CAPITAL SENIOR LIVING CORP, S-1/A, 1997-10-01

CAPITAL SENIOR LIVING CORP
S-1/A, 1997-10-01
NURSING & PERSONAL CARE FACILITIES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997

REGISTRATION NO. 333-33379
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 2

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CAPITAL SENIOR LIVING CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<C> <C> <C>
DELAWARE 8361 75-2678809
(State or other jurisdiction of (Primary industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
14160 DALLAS PARKWAY, SUITE 300 DAVID R. BRICKMAN, ESQ.
DALLAS, TEXAS 75240 CAPITAL SENIOR LIVING CORPORATION
(972) 770-5600 14160 DALLAS PARKWAY, SUITE 300
(Address, including zip code, and telephone DALLAS, TEXAS 75240
number, (972) 770-5600
including area code, of registrant's principal (Name, address, including zip code,
executive offices and principal place of and telephone number, including
business) area code, of agent for service)
</TABLE>

---------------------
Copies to:

<TABLE>
<C> <C>
L. STEVEN LESHIN, ESQ.
JENKENS & GILCHRIST, ROBERT E. KING, JR., ESQ.
A PROFESSIONAL CORPORATION ROGERS & WELLS
1445 ROSS AVENUE, SUITE 3200 200 PARK AVENUE
DALLAS, TEXAS 75202 NEW YORK, NEW YORK 10166
(214) 855-4500 (212) 878-8000
</TABLE>

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED OCTOBER 1, 1997

PROSPECTUS
9,000,000 Shares

Capital Senior Living Corporation

[LOGO] Common Stock
---------------------------

Capital Senior Living Corporation (the "Company") is one of the five largest
providers of senior living services in the United States. The Company currently
owns interests in and/or operates 33 communities in 17 states with a capacity of
approximately 5,000 residents, including 17 communities in which it owns
interests, 15 communities that it manages for third parties pursuant to
multi-year management contracts and one community that it leases from a third
party.

All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by the Company. See
"Use of Proceeds." Prior to the Offering, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. At the request of the Company, up to 450,000 shares of
Common Stock have been reserved for sale in the Offering to certain individuals,
including directors and employees of the Company, members of their families, and
other persons having business relationships with the Company. See
"Underwriting." Application has been made to have the Common Stock approved for
listing on the New York Stock Exchange under the symbol "CSU."

---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)................................. $ $ $
==================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering, estimated at $ payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,350,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will total $ , $ , and
$ , respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., in New York, New York on or
about , 1997.
---------------------------
LEHMAN BROTHERS
J.C. BRADFORD & CO.
SMITH BARNEY INC.

, 1997.
<PAGE> 3

Inside cover page to include:

- Company logo

- map of U.S. showing locations of the Company's owned, managed and leased
communities

- exterior photos of the Veranda Club and Independence Village

- interior photos of Veranda Club and Independence Village

- photos of residents engaging in activities

- photos of construction projects

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON STOCK FOR THE PURPOSE OF MAINTAINING THE
PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless indicated otherwise or the context suggests
otherwise, references in this Prospectus to the "Company" mean Capital Senior
Living Corporation and its subsidiaries and predecessor entities and the
Acquired Assets (as defined herein). Unless otherwise indicated, the information
in this Prospectus assumes: (i) the completion of the reorganization of the
Company and related transactions (the "Formation," as more specifically
described under "The Company -- Formation Transactions") simultaneously with the
completion of the Offering; (ii) no exercise of the Underwriters' over-allotment
option; and (iii) an initial public offering price of $12.00 per share (which
represents the mid-point of the range set forth on the cover page of this
Prospectus and which affects the number of shares and the amount of proceeds to
be received by the parties in the Formation Transactions and the calculation of
the net proceeds from the Offering). See "The Company -- Formation Transactions"
and "Underwriting."

THE COMPANY

The Company is one of the five largest providers of senior living services
in the United States in terms of 1996 resident capacity, according to the
Assisted Living Federation of America's Annual Largest Provider Survey. The
Company currently owns interests in and/or operates 33 communities in 17 states
with a capacity of approximately 5,000 residents, including 17 communities in
which it owns interests, 15 communities that it manages for third parties
pursuant to multi-year management contracts and one community that it leases
from a third party. The Company is currently developing 17 new communities which
will have a capacity of approximately 3,130 residents and is expanding 12
existing communities to accommodate 994 additional residents. The Company also
operates one home health care agency. Approximately 93% of the Company's
revenues and reimbursable expenses are derived from private pay sources. At June
30, 1997, communities which the Company operates and in which it owns interests
had an occupancy rate of approximately 95%, its managed communities had an
occupancy rate of approximately 95%, and its leased community had an occupancy
rate of approximately 95%. The Company and its predecessors have provided senior
living services since 1990.

The senior living services industry encompasses a broad and diverse range
of living accommodations and health care services that are provided primarily to
persons 65 years of age or older. For the elderly who require limited services,
care in independent living ("IL") residences, supplemented at times by home
health care, offers a viable option. Most independent living residences and
retirement centers typically offer community living together with a basic
services package consisting of meals, housekeeping, laundry, security,
transportation, social and recreational activities and health care monitoring.
As a senior's need for assistance increases, care in an assisted living ("AL")
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24-hour a day personal support services designed to aid elderly
residents with activities of daily life ("ADLs"), such as ambulation, bathing,
dressing, eating, grooming, personal hygiene and monitoring or assistance with
medications. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs (generally consisting of assistance and
reminders to residents that suffer from short periods of memory loss and
dementia, including reminders regarding medications), or may offer higher levels
of personal assistance for incontinent residents or residents with Alzheimer's
disease or other cognitive or physical frailties. Generally, assisted living
residents require higher levels of care than residents of independent living
residences and retirement living centers, but require lower levels of care than
patients in skilled nursing ("SN") facilities. For seniors who need the constant
attention of a skilled nurse or medical practitioner, a skilled nursing facility
may be required.

The Company believes that the senior living services industry will require
large capital infusions over the next 30 years to meet the growing demand for
senior living facilities. The National Investment Conference has estimated that
gross capital expenditures for the senior living marketplace will grow from $86
billion in 1996 to $126 billion in 2005 and to $490 billion in 2030, in order to
accommodate increasing demand for senior living services.
3
<PAGE> 5

The Company's operating philosophy emphasizes a "continuum of care" which
integrates independent living, assisted living, skilled nursing and home health
care and provides senior citizens with the opportunity to "age in place." The
Company is a fully integrated senior living services organization, with internal
capabilities to operate, expand, develop, and acquire "purpose-built" senior
living communities (i.e., communities designed for the efficient delivery of
senior living services). The Company believes that its size, national scope and
comprehensive information systems provide it with economies of scale in its
operations and a platform for future growth. The Company anticipates that these
factors will position it to capitalize on emerging trends in the senior living
services industry and provide it with a competitive advantage.

The Company has built a senior management team that it believes is one of
the most experienced in the acquisition, development, and operation of senior
living communities. The Company was founded by its co-chairmen Jeffrey L. Beck
and James A. Stroud, who together have 35 years of experience in the residential
and senior living services industries. The Company's eight executive officers
have an average of 17 years of industry experience. In addition, the Company's
14 executive, regional and district officers have an average of 14 years of
industry experience, and its 26 on-site executive directors have an average of
12 years of industry experience. The Company's senior management will own
approximately 51% of the outstanding shares of Common Stock after giving effect
to the Offering.

The Company has distinguished itself from many of its competitors because
it has been profitable in each quarter since 1992. The Company's management team
has created substantial value through the intensive management of its
communities. From 1992 through 1996, the Company achieved a compounded annual
growth rate in net operating income before depreciation and amortization of
15.4% for the nine senior living communities in which the Company owned
interests and operated during that period. During the same period, revenues for
such communities increased by a compounded annual growth rate of 5.4%, while
expenses for such communities increased by a compounded annual growth rate of
2.9%.

Growth Strategies

The Company believes its current operations throughout the United States
provide an established foundation for continued growth and that it has
implemented the systems and attracted the personnel necessary to support its
future growth plans. The Company plans to continue its growth principally
through the following strategies:

- Expand Existing Communities. The Company plans to expand certain of its
existing communities to include additional independent living and
assisted living residences (including special programs and living units
for residents with Alzheimer's and other cognitive and physical
frailties), and skilled nursing beds. The Company believes that the
incremental returns on expansion projects are attractive because they
enable the Company to spread the fixed costs associated with a single
location over more units and to capitalize on a community's existing
market presence. Moreover, expansions provide the Company with more
flexible capacity to accommodate residents as they "age in place."

The Company currently has 12 expansion projects which it expects to
complete in 1998 and 1999, representing an aggregate increase in capacity
of 994 residents. The Company or its strategic partners have purchased the
land associated with six of the planned expansion projects, with an
additional six parcels under contract to be acquired.

- Develop New Communities. The Company's senior management has developed in
excess of $350 million of senior living communities. In selected markets,
the Company is developing new senior living communities that are designed
to provide a quality lifestyle that is attractive to a large segment of
the senior population. Markets are chosen based on a variety of factors,
including demographic and economic factors, the supply of existing or
potential senior living communities, as well as potential economies of
scale that the Company may achieve through the clustering of communities
in a given region. The Company plans to develop new communities,
including its proprietary "Waterford" communities, which will be designed
to provide middle-income seniors with amenities comparable to communities
with higher resident fee structures. The Company plans to develop these
communities for its own account, as well as in alliances with for-profit
and not-for-profit organizations.

