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Loan Agreement- $ 12,770,000

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THIS LOAN AGREEMENT (this "Agreement") is made as of the 4th day of June, 1999, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company (together with its successors and assigns, the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, the "Lender").

R E C I T A L S:

1. Borrower has requested that the Lender make a loan to Borrower in the principal sum of $12,770,000 (the "Loan").

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

A G R E E M E N T:

NOW, THEREFORE, it is hereby agreed as follows:


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

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

"Acquisition Line" means the $40,000,000 non-revolving line of credit extended by the Lender to Advocat for the sole purpose of acquisitions of healthcare related facilities, pursuant to a Commitment Letter accepted October 22, 1996.



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

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

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

"Allocated Loan Amount" means, with respect to a Facility, the portion of the Loan allocated to such Facility, as set forth on Schedule A attached hereto.

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

"Assignment of Licenses" means that certain Assignment of Licenses, Permits and Contracts executed by the Borrower in favor of the Lender.

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

"Bridge Loan" means the loan to Diversicare Assisted Living Services NC, LLC extended by the Working Capital Lender and AmSouth Bank.

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

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

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

"Commitment Letter" means the commitment letter issued by Lender to Borrower dated February 19, 1999.

"Debt Service Coverage" means a ratio in which the first number is the sum of net pre-tax income of the Borrower from the normal operations of a Facility as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred),



calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense, to the extent deducted in determining net income, plus non-cash expenses or allowances for depreciation and amortization of the Facility for said period, less either Assumed Management Fees or Actual Management Fees, as applicable, and the second number is the sum of the scheduled principal amounts due (even if not paid) on such Facility's Allocated Loan Amount (excluding the amount of any prepayment made during such period) for the applicable period plus the interest expense on such Facility's Allocated Loan Amount for the applicable period. In calculating "pre-tax income", Extraordinary Income and Extraordinary Expenses shall be excluded.

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

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

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

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

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

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

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

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



"Facilities" means the six (6) adult care facilities described on Schedule A attached hereto, as they may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any skilled care facilities), now or hereafter operated on the Property; each of the Facilities, individually, is herein called a "Facility".

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

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

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

"Guarantors" mean Advocat, Diversified Management Services Co., Advocat Finance, Inc., Diversicare Assisted Living Services, Inc., Diversicare Assisted Living Services NC, LLC and Diversicare Assisted Living Services NC II, LLC.

"Guaranty Agreements" means those certain Guaranty Agreements of even date herewith from Guarantors to Lender.

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

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



Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs.

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

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

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

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

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

"Loan" means the Loan in the principal sum of $12,770,000 made by Lender to Borrower as of the date hereof.

"Loan Documents" means, collectively, this Agreement, the Assignment of Leases and Rents, the Note, the Environmental Reserve Agreement, the Assignment of Licenses, the Guaranty Agreements, the Mortgage, and the Subordination Agreement, together with any and all other documents executed by Borrower or others, evidencing, securing or otherwise relating to the Loan.



"Loan Obligations" means the aggregate of all principal and interest owing from time to time under the Note and all expenses, charges and other amounts from time to time owing under the Note, this Agreement, or the other Loan Documents, together with the Borrower's obligations, as a Guarantor, for the Related Loan, and all covenants, agreements and other obligations of Borrower from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents.

"Management Agreement" means that certain Management Agreement dated as of May 26, 1999, by and between Manager and Borrower, obligating the Manager to operate and manage the Facilities.

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

"Maturity Date" means July 1, 2002.

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

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

"Mortgage" means collectively those certain Deeds of Trust and Security Agreements, of even date herewith, from the Borrower in favor of or for the benefit of Lender and covering the Property.

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

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

"Overline Facility" means the $10,000,000 temporary working capital loan extended by the Working Capital Lender to Advocat.

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



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

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

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

"Property" means the tracts of real estate located in North Carolina, which are more particularly described in Exhibit "A" hereto, upon which the Facilities are located.

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

"Related Loan" means that certain loan in the principal amount of $12,480,000 extended by the Lender to Diversicare Assisted Living Services NC II, LLC, an Affiliate of the Borrower.

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

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

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

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

"Working Capital Lender" means First American National Bank, a national banking association with a principal place of business in Nashville, Tennessee.



"Working Capital Loan" means the $10,000,000 line of credit extended by the Working Capital Lender to Advocat and certain of the Guarantors, secured by, among other collateral, a first lien on the Borrower's Accounts.

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

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

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

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

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


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

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

2.3 RELEASE OF A FACILITY. So long as no Event of Default has occurred and is continuing, a Facility may be released from the lien and security interest of the Mortgage and the other Loan Documents if, after giving effect to such release, the Facilities remaining subject to the Mortgage and the other Loan Documents would have a combined Debt Service Coverage equal to the greater of (a) 1.25 to 1.0 or (b) the Debt Service Coverage for all Facilities (including the to-be-released Facility) for the testing period immediately preceding such proposed release. The provisions of this Section 2.3 may be utilized by the Borrower in the event of a sale or refinancing of a Facility, and the damage, destruction or condemnation of a Facility.




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

3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and validly existing limited liability company, organized under the laws of the State of Delaware, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary, specifically including, without limitation, the State of North Carolina.

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

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

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


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

b. Condemnation or Casualty. There are no proceedings pending, or, to the best of Borrower's knowledge, threatened, to acquire through the exercise of any power of condemnation, eminent domain or similar proceeding any part of the Property, the Improvements or any interest



therein, or to enjoin or similarly prevent or restrict the use of the Property or the operation of any Facility in any manner. None of the Improvements is subject to any unrepaired casualty or other damage.

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

3.7 COMPLIANCE WITH FACILITY LAWS. Each Facility is duly licensed and is currently operated at the unit and/or bed level shown on Exhibit "F" attached hereto, under the applicable laws of the state where the Property is located. Borrower is the lawful owner of all Permits for each Facility, including, without limitation, the Adult Care Home License issued by the North Carolina Department of Health and Human Services (the "Adult Care Home License"), which (a) are in full force and effect, (b) constitute all of the permits, licenses and certificates required for the use, operation and occupancy thereof, (c) have not been pledged as collateral for any other loan or Indebtedness, (d) are held free from restrictions or any encumbrance which would materially adversely affect the use or operation of any Facility, and (e) are not provisional, probationary or restricted in any way. The Borrower and Manager as well as the operati
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