest rate 5.5% TO 6.0% 5.5% to 6.0% Expected life 1 YEAR AFTER VEST 1 year after vest Expected volatility .42 .30 Expected dividends -- -- =====================================================================
These assumptions produced weighted average fair values per option of a range of $0.85 to $3.97 for options issued in fiscal 1998 and $0.41 for options issued in fiscal 1997 and 1996. All options issued during these periods were granted at an exercise price at, or in excess of, the fair market value on the grant date. 13. RELATED PARTY TRANSACTIONS The Company had the following related party transactions: - - Rental payments made to companies owned by a stockholder/director for the lease of two facilities and other items. Management fees paid to a company owned by the same stockholder/director for managing ten skilled nursing facilities owned or leased by the company. On July 1, 1997, the Company purchased the assets and operations of this management company for approximately $120,000. - - Respiratory therapy supplies and management fees paid to a company owned by a stockholder/director. - - Legal services provided by a relative of a stockholder/ officer and consulting services provided by two stockholders/directors. - - Rental payments to a company owned by two minority stockholders for the lease of seven skilled nursing facilities. - - Fees paid to an investment banking firm for finding acquisition targets and for raising private equity. A minority stockholder of the Company is an officer of this firm. A summary of those transactions for the periods ended June 30 follows (dollars in thousands):
1998 1997 1996 - ------------------------------------------------------------------ Rentals $ 415 $ 175 $-- Management fees 15 1,076 -- Respiratory therapy 152 731 -- Legal & consulting services 227 134 -- Skilled nursing facility rentals 4,627 3,877 -- Finder's fees -- 250 35 - ------------------------------------------------------------------
Accounts payable include approximately $4,000 and $648,000 related to these services at June 30, 1998 and 1997, respectively. 14. COMMITMENTS AND CONTINGENCIES LEASES The Company leases 13 assisted living facilities and 10 skilled nursing facilities, as well as certain equipment and office space under noncancellable operating and capital leases that expire at various times through 2011. Rental expense on such operating leases for the years ended June 30, 1998, 1997 and 1996 was $9,442,000, $5,417,000 and $77,000. At June 30, 1998 and 1997, property and equipment includes approximately $368,000 and $115,000 of assets that have been capitalized under capital leases. Amortization of the leased assets is included in depreciation and amortization expense. BALANCED CARE CORPORATION PAGE 29 19 BALANCED CARE CORPORATION 1998 ANNUAL REPORT Future annual minimum lease payments for the next five years and thereafter under capital leases and noncancellable operating leases with initial terms of one year or more in effect at June 30, 1998, are as follows (dollars in thousands):
Capital Operating Fiscal Year Leases Leases - ------------------------------------------------------------------------ 1999 $122 $ 9,759 2000 80 9,533 2001 42 8,867 2002 21 8,825 2003 10 8,794 Thereafter -- 45,471 - ------------------------------------------------------------------------ Total Minimum Lease Payments 275 $91,249 ======================================================================== Amount Representing Interest 42 - ------------------------------------------------------------------------ Present value of net minimum lease payments (including current portion of $100) $233 ========================================================================
The operating lease agreements require the payment of additional rent commencing in the second lease year of up to 2% of prior year rent based contingently upon increases in facility gross revenues. In addition, most of the facility leases have renewal options for periods ranging from 5 years to 24 years after the initial lease period. Contingent lease payments made during the year ended June 30, 1998 were $104,000; none in prior years. MANAGEMENT AGREEMENTS As discussed in note 3, the Company manages certain assisted living facilities owned by REITs and leased to special purpose entities owned by independent third parties (the "operator/lessees"). The Company has the option (but not the obligation) to purchase the stock or assets of the operator/lessee pursuant to an option agreement at an exercise price based on formulas set forth in the agreements. Certain option agreements require the Company to make periodic payments to maintain its option. At June 30, 1998 the Company had made option payments of $322,000 to three operator/lessees, which expire by March 31, 1999. Pursuant to shortfall funding agreements, the Company has agreed to make loans to the operator/lessees if the equity and working capital loans of the operator/lessee are depleted by negative cash flows from start up operations of the facilties. There were no loans outstanding at June 30, 1998. LITIGATION The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such a kind, or involve such amounts, that their unfavorable disposition would not have a material effect on the financial position, results of operations or the liquidity of the Company. 15. NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 131 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS No. 131). SFAS No. 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS NO. 131 is effective for the Company's financial statements in fiscal 1999. In the initial year of application, comparative information for earlier years is to be restated, unless it is impracticable to do so. The Company is currently assessing the effect of the pronouncement. SOP 98-5 In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 provides guidance as to the definition of costs of start-up activities, including organization costs, and provides that these costs should be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998; however, earlier application is encouraged for financial statements which have not been issued. The Company wrote off all costs of start-up activities in fiscal 1998 of approximately $250,000. PAGE 30 BALANCED CARE CORPORATION 20 16. QUARTERLY FINANCIAL INFORMATION (unaudited, in thousands except for diluted earnings (loss) per share)
First Second Third Fourth Full Quarter Quarter Quarter Year Year - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED JUNE 30, 1998: - --------------------------------------------------------------------------------------------------------------------- TOTAL REVENUE $19,138 $21,255 $25,286 $25,002 $90,681 - --------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $19,664 $22,681 $23,175 $22,681 $88,201 NET INCOME (LOSS) $ (657) $ 849 $ 1,347 $ 2,036 $ 3,575 PRO FORMA DILUTED EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.09 $ 0.10 $ 0.11 $ 0.28 Year ended June 30, 1997: - --------------------------------------------------------------------------------------------------------------------- Total revenue $ 4,372 $12,621 $14,953 $17,534 $49,480 - --------------------------------------------------------------------------------------------------------------------- Total operating expenses $ 4,928 $13,016 $15,335 $19,988 $53,267 - --------------------------------------------------------------------------------------------------------------------- Net loss $ (729) $ (583) $ (551) $(2,629) $(4,492) - --------------------------------------------------------------------------------------------------------------------- Pro forma diluted loss per share $ (0.16) $ (0.09) $ (0.07) $ (0.30) $ (0.66) - ---------------------------------------------------------------------------------------------------------------------
BALANCED CARE CORPORATION PAGE 31 21 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS BALANCED CARE CORPORATION: We have audited the consolidated balance sheets of Balanced Care Corporation as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Balanced Care Corporation as of June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Baltimore, Maryland August 20, 1998 PAGE 32 BALANCED CARE CORPORATION EX-21.1 66 BALANCED CARE CORPORATION 1 Exhibit 21.1 SIGNIFICANT SUBSIDIARIES OF BALANCED CARE CORPORATION BCC DEVELOPMENT AND MANAGEMENT CO. BCC INVESTMENT CORPORATION BCC AT HERMITAGE PARK CARE CENTER, INC. BCC AT LEBANON CARE CENTER, INC. BCC AT LEBANON PARK MANOR, INC. BCC AT NEVADA PARK CARE CENTER, INC. BCC AT NEVADA PARK TERRACE APARTMENTS, INC. BCC AT NIXA PARK CENTER, INC. BCC AT REPUBLIC PARK CENTER, INC. BCC AT SPRINGFIELD CARE CENTER, INC. BCC AT KINGSTON II, INC. BCC AT KINGSTON, INC. BCC AT BLAKELY, INC. BCC OF WISCONSIN, INC. BCC AT BLOOMSBURG, INC. BALANCED CARE AT BUTLER, INC. BCC AT MID-VALLEY, INC. BCC AT STATE COLLEGE, INC. BCC AT MT. VERNON PARK CARE CENTER, INC. DIXON MANAGEMENT, INC. BCC AT MT. ROYAL PINES, INC. BALANCED CARE AT NORTH RIDGE, INC. BCC AT DARLINGTON, INC. BALANCED CARE AT EYERS GROVE, INC. EX-23.1 67 BALANCED CARE CORPORATION 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Balanced Care Corporation The audits referred to in our report dated August 20, 1998 included the related financial statement schedule for each of the years in the three-year period ended June 30, 1998, included herein. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our report incorporated herein by reference to the June 30, 1998 annual report to the stockholders of Balanced Care Corporation. /s/ KPMG Peat Marwick LLP Baltimore, Maryland September 28, 1998 EX-27.1 68 BALANCED CARE CORPORATION
5 1,000 YEAR JUN-30-1998 JUL-1-1997 JUN-30-1998 15,481 0 19,630 916 0 41,648 27,862 2,012 85,972 15,266 0 0 0 17 61,842 85,972 90,681 90,681 0 88,201 0 0 1,798 4,255 680 3,575 0 0 0 3,575 .31 .28
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