4
<PAGE> 6

The Company has commenced development of 17 senior living communities
which are expected to be completed by 1999. Of these 17 new communities,
11 will be Waterford communities (with an expected capacity of
approximately 1,496 residents). The Waterford communities will be
developed pursuant to an arrangement with an affiliate under which the
affiliate will fund the construction and lease-up costs and will pay the
Company a fee for development and management services. The Company will
have options to purchase or lease the Waterford communities upon their
completion. See "Certain Transactions -- Tri Point Development Agreement."
In addition, six senior living communities are expected to be developed in
strategic alliances with third parties (with an expected capacity of
approximately 1,694 residents). The Company or its strategic partners have
purchased the land associated with four of the planned development
projects, with an additional two parcels under contract to be acquired. Of
the 17 new communities under development, four are to be owned by Buckner
Retirement Services, Inc., two are to be owned by LCOR Incorporated and 11
are to be owned by Tri Point Communities, L.P.

The Company has executed a joint venture agreement pursuant to which it
will form an entity to develop and operate senior living communities in
major cities in the Peoples Republic of China. The Company currently
expects that, following its initial development of senior living
communities in China, the joint venture will sell individual units in the
communities to prospective residents, and the Company will retain the
operating responsibilities and management fees associated with such
communities.

- Pursue Strategic Acquisitions. The Company believes that the fragmented
nature of the senior living services industry, combined with the
Company's financial resources, national presence and extensive industry
relationships, should provide it with ample acquisition opportunities.
The Company intends to continue to: (i) increase its ownership interests
in certain communities in which it already possesses an interest; (ii)
pursue single or portfolio acquisitions of senior living communities; and
(iii) pursue strategic acquisitions of other senior living companies as
the industry consolidates.

- Expand Home Health Care Services. The Company plans to establish or
acquire additional home health care agencies to permit it to expand the
range of services that it offers at its senior living communities. In
addition, home health care services are planned to be offered in many of
the Company's newly-developed communities and expanded communities. The
Company currently intends to establish approximately five new home health
care agencies at its owned communities by the fourth quarter of 1998.

The Company believes that it will have significant capacity to fund
additional growth by virtue of its capital structure. Upon completion of the
Offering, the Company's ratio of debt-to-total market capitalization (i.e.,
total indebtedness divided by the sum of total indebtedness plus the market
value of outstanding Common Stock) will be approximately 3%, and at June 30,
1997, on a pro forma basis after giving effect to the Offering, the Company
would have had cash and cash equivalents of approximately $21.7 million.

The success of the Company's growth strategy will depend, in large part, on
the Company's ability to effectively integrate the operations and assets
acquired in the Formation Transactions, as well as new senior living communities
that are acquired or developed. In addition, the Company will need to
effectively manage the varying sources of revenue resulting from the Company's
ownership, management and development of senior living communities and home
health care agencies. See "Risk Factors -- No Assurance as to Ability to Manage
Growth," "-- Risks in Acquisitions of Communities and Complementary Businesses;
Difficulties of Integration," and "-- Risks Associated with Third-Party
Management Business."

5
<PAGE> 7

THE OFFERING

Common Stock offered by the
Company.................. 9,000,000 shares

Common Stock to be
outstanding after the
Offering................. 18,367,347 shares (1)

Use of proceeds............ The net proceeds to the Company from the Offering
will be used to repay indebtedness incurred by the
Company to acquire assets in the Formation
Transactions, to fund development activities and to
repay indebtedness to affiliates. Any remaining
balance will be used for general corporate
purposes, including working capital, and may be
used to purchase additional interests in the
Company's existing senior living communities. An
affiliate of Lehman Brothers Inc. ("Lehman"), the
lead managing underwriter of the Offering, will
receive net proceeds in reduction of a secured loan
made by the Lehman affiliate prior to the Offering.
See "Use of Proceeds," "Certain
Transactions -- LBHI Loan" and "Underwriting."

Proposed New York Stock
Exchange symbol.......... CSU

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

(1) Does not include 782,500 shares of Common Stock reserved for issuance
pursuant to outstanding stock options under the Company's 1997 Omnibus Stock
and Incentive Plan (the "1997 Stock Incentive Plan"), which options are
exercisable at the initial public offering price. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan"
and "Description of Capital Stock."

6
<PAGE> 8

SUMMARY FINANCIAL DATA

The following sets forth summary combined financial and operating
information for the Company: (i) on a historical basis for each of the periods
and dates indicated; and (ii) on a pro forma basis for each of the periods and
dates indicated. The following information should be read in conjunction with
the financial statements and notes thereto of the Company included elsewhere in
this Prospectus. The historical financial information for the Company as of and
for the fiscal years ended December 31, 1996, 1995 and 1994 has been derived
from the Company's historical financial statements audited by Ernst & Young LLP,
independent auditors, whose report with respect thereto is included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------- ------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994
------------ ------- ------ ------------ ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Resident and health care revenue........ $10,428 $10,428 $6,955 $16,662 $13,692 $13,238 $12,761
Rental and lease income................. 2,158 2,158 648 5,691 1,101 1,231 1,235
Unaffiliated management services
revenue............................... 949 949 53 801 801 -- --
Affiliated management services
revenue............................... 701 701 1,419 1,753 2,708 2,778 3,113
Development fees........................ 370 370 -- 674 673 -- --
Other................................... 461 461 438 924 924 871 800
------- ------- ------ ------- ------- ------- -------
Total revenues...................... 15,067 15,067 9,513 26,505 19,899 18,118 17,909
------- ------- ------ ------- ------- ------- -------
Expenses:
Operating expenses...................... 8,080 8,080 5,394 13,526 10,798 10,287 10,142
General and administrative
expenses(2)........................... 2,000 3,933 2,465 4,967 5,493 4,364 4,595
Depreciation and amortization........... 994 950 779 2,140 1,481 1,776 1,707
------- ------- ------ ------- ------- ------- -------
Total expenses...................... 11,074 12,963 8,638 20,633 17,772 16,427 16,444
------- ------- ------ ------- ------- ------- -------
Income from operations.................... 3,993 2,104 875 5,872 2,127 1,691 1,465
Other income (expense):
Interest income......................... 722 794 206 362 432 368 122
Interest expense........................ (344) (419) (75) (966) (221) (278) (261)
Gain on sale of properties(3)........... -- -- -- 825 438 -- --
Equity in earnings on investments....... -- -- 398 -- 459 -- --
Other................................... -- -- 26 (72) 42 -- (16)
------- ------- ------ ------- ------- ------- -------
Income before income taxes and minority
interest in combined partnerships....... 4,371 2,479 1,430 6,021 3,277 1,781 1,310
Provision for income taxes(4)............. -- -- -- -- -- (18) (130)
------- ------- ------ ------- ------- ------- -------
Income before minority interest in
combined partnerships................... 4,371 2,479 1,430 6,021 3,277 1,763 1,180
Minority interest in combined
partnerships............................ (395) (1,266) (650) (527) (1,224) (760) (634)
------- ------- ------ ------- ------- ------- -------
Net income................................ $ 3,976 $ 1,213 $ 780 $ 5,494 $ 2,053 $ 1,003 $ 546
======= ======= ====== ======= ======= ======= =======
Pro Forma Net Income (unaudited):(5)
Net income................................ $ 3,976 $ 1,213 $ 5,494 $ 2,053
Pro forma income taxes.................... (1,571) (479) (2,170) (811)
------- ------- ------- -------
Pro forma net income...................... $ 2,405 $ 734 $ 3,324 $ 1,242
======= ======= ======= =======
Pro forma net income per share data:
Pro forma net income per share.......... $ 0.13 $ 0.18
======= =======
Shares used in computing pro forma net
income per share(1)................... 18,367 18,367
======= =======
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31,
-------------------------- ---------------------------
PRO FORMA(1) HISTORICAL 1996 1995 1994
------------ ---------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $21,663 $13,199 $10,819 $10,017 $ 8,799
Working capital........................................... 21,083 5,138 9,567 6,784 5,938
Total assets.............................................. 86,879 56,634 33,203 29,747 29,913
Long-term debt, including current portion................. 6,946 13,613 666 2,687 2,192
Equity.................................................... 67,430 18,789 17,201 14,447 12,495
</TABLE>

7
<PAGE> 9

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994
------------ ----- ----- ------------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Facilities:
Owned(6)................................... 17 17 19 17 17 20 23
Managed for third parties.................. 15 15 1 15 15 -- --
Leased from third party(7)................. 1 1 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
33 33 20 32 32 20 23
===== ===== ===== ===== ===== ===== =====
Resident capacity:
Owned(6)................................... 2,572 2,572 2,840 2,572 2,572 2,949 3,250
Managed for third parties.................. 2,372 2,372 117 2,325 2,325 -- --
Leased from third party(7)................. 98 98 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
5,042 5,042 2,957 4,897 4,897 2,949 3,250
===== ===== ===== ===== ===== ===== =====
Occupancy rates(8):
Owned and operated(9)...................... 95% 95% 91% 92% 92% 91% 89%
Managed for third parties(10).............. 95% 95% -- 94% 94% -- --
Leased from third party(7)................. 95% 95% -- -- -- -- --
</TABLE>

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

(1) Gives effect to the consummation of the Offering and the completion of the
Formation Transactions (as more specifically described under "Prospectus
Summary -- The Offering," "The Company -- Formation Transactions," and "Use
of Proceeds") as if they had occurred on January 1, 1996 for the statement
of income data and on June 30, 1997 for the balance sheet data.

(2) General and administrative expenses include officers' salaries of
$2,600,000 and $1,658,000 for the six months ended June 30, 1997 and 1996,
respectively, and $3,372,000, $2,976,000 and $3,443,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. These amounts are primarily
comprised of salaries and bonuses paid to the founders and were based in
part on Federal income tax regulations regarding distributions of closely
held corporations and S corporations. After the Offering, these Federal
income tax regulations will no longer apply to the Company and the pro
forma amounts include approximately $378,000 and $189,000 for founders'
salaries and bonuses for the year ended December 31, 1996 and the six
months ended June 30, 1997, respectively, which are based on the founders'
employment agreements. See "Management -- Employment Agreements."

(3) The historical statement of income for the year ended December 31, 1996
includes a gain of $438,000 on the sale of two multi-family rental
properties on November 1, 1996. The pro forma statement of income for the
year ended December 31, 1996 also includes the sale of one community on May
1, 1996 which resulted in: (i) a gain of $387,000 representing the
difference between the carrying value of the community and the sales
proceeds; and (ii) an extraordinary gain of $953,000 (which is not
reflected in the pro forma statement of income).

(4) A provision for income taxes was recorded by the Company from inception
through February 1, 1995. No provision for income taxes has been recorded
after February 1, 1995 as the operating companies included in the
historical combined financial statements are S corporations or partnerships
and accordingly are not subject to income taxes.

(5) The provision for income taxes to arrive at pro forma net income assumes a
combined Federal and state effective income tax rate of 39.5%.

(6) Includes communities in which the Company owns interests and which it
operates, and communities in which the Company owns interests and which are
operated by third parties under leases which were in place when the Company
acquired its interests. See "Business -- Operating Communities."

(7) The Company has managed this community from September 1, 1996 through May
31, 1997 and acquired a leasehold interest in it effective June 1, 1997.

(8) Occupancy rates are based on the ratio of occupied units to total available
units for independent and assisted living residences, and occupied beds to
available beds on a per diem basis for skilled nursing beds as of the end
of each period.

(9) Does not include communities owned by the Company and leased to third
parties pursuant to leases under which the Company receives rent regardless
of whether the units are occupied. See "Business -- Operating Communities."

(10) Does not include occupancy information on Buckner Westminster Place and
Buckner Haven. See "Business -- Operating Communities."
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RISK FACTORS

An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Stock in the Offering.

NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH

The Company intends to expand its operations through the development,
expansion and acquisition of senior living communities, as well as through the
expansion of the Company's home health care services. The success of the
Company's growth strategy will depend, in large part, on its ability to
effectively operate such communities or home health care agencies, as to which
there can be no assurance. The Company's growth plans will also place
significant demands on the Company's management and operating personnel. The
Company's ability to manage its future growth effectively will require it to
continue to attract, retain, train, motivate, and manage key employees. If the
Company is unable to manage its growth effectively, its business, results of
operations, and financial condition may be adversely affected. See
"Business -- Growth Strategies" and "Management -- Executive Officers, Directors
and Key Employees."

NO ASSURANCE AS TO ABILITY TO DEVELOP AND EXPAND ADDITIONAL SENIOR LIVING
COMMUNITIES

An integral component of the Company's growth strategy is to develop,
expand and acquire senior living communities. As part of its growth strategy,
the Company is currently developing 17 new senior living communities, with an
estimated aggregate capacity for 3,130 residents, and is expanding 12 existing
senior living communities to add capacity to accommodate an additional 994
residents. The Company's ability to successfully develop and expand senior
living communities will depend on a number of factors, including, but not
limited to, the Company's ability to acquire suitable development sites at
reasonable prices; the Company's success in obtaining necessary zoning,
licensing, and other required governmental permits and authorizations; and the
Company's ability to control construction costs and accurately project
completion schedules. In addition, the Company's development and expansion plans
are subject to numerous factors over which it has little or no control,
including competition for developable properties; shortages of labor or
materials; changes in applicable laws or regulations or their enforcement; the
failure of general contractors or subcontractors to perform under their
contracts; strikes; and adverse weather conditions. As a result of these
factors, there can be no assurance that the Company will not experience
construction delays, that it will be successful in developing and constructing
currently planned or additional senior living communities, or that any developed
senior living communities will be economically successful. If the Company's
development and expansion schedule is delayed, the Company's growth plans could
be adversely affected. Additionally, the Company anticipates that the
development and expansion of senior living communities may involve a substantial
commitment of capital for a period of time of two years or more until the
communities are operating and producing revenue, the consequence of which could
be an adverse impact on the Company's liquidity. In addition, there can be no
assurance that once operating, such communities will be profitable. See
"Business -- Growth Strategies."

RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES
OF INTEGRATION

The Company may make strategic acquisitions of senior living communities
(which may include a variety of independent living, assisted living, and skilled
nursing communities), home health care agencies, and other properties or
businesses that are complementary to the Company's operations and growth
strategy. The acquisition of existing communities or other businesses involves a
number of risks. Existing communities available for acquisition frequently serve
or target different markets than those presently served by the Company. The
Company may also determine that renovations of acquired communities and changes
in staff and operating management personnel are necessary to successfully
integrate such communities or businesses into the Company's existing operations.
The costs incurred to reposition or renovate newly acquired communities may not
be recovered by the Company. In undertaking acquisitions, the Company also may
be adversely impacted by unforeseen liabilities attributable to the prior
operators of such communities or businesses, against whom the Company may have
little or no recourse. The success of the Company's

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<PAGE> 11

acquisition strategy will be determined by numerous factors, including the
Company's ability to identify suitable acquisition candidates; the competition
for such acquisitions; the purchase price; the requirement to make operational
or structural changes and improvements; the financial performance of the
communities or businesses after acquisition; the Company's ability to finance
the acquisitions; and the Company's ability to integrate effectively any
acquired communities or businesses into the Company's management, information,
and operating systems. There can be no assurance that the Company's acquisition
of senior living communities and complementary properties and businesses will be
completed at the rate currently expected, if at all, or, if completed, that any
acquired communities or businesses will be successfully integrated into the
Company's operations.

OFFERING TO BENEFIT EXISTING STOCKHOLDERS; CONFLICTS OF INTEREST

Simultaneously with the completion of the Offering, the Company will
complete the Formation Transactions, which will benefit the existing
stockholders of the Company. The Company will use a substantial portion of the
net proceeds of the Offering to complete the Formation Transactions and repay
the Formation Note (as defined herein). At the mid-point, low end and high end
of the price range set forth on the cover page of this Prospectus, the principal
amount of the Formation Note would be $12.7 million, $8.8 million, and $17.1
million, respectively. The Formation Transactions were not the result of arms'
length negotiations. Although the price to be paid by the Company for certain of
the assets to be acquired in the Formation Transactions from a related party was
based on a third-party appraisal of the estimated value of those assets, the
consideration to be paid to the Company's existing stockholders in exchange for
the contribution of certain other assets to be acquired in the Formation
Transactions was not based upon a third-party appraisal of those assets. There
can be no assurance that the value of any of the assets acquired or contributed
in the Formation Transactions are equivalent to the consideration to be paid by
the Company. See "The Company -- Formation Transactions," "Use of Proceeds," and
"Certain Transactions."

The Company expects to continue to be a party to certain transactions with
affiliates, as described in "Certain Transactions." The Company has implemented
a policy requiring any material transaction (or series of related transactions)
between the Company and related parties to be approved by a majority of the
directors who have no beneficial or economic interest in such related party upon
such directors' determination that the terms of the transaction are no less
favorable to the Company than those that could have been obtained from third
parties. See "Management -- Executive Officers, Directors and Key Employees" and
"Certain Transactions -- Policy of the Board of Directors."

RISKS ASSOCIATED WITH THIRD-PARTY MANAGEMENT BUSINESS

The Company currently manages 15 senior living communities for third
parties pursuant to multi-year management contracts. The management contracts
have terms of between four and 15 years. While the management contracts are
generally terminable by the community owner only for cause, in certain cases the
community owner may terminate the contract upon 30 days' notice to the Company
in the event of a sale of the community. In those contracts which are terminable
in the event of a sale of the community, the Company has certain rights to offer
to purchase the community. In addition, certain of the management contracts are
based on a fixed fee. To the extent that the costs associated with providing
services under such contracts increase faster than the fees established under
such contracts, the Company's earnings could be reduced. The factors affecting
the financial performance of communities managed under contracts with third
parties do not vary substantially from the factors affecting performance of
owned communities, although the risk of termination related to managed
communities is qualitatively different from certain risks associated with owned
communities, such as liabilities of a property owner for compliance with
environmental laws. See "Business -- Third-Party Management Contracts."

CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS

Upon completion of the Offering, the Company's officers and directors and
entities controlled by them will, collectively, beneficially own approximately
51% of the outstanding shares of Common Stock (approximately 48% if the
Underwriters' over-allotment option is exercised in full). Accordingly, such
persons will

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<PAGE> 12

have the ability, by voting their shares in concert, to control the election of
the Company's Board of Directors and the outcome of all other matters submitted
to the Company's stockholders. Furthermore, such influence could deter any
unsolicited acquisition of the Company and, consequently, adversely affect the
market price of the Common Stock. See "Principal Stockholders."

INCREASING COMPETITION

The senior living services industry is highly competitive, and the Company
expects that all segments of the industry will become increasingly competitive
in the future. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
services and care alternatives. Although the Company believes there is a need
for senior living communities in the markets where the Company is operating and
developing residences, the Company expects that competition will increase from
existing competitors and new market entrants, some of whom may have
substantially greater financial resources than the Company. In addition, some of
the Company's competitors operate on a not-for-profit basis or as charitable
organizations and have the ability to finance capital expenditures on a
tax-exempt basis or through the receipt of charitable contributions, neither of
which are available to the Company, except indirectly through its alliances with
not-for-profit organizations. Furthermore, if the development of new senior
living communities (particularly given the current rapid pace of development of
new senior living communities) outpaces the demand for such communities in the
markets in which the Company has or is developing senior living communities,
such markets may become saturated. An oversupply of such communities in the
Company's markets could cause the Company to experience decreased occupancy,
reduced operating margins, and lower profitability. See
"Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the services of its executive officers
(particularly the Company's Co-Chairman and Chief Executive Officer, Jeffrey L.
Beck, and the Company's Co-Chairman and Chief Operating Officer, James A.
Stroud) for the management of the Company. The loss by the Company of certain of
its executive officers and the inability to attract and retain qualified
management personnel could adversely affect the Company's business, financial
condition, and results of operations. In particular, certain matters regarding
Mr. Stroud may impact his ability to continue to serve as an employee of the
Company. See "Management -- Executive Officers, Directors and Key Employees."

COMMUNITY MANAGEMENT, STAFFING, AND LABOR COSTS

The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. No assurance can be given
that the Company's labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents.
Any significant failure by the Company to attract and retain qualified
management and staff personnel, to control its labor costs, or to pass on any
increased labor costs to residents through rate increases could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

DEPENDENCE ON PRIVATE PAY RESIDENTS

Approximately 94% of the Company's total revenues and reimbursable expenses
for the year ended December 31, 1996, and approximately 93% of the Company's
total revenues and reimbursable expenses for the six months ended June 30, 1997,
were attributable to private pay sources. For the same periods, approximately 6%
and 7% respectively, of the Company's revenues and reimbursable expenses were
attributable to reimbursements from Medicare and Medicaid. The Company expects
to continue to rely primarily on the ability of residents to pay for the
Company's services from their own or familial financial

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<PAGE> 13

resources. Inflation or other circumstances that adversely affect the ability of
the elderly to pay for the Company's services could have a material adverse
effect on the Company's business, financial condition, and results of
operations.

NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES

The Company's ability to meet its growth objectives and to satisfy its
working capital needs will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources, including the
use of off balance sheet financing. There can be no assurance that such
financing will be available or that, if available, future debt instruments will
not also include covenants restricting the Company's ability to incur additional
debt. Moreover, raising additional funds through the issuance of equity
securities could cause existing stockholders to experience further dilution and
could adversely affect the market price of the Common Stock. There can be no
assurance that the Company will be successful in securing additional financing,
that adequate financing will be available and, if available, will be on terms
that are acceptable to the Company, or that off balance sheet financing will be
available. The Company's inability to obtain additional financing on acceptable
terms could delay or eliminate some or all of the Company's growth plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Future indebtedness, including amounts available under the LBHI Loan (which
bears interest at the 30-day LIBOR rate plus 0.50%), and lease obligations may
be based on floating interest rates prevailing from time to time. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease payment obligations and could have a material adverse effect on the
Company's business, financial condition, and results of operations.

LIMITED COMBINED OPERATING HISTORY

While the Company and its predecessors have provided senior living services
since 1990, these operations have not been conducted under a single entity. The
Company is acquiring all of its assets in the Formation Transactions and there
can be no assurance that the Company will be able to effectively integrate the
ownership and operation of these assets acquired. The Company itself has a
limited operating history upon which investors may evaluate the performance of
the Company as an integrated entity. See "The Company -- Formation
Transactions."

GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE

Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from the Medicare
program, restrictions on the ability to acquire new communities or expand
existing communities, and, in extreme cases, the revocation of a community's
license or closure of a community. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could materially adversely affect the Company.

Many states, including several of the states in which the Company currently
operates, control the supply of licensed skilled nursing beds and home health
care agencies through certificate of need ("CON") programs. In those states,
approval is required for the construction of new health care communities, the
addition of licensed beds, and certain capital expenditures at such communities,
as well as the opening of a home health care agency. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
communities, the expansion of the number of licensed beds, services, or existing

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<PAGE> 14

communities, or the opening of a home health care agency, the Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval, and possible delays and expenses
associated with obtaining such approval. In addition, in most states, the
reduction of the number of licensed beds or the closure of a community requires
the approval of the appropriate state regulatory agency and, if the Company were
to seek to reduce the number of licensed beds at, or to close, a community, the
Company could be adversely affected by a failure to obtain or a delay in
obtaining such approval.

Federal and state anti-remuneration laws, such as "anti-kickback" laws,
govern certain financial arrangements among health care providers and others who
may be in a position to refer or recommend patients 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.
Federal anti-kickback laws have been broadly interpreted to apply to certain
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary, are sometimes vague, and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in Medicare and Medicaid programs.
There can be no assurance that such laws will be interpreted in a manner
consistent with the practices of the Company.

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 that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities 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.
See "Business -- Government Regulation."

RISKS OF CHINESE OPERATIONS

In addition to normal investment risks, the Company's joint venture
activities in China are subject to certain risks that are unique to that
country. The Company intends to be one of the first providers of senior living
services in China. There can be no assurance that the Company's products and
services will be accepted in China. The value of the Company's interests in
China may also be affected adversely by significant political, social, and legal
uncertainties in China. A change in the policies of the Chinese government,
including, changes in laws or regulations, or the interpretation thereof,
taxation, restrictions on currency conversion, the imposition of exchange
controls or price controls, or the expropriation of private or foreign business
or property interests, could adversely affect the Company's interests in China.
In addition, the Chinese currency is not freely convertible into United States
dollars. Foreign investment enterprises are permitted to maintain up to a
maximum amount of foreign exchange in their own foreign exchange account in
China with respect to their regular foreign exchange revenue items. Foreign
investment enterprises are required to sell any foreign exchange revenue beyond
the prescribed maximum amount either to authorized foreign exchange banks or
though swap centers in exchange for Chinese currency. There is no assurance
that, even if converted to United States dollars, the Company will be able to
repatriate any earnings from Chinese operations. Additionally, there is no
assurance that the Chinese currency will not be subject to devaluation or
depreciation or that shortages in the availability of foreign currency will not
develop. The value of the Company's investments and profitability of its
operations in China may be materially adversely affected by devaluation of the
Chinese currency.

POTENTIAL FOR ENVIRONMENTAL LIABILITY

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to third parties for property damage and for investigation and clean up costs
incurred by such parties in connection with the contamination. Such laws
typically impose clean-up responsibility and liability without regard to whether
the owner knew of or caused the presence of the contaminants, and liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation, or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
lease such property or to borrow using such property as collateral. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. The Company believes that
there is no asbestos in the properties owned or operated by it. The Company has
completed Phase I environmental audits of the communities in which the Company
owns interests, and such surveys have not revealed any material environmental
liabilities that exist with respect to these communities.

LIABILITY AND INSURANCE

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living services
industry have become subject to an increasing number of lawsuits alleging
negligence or related legal theories, many of which involve large claims and
result in the incurrence of significant defense costs. Moreover, senior living
communities offer residents a greater degree of independence in their daily
living. This increased level of independence may subject the resident and the
Company to certain risks that would be reduced in more institutionalized
settings. The Company currently maintains insurance in amounts it believes are
comparable to that maintained by other senior living companies based on the
nature of the risks, its historical experience, and industry standards, and the
Company believes that such insurance coverage is adequate. There can be no
assurance, however, that claims in excess of the Company's insurance or claims
not covered by the Company's insurance, such as claims for punitive damages,
will not arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed 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 economic terms. See "Business -- Insurance and Legal Proceedings."

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and the Company's Bylaws (the "Bylaws"), as well as Delaware
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow the Company to issue,
without stockholder approval, preferred stock having rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements, including advance notice and super-majority voting provisions,
that could make it more difficult for stockholders to effect certain corporate
actions. In addition, the Company's Board of Directors is divided into three
classes, each of which serves for a staggered three-year term, which may make it
more difficult for a third party to gain control of the Board of Directors. As a
Delaware corporation, the Company is subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) for three
years following the date such person became an interested stockholder unless
certain conditions are satisfied.

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<PAGE> 16

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 18,367,347 shares of Common Stock outstanding.
Of these shares, the 9,000,000 shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act of 1933, as
amended (the "Securities Act"), except for shares purchased by "affiliates" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining 9,367,347 shares, including the shares issued in
the Formation Transactions, will be "restricted securities" within the meaning
of Rule 144 and may not be resold in the public markets unless registered under
the Securities Act or pursuant to an exemption, such as the safe harbor provided
by Rule 144. The Company and all directors and executive officers of the Company
(who in the aggregate will beneficially own 9,367,347 shares of Common Stock)
and all of its stockholders will agree prior to the Offering, subject to certain
exceptions, not to offer, sell, or otherwise dispose of any Common Stock for a
period of 180 days after the date hereof, without the written consent of Lehman
Brothers Inc. ("Lehman Brothers"). See "Principal Stockholders" and "Shares
Eligible For Future Sale."

The Company intends to file a registration statement under the Securities
Act to register the issuance of an aggregate of 1,565,000 shares under the
Company's 1997 Stock Incentive Plan. See "Management -- Compensation Pursuant to
Plans -- 1997 Stock Incentive Plan" and "Shares Eligible For Future Sale."

ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE

Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock will be determined
by negotiations among the Company and the Underwriters based upon several
factors and will not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. See "Underwriting." Although application to have the
Common Stock approved for listing on the New York Stock Exchange ("NYSE") has
been made, there can be no assurance that such approval will be granted or that,
if granted, an active trading market will develop or be sustained after the
Offering. To the extent that an active trading market does develop, factors such
as quarterly variations in the Company's financial results, announcements by the
Company or others, general market conditions, or certain regulatory
pronouncements may cause the market price of the Common Stock to fluctuate
substantially. There can be no assurance that the Common Stock can be resold at
or above the initial public offering price.

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the amount of $8.41 per share in the pro forma net
tangible book value of their shares of Common Stock, based upon the assumed
initial public offering price of $12.00 per share. See "Dilution."

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THE COMPANY

GENERAL

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and senior living services industries. The Company's eight executive officers
have an average of 17 years of industry experience. In addition, the Company's
14 executive, regional and district officers have an average of 14 years of
industry experience, and its 26 on-site executive directors have an average of
12 years of industry experience. The Company's senior management will own
approximately 51% of the outstanding shares of Common Stock after giving effect
to the Offering.

The Company has distinguished itself from many of its competitors because
it has been profitable in each quarter since 1992. The Company's management team
has created substantial value through the intensive management of its
communities. From 1992 through 1996, the Company achieved a compounded annual
growth rate in net operating income before depreciation and amortization of
15.4% for the nine communities in which the Company owned interests and operated
during that period. During the same period, revenues for such communities
increased by a compounded annual growth rate of 5.4%, while expenses for such
communities increased by a compounded annual growth rate of 2.9%.

Growth Strategies

The Company currently has 12 expansion projects which it expects to
complete in 1998 and 1999, representing an aggregate increase in capacity
of 994 residents. The Company or its strategic partners have purchased
the land associated with six of the planned expansion projects, with an
additional six parcels under contract to be acquired.

The Company has commenced development of 17 senior living communities
which are expected to be completed by 1999. Of these 17 new communities,
11 will be Waterford communities (with an expected capacity of
approximately 1,496 residents). The Waterford communities will be
developed pursuant to an arrangement with an affiliate under which the
affiliate will fund the construction and lease-up costs and will pay the
Company a fee for development and management services. The Company will
have options to purchase or lease the Waterford communities upon their
completion. See "Certain Transactions -- Tri Point Development
Agreement." In addition, six senior living communities are expected to be
developed in strategic alliances with third parties (with an expected
capacity of approximately 1,694 residents). The Company or its strategic
partners have purchased the land associated with four of the planned
development projects with an additional two parcels under contract to be
acquired. Of the 17 new communities under development, four are to be
owned by

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Buckner Retirement Services, Inc., two are to be owned by LCOR Incorporated and
11 are to be owned by Tri Point Communities, L.P.

The Company has executed a joint venture agreement pursuant to which it will
form an entity to develop and operate senior living communities in major cities
in the Peoples Republic of China. The Company currently expects that,
following its initial development of senior living communities in China,
the joint venture will sell individual units in the communities to
prospective residents, and the Company will retain the operating
responsibilities and management fees associated with such communities.

- Pursue Strategic Acquisitions. The Company believes that the fragmented
nature of the senior living services industry, combined with the
Company's financial resources, national presence and extensive industry
relationships, should provide it with ample acquisition opportunities.
The Company intends to continue to: (i) increase its ownership interests
in certain communities in which it already possesses an ownership
interest; (ii) pursue single or portfolio acquisitions of senior living
communities; and (iii) pursue strategic acquisitions of other senior
living companies as the industry consolidates.

The Company was incorporated under the laws of the State of Delaware in
October 1996. The Company's principal executive offices are located at 14160
Dallas Parkway, Suite 300, Dallas, Texas 75240, and its telephone number at that
address is (972) 770-5600.

FORMATION TRANSACTIONS

The Company was incorporated in October 1996 in anticipation of the
Offering. Simultaneously with the consummation of the Offering, the Company, the
Company's founders, Messrs. Beck and Stroud, Lawrence A. Cohen, Vice Chairman
and Chief Financial Officer of the Company, and affiliates of Messrs. Beck and
Stroud will complete a series of transactions (the "Formation Transactions")
that will result in the reorganization of the Company (the "Formation").
Following the Offering, all of the Company's operations will be conducted by the
Company or its wholly owned subsidiaries.

As part of the Formation Transactions, Messrs. Beck and Stroud (and their
affiliates) will contribute all of the capital stock of Capital Senior Living,
Inc., Capital Senior Management 1, Inc., Capital Senior Management 2, Inc.,
Capital Senior Development, Inc., and, with Lawrence A. Cohen, of Quality Home
Care, Inc. (the "Contributed Entities") to the Company in exchange for the
issuance of 7,687,347 shares of Common Stock and the issuance of separate notes
to Messrs. Beck, Stroud and Cohen in the aggregate principal amount of $12.7
million (collectively, the "Formation Note"). The number of shares of Common

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Stock to be issued and the principal amount of the Formation Note were
established by Messrs. Beck and Stroud and the Company in connection with the
Formation based on an assessment of the value of the Contributed Entities and
the value of the Acquired Assets. The Formation Note will be repaid from net
proceeds of the Offering. Such repayment received by Messrs. Beck and Stroud
will in turn be used by them to pay tax obligations which they will incur in
connection with the Formation. The primary assets of the Contributed Entities
consist of third-party management contracts, development contracts and a home
health care agency. See "Risk Factors -- Offering to Benefit Existing
Stockholders; Conflicts of Interest."

Also as part of the Formation Transactions, the Company will purchase
substantially all of the assets (the "Acquired Assets"), other than working
capital items, of Capital Senior Living Communities, L.P., a Delaware limited
partnership ("CSLC"), for the assumption of approximately $70.0 million of debt
plus cash sufficient so that the sum of the debt assumed plus cash equals $74.0
million (subject to closing pro rations), and new construction at CSLC's
Cottonwood community will be transferred to the Company for assumption by the
Company of the related construction loan (the "Asset Acquisition"). The purchase
price to be paid for the Acquired Assets is based on the appraised value of the
properties derived by a third-party appraisal, adjusted for working capital and
other assets and liabilities that will be settled in cash. The Acquired Assets
of CSLC are: (i) four senior living communities located in Cottonwood, Arizona,
Indianapolis, Indiana, Merrillville, Indiana and Canton, Ohio; (ii)
approximately 56% of the limited partner interests in HealthCare Properties,
L.P., a Delaware limited partnership ("HCP"); and (iii) approximately 30% of the
aggregate principal amount of certain notes (the "NHP Notes") issued by NHP
Retirement Housing Partners I, L.P., a Delaware a limited partnership ("NHP").
The primary assets of HCP consist of: (i) approximately $9.5 million in cash and
cash equivalents at June 30, 1997; (ii) four physical rehabilitation facilities
located in Orlando, Florida, Nashville, Tennessee, Lancaster, South Carolina,
and Martin, Tennessee; and (iii) four skilled nursing communities located in
Evansville, Indiana, Cambridge, Massachusetts, Fort Worth, Texas, and Austin,
Texas. The outstanding principal amount of all of the NHP Notes at June 30, 1997
was $42.7 million. The NHP Notes accrue interest at a rate of 13% per annum, pay
cash interest at a rate of 7% per annum, are secured by substantially all of the
assets of NHP, and mature on December 31, 2001. The primary assets of NHP
consist of five senior living communities located in Buffalo, New York,
Sacramento, California (two communities), Detroit, Michigan, and Boca Raton,
Florida. Messrs. Beck and Stroud control approximately 67% of the limited
partnership interests in CSLC and will initiate the steps to begin the
liquidation of CSLC, pursuant to the terms of CSLC's partnership agreement,
following completion of the Formation Transactions.

CSLC, HCP and NHP are limited partnerships required to file periodic
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The general partner of CSLC is Retirement Living Communities, an Indiana
limited partnership, which is beneficially owned by Messrs. Beck and Stroud. The
general partner of HCP and NHP is Capital Realty Group Senior Housing, Inc.
("Senior Housing"), an entity beneficially owned by Mr. Beck and Mr. Stroud. The
general partners of CSLC, HCP and NHP will remain beneficially owned by Messrs.
Beck and Stroud after completion of the Formation Transactions. As part of the
Formation Transactions, the Company has received a ten-year option to purchase
all of the capital stock of Senior Housing at fair market value, which it
intends to exercise in 1998. Pending such exercise, any fees received by Senior
Housing from HCP or NHP will be assigned to the Company. The debt to be assumed
by the Company in the Asset Acquisition consists of a $77.0 million mortgage
loan commitment made on June 30, 1997 to CSLC by Lehman Brothers Holdings, Inc.
("LBHI"), an affiliate of Lehman Brothers (the "LBHI Loan"), of which $70.0
million was outstanding on July 1, 1997. Of the proceeds from the LBHI Loan,
$5.5 million was used to repay outstanding amounts under the CSLC's prior credit
facility, $64.5 million was used by CSLC to purchase U.S. Treasury securities
and the remaining $7.0 million is being used to fund expenditures associated
with the expansion of one of CSLC's communities.

The Company intends to repay the LBHI Loan and the Formation Note out of
the net proceeds from the Offering. See "Use of Proceeds," "Risk
Factors -- Offering to Benefit Existing Stockholders; Conflicts of Interest,"
"Certain Transactions -- Organization of the Company," "-- Formation
Transactions," and "Underwriting."

19
<PAGE> 21

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $99.4 million (approximately $114.3 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $12.00 per share (the mid-point of the price range
shown on the cover page of this Prospectus) and after deduction of the
underwriting discounts and commissions and estimated offering expenses payable
by the Company.

The Company will use approximately $70.0 million of the net proceeds of the
Offering to reduce the outstanding balance of the LBHI Loan, $5.5 million of
which was used to repay outstanding amounts under CSLC's prior credit facility
and $64.5 million of which was used by CSLC to purchase U.S. Treasury
securities. The $7.0 million of borrowings that will remain available to the
Company under the LBHI Loan will be refinanced following the Offering to fund
expenditures associated with the expansion of one of the Company's communities.
Borrowings under the LBHI Loan bear interest at the 30-day LIBOR rate plus 0.50%
and mature on December 31, 1997. See "Certain Transactions -- LBHI Loan." The
Company expects to use the balance of the net proceeds remaining after reduction
of the LBHI Loan as follows: (i) $4.0 million related to the purchase of the
Acquired Assets; (ii) $12.7 million to repay the Formation Note; (iii)
approximately $5.0 million to fund its anticipated contribution and costs
associated with its development alliances with not-for-profit and for-profit
organizations in the United States; (iv) approximately $2.0 million to fund its
anticipated contribution and costs associated with its venture in China; and (v)
repayment of $1.2 million of notes payable and accrued interest to the Company's
founders and an affiliate. The Company may use a portion of the remaining $4.5
million of net proceeds over the next 12 to 18 months to purchase additional
interests in the Company's existing senior living communities, although there
are no agreements or commitments to do so. If not used to purchase such
additional interests, such net proceeds will be used for general corporate
purposes, including working capital.

Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.

DIVIDEND POLICY

Following the Offering, it will be the policy of the Company's Board of
Directors to retain all future earnings to finance the operation and expansion
of the Company's business. Accordingly, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, the Company's earnings, operations, capital requirements, financial
condition, restrictions in then existing financing agreements, and other factors
deemed relevant by the Board of Directors.

Since the respective dates of their incorporation, the Contributed Entities
have elected to operate as S corporations under Subchapter S of the Internal
Revenue Code. As a result, the Contributed Entities' earnings for the period
commencing on the dates of their incorporation and ending on the day preceding
the date of termination of their S corporation status have been or will be, as
the case may be, taxed for Federal income tax purposes, with certain exceptions,
directly to the stockholders of the Contributed Entities. The termination of the
Contributed Entities' S corporation status will occur on the date of the
completion of the Offering. Commencing upon the completion of the Offering, the
Contributed Entities will no longer be treated as S corporations and,
accordingly, will be fully subject to Federal income taxes.

20
<PAGE> 22

CAPITALIZATION

The following table sets forth at June 30, 1997, the historical
capitalization of the Company and the pro forma capitalization as adjusted to
reflect: (i) the Offering; (ii) the funding and subsequent repayment of the LBHI
Loan; and (iii) the Formation Transactions. The table should be read in
conjunction with the Combined Financial Statements and the related notes
thereto, the "Pro Forma Combined Financial Statements," "The
Company -- Formation Transactions," and "Use of Proceeds" contained elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion).................. $13,613 $ 6,946
------- -------
Minority interest in combined partnerships.................. 20,749 11,090
------- -------
Equity:
Partners' capital......................................... 19,370 --
------- -------
Preferred Stock, $.01 par value,
15,000,000 shares authorized; no shares issued and
outstanding............................................ -- --
Common Stock, $.01 par value,
65,000,000 shares authorized; 1,680,000 shares issued
and outstanding, historical; and 18,367,347 issued and
outstanding, as adjusted(1)............................ 17 184
Additional paid-in capital................................ 27 67,916
Retained earnings (deficit)............................... (625) (670)
------- -------
Total equity...................................... 18,789 67,430
------- -------
Total capitalization.............................. $53,151 $85,466
======= =======
</TABLE>

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

(1) Excludes 782,500 shares of Common Stock subject to options expected to be
granted pursuant to the Company's 1997 Stock Incentive Plan as of the
closing of the Offering, which options will be exercisable at the initial
public offering price. The Company has reserved for issuance up to 1,565,000
shares of Common Stock under its 1997 Stock Incentive Plan. See
"Management -- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."

21
<PAGE> 23

DILUTION

The net tangible book value of the Company at June 30, 1997, was
approximately $18.4 million, or $1.97 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, which, for purposes of these calculations, is presumed to be
9,367,347 shares (which reflects 1,680,000 shares outstanding as of June 30,
1997, and 7,687,347 shares to be issued in the Formation Transactions). Pro
forma net tangible book value was calculated after giving effect to: (i) the
sale of the 9,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company; (ii) the Formation Transactions; and (iii) the application of a
portion of the estimated net proceeds to retire the Formation Note, the LBHI
Loan, and notes payable to the Company's founders and an affiliate. Pro forma
net tangible book value of the Company, after giving effect to the Offering and
the Formation Transactions, as of June 30, 1997 would have been approximately
$65.9 million, or $3.59 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value per share of $1.62 to existing
stockholders and an immediate dilution of $8.41 per share to investors
purchasing Common Stock in the Offering. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price............................... $12.00
Net tangible book value after giving effect to the
Formation Transactions as of June 30, 1997............. $1.97
Increase in net tangible book value attributable to the
Offering............................................... 1.62
-----
Pro forma net tangible book value after giving effect to the
Offering and the Formation................................ 3.59
------
Dilution to new investors in the Offering................... $ 8.41
======
</TABLE>

The following table summarizes the number of shares of Common Stock issued
by the Company, the total cash consideration paid to the Company, and the
average price per share by the existing stockholders and to be paid by the new
investors purchasing Common Stock in the Offering.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,367,347 51.0% $ 16,800 -- --
New investors.............. 9,000,000 49.0 108,000,000 100.0% $12.00
---------- ----- ------------ -----
Total............ 18,367,347 100.0% $108,016,800 100.0%
========== ===== ============ =====
</TABLE>

The tables above exclude the effect of 782,500 shares of Common Stock
subject to issuance pursuant to outstanding stock options under the Company's
1997 Stock Incentive Plan. See "Management -- Compensation Pursuant to
Plans -- 1997 Stock Incentive Plan."

22
<PAGE> 24

SELECTED FINANCIAL DATA

The following table sets forth selected financial data, other data and pro
forma financial data of the Company. The selected financial data for the years
ended December 31, 1993 and 1992 are derived from the unaudited combined
financial statements of the Company. The selected financial data for the years
ended December 31, 1996, 1995 and 1994 are derived from the combined financial
statements of the Company, which financial statements have been audited by Ernst
& Young LLP, independent auditors. The combined financial statements as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, and the independent auditor's report thereon, are included
elsewhere in this Prospectus. The selected balance sheet data as of June 30,
1997, and the statements of income for the six months ended June 30, 1997 and
1996, are derived from the unaudited combined financial statements of the
Company. In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. The information below should be read in conjunction with, and
are qualified in their entirety by, the combined financial statements and
related notes thereto, the "Pro Forma Combined Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994 1993 1992
------------ ------- ------ ------------ ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Resident and health care
revenue................... $10,428 $10,428 $6,955 $16,662 $13,692 $13,238 $12,761 $12,140 $11,361
Rental and lease income..... 2,158 2,158 648 5,691 1,101 1,231 1,235 1,175 1,055
Unaffiliated management
services revenue.......... 949 949 53 801 801 -- -- -- --
Affiliated management
services revenue.......... 701 701 1,419 1,753 2,708 2,778 3,113 3,458 1,533
Development fees............ 370 370 -- 674 673 -- -- -- --
Other....................... 461 461 438 924 924 871 800 1,022 1,141
------- ------- ------ ------- ------- ------- ------- ------- -------
Total revenues.......... 15,067 15,067 9,513 26,505 19,899 18,118 17,909 17,795 15,090
------- ------- ------ ------- ------- ------- ------- ------- -------
Expenses:
Operating expenses............ 8,080 8,080 5,394 13,526 10,798 10,287 10,142 9,653 9,226
General and administrative
expenses(2)................. 2,000 3,933 2,465 4,967 5,493 4,364 4,595 5,406 3,783
Depreciation and
amortization................ 994 950 779 2,140 1,481 1,776 1,707 1,609 1,566
------- ------- ------ ------- ------- ------- ------- ------- -------
Total expenses.......... 11,074 12,963 8,638 20,633 17,772 16,427 16,444 16,668 14,575
------- ------- ------ ------- ------- ------- ------- ------- -------
Income from operations......... 3,993 2,104 875 5,872 2,127 1,691 1,465 1,127 515
Other income (expense):
Interest income............... 722 794 206 362 432 368 122 89 73
Interest expense.............. (344) (419) (75) (966) (221) (278) (261) (307) (293)
Gain on sale of
properties(3)............... -- -- -- 825 438 -- -- -- --
Equity in earnings on
investments................. -- -- 398 -- 459 -- -- -- --
Other....................... -- -- 26 (72) 42 -- (16) (20) --
------- ------- ------ ------- ------- ------- ------- ------- -------
Income before income taxes and
minority interest in combined
partnerships.................. 4,371 2,479 1,430 6,021 3,277 1,781 1,310 889 295
(Provision) benefit for income
taxes(4)...................... -- -- -- -- -- (18) (130) 62 96
------- ------- ------ ------- ------- ------- ------- ------- -------
Income before minority interest
in combined
partnerships.................. 4,371 2,479 1,430 6,021 3,277 1,763 1,180 951 (292)
Minority interest in combined
partnerships.................. (395) (1,266) (650) (527) (1,224) (760) (634) (572) (391)
------- ------- ------ ------- ------- ------- ------- ------- -------
Net income..................... $ 3,976 $ 1,213 $ 780 $ 5,494 $ 2,053 $ 1,003 $ 546 $ 379 $ 94
======= ======= ====== ======= ======= ======= ======= ======= =======
Pro Forma Net Income Data
(unaudited):(5)
Net income.................... $ 3,976 $ 1,213 $ 5,494 $ 2,053
Pro forma income taxes........ (1,571) (479) (2,170) (811)
------- ------- ------- -------
Pro forma net income.......... $ 2,405 $ 734 $ 3,324 $ 1,242
======= ======= ======= =======
Pro forma net income per share
data:
Pro forma net income per
share....................... $ 0.13 $ 0.18
======= =======
Shares used in computing pro
forma net income per
share(1)...................... 18,367 18,367
======= =======
</TABLE>

23
<PAGE> 25

<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31,
------------------------- -----------------------------------------------
PRO FORMA(1) HISTORICAL 1996 1995 1994 1993 1992
------------ ---------- ------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $21,663 $13,199 $10,819 $10,017 $ 8,799 $ 2,065 $ 3,561
Working capital................................... 21,083 5,138 9,567 6,784 5,938 48 2,889
Total assets...................................... 86,879 56,634 33,203 29,747 29,913 27,861 26,792
Long-term debt, including current portion......... 6,946 13,613 666 2,687 2,192 2,556 2,998
Equity............................................ 67,430 18,789 17,201 14,447 12,495 10,631 10,130
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------------------------------------
1997 1996
PRO FORMA(1) 1997 1996 PRO FORMA(1) 1996 1995 1994 1993 1992
------------ ------ ------ ------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Facilities:
Owned(6).......................... 17 17 19 17 17 20 23 23 23
Managed for third parties......... 15 15 1 15 15 -- -- -- 1
Leased from third party(7)........ 1 1 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
33 33 20 32 32 20 23 23 24
====== ====== ====== ====== ====== ====== ====== ====== ======
Resident capacity:
Owned(6).......................... 2,572 2,572 2,840 2,572 2,572 2,949 3,250 3,250 3,250
Managed for third parties......... 2,372 2,372 117 2,325 2,325 -- -- -- 239
Leased from third party(7)........ 98 98 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
5,042 5,042 2,957 4,897 4,897 2,949 3,250 3,250 3,489
====== ====== ====== ====== ====== ====== ====== ====== ======
Occupancy rates(8):
Owned and operated(9)............. 95% 95% 91% 92% 92% 91% 89% 89% 87%
Managed for third parties(10)..... 95% 95% -- 94% 94% -- -- -- 86%
Leased from third party(7)........ 95% 95% -- -- -- -- -- -- --
</TABLE>

- ---------------
(1) Gives effect to the consummation of the Offering and the completion of the
Formation Transactions (as more specifically described under "Prospectus
Summary -- The Offering," "The Company -- Formation Transactions," and "Use
of Proceeds") as if they had occurred on January 1, 1996 for the statement
of income data and on June 30, 1997 for the balance sheet data.

(5) The provision for income taxes to arrive at pro forma net income assumes a
combined Federal and state effective income tax rate of 39.5%.

(7) The Company has managed this community from September 1, 1996 through May
31, 1997 and acquired a leasehold interest in it effective June 1, 1997.

(10) Does not include occupancy information on Buckner Westminster Place and
Buckner Haven. See "Business -- Operating Communities."

24
<PAGE> 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion and analysis addresses the Company's results of
operations on an historical combined basis for the six months ended June 30,
1997 and 1996 and for the years ended December 31, 1996, 1995, and 1994. The
following should be read in conjunction with the Company's historical combined
financial statements and the summary and selected financial data and other
information contained elsewhere in this Prospectus.

The Company's historical financial statements include the combined
financial statements of Capital Senior Living Corporation, Capital Senior
Living, Inc., Quality Home Care, Inc., Capital Senior Development, Inc., Capital
Senior Management 1, Inc. and Capital Senior Management 2, Inc. (the
"Contributed Entities"), CSLC, and, since January 1, 1997, HCP. The Contributed
Entities are owned and controlled 50% by James A. Stroud (individually and
through a trust) and 50% by Jeffrey L. Beck, except that Lawrence A. Cohen is
also a stockholder of Quality Home Care, Inc. In addition, Messrs. Beck and
Stroud or entities owned and controlled by them are the managing general
partners of CSLC and HCP.

Due to all of these entities being under the common control of Messrs. Beck
and Stroud, the Company's combined financial statements reflect the assets and
liabilities at their historical values and the accompanying combined statements
of income, equity, and cash flows reflect the combined results for the periods
indicated even though they have historically operated as separate entities. The
Formation Transactions will be accounted for at historical cost in a manner
similar to a pooling of interests to the extent of the percentage ownership by
Messrs. Beck and Stroud of the Company. Assets and liabilities in CSLC will be
recorded at fair value to the extent of any minority interest. CSLC's assets
include investments in HCP and NHP.

From 1990 through June 30, 1997, the Company acquired interests in 17
communities and entered into an operating lease with respect to one community.
In 1996, the Company expanded its senior living management services by taking
over the management service contracts on 15 communities for four independent
third-party owners and commenced providing development and construction
management services for new residence properties in addition to adding a home
health care service agency.

The Company generates revenue from a variety of sources. For the six months
ended June 30, 1997, the Company's revenue was derived as follows: 72.2% from
the operation of five owned and one leased senior living communities that are
operated by the Company; 14.3% from lease rentals from triple net leases of
three skilled nursing facilities and four physical rehabilitation centers; 11.0%
from management fees arising from management services provided for five
affiliate owned and operated senior living communities and fifteen third party
owned and operated senior living communities; and 2.5% derived from development
fees earned for managing the development and construction of new senior living
communities for third parties. As the Company implements its business plan,
management believes that the mix of the Company's revenues may change and that
development activities will take on an increased importance to the Company.

The Company's triple net leases extend through the year 2000 for three of
its owned communities and through the year 2001 for four of its owned
communities. The payments under these leases are fixed and are not subject to
change based upon the operating performance of these communities. Following
termination of the lease agreements, the Company intends to convert and operate
the communities as assisted living and Alzheimer's care facilities.

The Company's current management contracts expire on various dates between
July 1998 and February 2004 and provide for management fees based generally upon
rates that vary by contract from 5% of net revenues to 7% of net revenues. In
addition, certain of the contracts provide for supplemental incentive fees that
vary by contract based upon the financial performance of the managed community.
The Company's development fees are generally based upon a percentage of
construction cost and are earned over the period commencing with the initial
development activities and ending with the opening of the community. As of June
30, 1997, development fees have been earned for services performed for one
community under development for a third party.

25
<PAGE> 27

During 1997, 1996, and 1995, CSLC made various purchases of limited
partnership interests in HCP, an affiliated partnership whose properties are
managed by the Company under management contracts. HCP owns and operates a
skilled nursing facility and owns and leases to third-party operators (under
triple net leases) three skilled nursing facilities and four physical
rehabilitation centers. During 1997, 1996, and 1995, CSLC paid $5,323,000,
$3,201,000, and $309,000, respectively, for partnership interests in HCP. CSLC
changed its method of accounting for its investment in HCP from the cost method
in 1995 to the equity method in 1996. As a result of additional purchases,
CSLC's ownership interest in HCP exceeded 50% on June 26, 1997. Accordingly,
this partial acquisition has been accounted for by the purchase method of
accounting and the assets, liabilities, minority interest, and the results of
operations of HCP have been consolidated in the Company's financial statements
since January 1, 1997.

During 1997, 1996, and 1995, CSLC made various purchases of outstanding
notes of NHP, an affiliated partnership whose properties are managed by the
Company under management contracts. NHP owns and operates five senior living
communities. As of June 30, 1997, CSLC has cumulatively paid $9,620,000 for
ownership of 27.9% of the outstanding NHP Notes. The NHP Notes bear simple
interest at 13% per annum and mature on December 31, 2001. Interest is paid
quarterly at a rate of 7%, with the remaining 6% interest deferred. Prior to
April 1997, CSLC did not accrue the deferred interest on the NHP Notes due to
uncertainties regarding their ultimate realization. Beginning April 1, 1997,
CSLC began accruing a portion of the deferred interest income due to improved
NHP cash flows. Also, during 1996, CSLC paid $1,364 for a 3% ownership of
limited partnership interests in NHP.

The Company will continue to develop senior living communities and is
currently expanding 12 existing senior living communities. The development of
senior living communities typically involves a substantial commitment of capital
over a 12-month construction period during which time no revenues are generated,
followed by a 12-month lease-up period. The Company anticipates that newly
opened or expanded communities will operate at a loss during a substantial
portion of the lease-up period. See "-- Liquidity and Capital Resources" and
"Risk Factors -- No Assurance as to Ability to Develop and Expand Additional
Senior Living Communities." The Company's growth strategy may also include the
acquisition of senior living communities, home health care agencies, and other
properties or businesses that are complementary to the Company's operations and
growth strategy.

26
<PAGE> 28

RESULTS OF OPERATIONS

The following tables set forth for the periods indicated, selected
historical Statements of Income data in thousands of dollars and expressed as a
percentage of total revenues.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- ------------------------------------------------------
1997 1996 1996 1995 1994
---------------- -------------- --------------- ----------------- ----------------
$ % $ % $ % $ % $ %
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue................ $10,428 69.2% $6,955 73.1% $13,692 68.8 $13,238 73.1 $12,761 71.3%
Rental and lease
income................. 2,158 14.3 648 6.8 1,101 5.5 1,231 6.8 1,235 6.9
Unaffiliated management
services revenue....... 949 6.3 53 0.6 801 4.0 -- -- -- --
Affiliated management
services revenue....... 701 4.7 1,419 14.9 2,708 13.6 2,778 15.3 3,113 17.4
Development fees......... 370 2.5 -- -- 673 3.4 -- -- -- --
Other.................... 461 3.1 438 4.6 924 4.6 871 4.8 800 4.5
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Total revenues......... 15,067 100.0 9,513 100.0 19,899 100.0 18,118 100.0 17,909 100.0
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Expenses:
Operating expenses....... 8,080 53.6 5,394 56.7 10,798 54.3 10,287 56.8 10,142 56.6
General and
administrative
expenses............... 3,933 26.2 2,465 25.9 5,493 27.6 4,364 24.1 4,595 25.7
Depreciation and
amortization........... 950 6.3 779 8.2 1,481 7.4 1,776 9.8 1,707 9.5
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Total expenses......... 12,963 86.0 8,638 90.8 17,772 89.3 16,427 90.7 16,444 91.8
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Income from operations..... 2,104 14.0 875 9.2 2,127 10.7 1,691 9.3 1,465 8.2
Other income (expense):
Interest income.......... 794 5.3 206 2.2 432 2.2 368 2.0 122 0.7
Interest expense......... (419) (2.8) (75) (0.8) (221) (1.1) (278) (1.5) (261) (1.5)
Gain on sale of
properties............. -- -- -- -- 438 2.2 -- -- -- --
Equity in earnings on
investments............ -- -- 398 4.2 459 2.3 -- -- -- --
Other.................... -- -- 26 0.3 42 0.2 -- -- (16) (0.1)
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Income before income taxes
and minority interest in
combined partnerships.... 2,479 16.5 1,430 15.0 3,277 16.5 1,781 9.8 1,310 7.3
Provision for income
taxes.................... -- -- -- -- -- -- (18) (0.1) (130) (0.7)
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Income before minority
interest in combined
partnerships............. 2,479 16.5 1,430 15.0 3,277 16.5 1,763 9.7 1,180 6.6
Minority interest in
combined partnerships.... (1,266) -- (650) (6.8) (1,224) (6.2) (760) (4.2) (634) (3.6)
------- ------ ------ ----- ------- ----- ------- ------- ------- ------
Net income................. $ 1,213 8.9% $ 780 8.2% $ 2,053 10.3% $ 1,003 5.5% $ 546 3.0%
======= ====== ====== ===== ======= ===== ======= ======= ======= ======
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996

Revenues. Total revenues were $15,067,000 in the first six months of 1997
compared to $9,513,000 for the first six months of 1996, representing an
increase of $5,554,000, or 58.4%. The inclusion of HCP revenues in 1997 from
January 1, 1997 contributed $4,653,000 of the increase, as HCP was not
consolidated in 1996. Resident and health care revenue increased $3,473,000, of
which $2,495,000 is a result of the HCP consolidation, $715,000 is improvement
in CSLC's revenues due to recovery of additional billings previously limited
under the Medicare program for 1994 and $220,000 relates to the Maryland Gardens
facility leased on June 1, 1997. Rental and lease income increased $1,510,000,
of which $2,158,000 was due to the HCP consolidation, offset by $648,000 due to
the sale of CSLC's multifamily properties on November 1, 1996. Unaffiliated
management services revenue increased $896,000 due to 15 third-party management
contracts added in the latter part of 1996 and one contract added in the second
quarter of 1997. Affiliated management services revenue decreased by $718,000,
of which $599,000 was due to the HCP consolidation and $111,000 was due to the
sale of an HCP managed property in May 1996. Development fees of $370,000 in
1997 is due to new development contract management revenue for managing the
development and construction of new third-party owned senior living communities.

Expenses. Total expenses were $12,963,000 in the first six months of 1997
compared to $8,638,000 in 1996, representing an increase of $4,325,000, or
50.1%. The inclusion of HCP expenses from January 1, 1997 contributed $3,190,000
of the increase. Operating expenses increased $2,271,000 as a result of the HCP

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<PAGE> 29

consolidation, $214,000 due to Maryland Gardens operating expenses, and an
increase in development expenses of $341,000 owing to increased development
operations. General and administrative expenses increased $1,468,000, which was
due to the HCP consolidation of $397,000, an increase in officers salaries and
bonuses of $942,000, and an increase in other general and administrative
expenses of $129,000, which is primarily the result of expanded business
operations and increased revenues. Depreciation and amortization increased
$171,000, of which $559,000 is related to the HCP consolidation, and an increase
in depreciation of $11,000 was related to office equipment additions, offset by
a $398,000 decrease in CSLC's depreciation associated with multi-family rental
properties sold on November 1, 1996.

Other income and expenses. Interest and other income increased $562,000,
primarily as a result of the HCP consolidation of $164,000 of other income, and
CSLC's increase in interest income of $398,000 associated with its increased
investment in NHP Notes and CSLC's beginning to accrue a portion of the deferred
interest on these notes. Interest expense increased $344,000, primarily as a
result of the HCP consolidation. Income from equity in earnings on investments
decreased $398,000 as a result of the consolidation of HCP on January 1, 1997.

Minority interest. Minority interest in limited partnerships increased
$616,000 in the first six months of 1997 over that of the comparable 1996
period, with $395,000 of the increase a result of the consolidation of HCP,
coupled with improved earnings of CSLC of $379,000, offset by $158,000 due to a
decrease in the weighted average minority interest in CSLC from 40.8% in the
first six months of 1996 to 34.5% in the first six months of 1997.

Net income. As a result of the foregoing factors, net income increased
$433,000 or 55.5% to $1,213,000 for the first six months of 1997 from that of
the comparable six-month period of 1996 of $780,000.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995

Revenues. Total revenues were $19,899,000 in 1996 compared to $18,118,000
in 1995, representing an increase of $1,781,000, or 9.8%. Resident and health
care revenue increased $454,000 as a result of $241,000 of 1996 revenues
associated with the home health care business established in 1996 and a $213,000
increase in CSLC's senior living and health care revenues caused primarily by
increased rates. Rental and lease income decreased $130,000 as a result of the
sale of CSLC's multi-family properties on November 1, 1996. Unaffiliated
management services revenue increased $801,000 due to the 15 third-party
management contracts added in 1996. Affiliated management services revenue
decreased by $70,000, with $181,000 of the decrease a result of the sale of two
HCP managed properties in 1995 and 1996, offset by improved occupancies in
managed properties and an overall increase in management fees to unconsolidated
affiliates of $110,000. Development fees of $673,000 in 1996 is due to new
development contract management revenue for managing the development and
construction of new third-party owned senior living communities.

Expenses. Total expenses were $17,771,000 in 1996 compared to $16,428,000
in 1995, representing an increase of $1,345,000, or 8.2%. Operating expenses
increased $512,000 as a result of $142,000 of expenses associated with property
development and $218,000 of expenses due to the skilled nursing care businesses
established in 1996, and a $150,000 increase in expenses related to increased
resident and health care revenues. General and administrative expenses increased
$1,129,000. This increase is due to an increase in officers salaries and bonuses
and a increase in other general and administrative expenses of $733,000 which is
primarily the result of expanded business operations. Depreciation and
amortization decreased $295,000 and is primarily related to decreases in
depreciation of $245,000 associated with multi-family rental properties sold on
November 1, 1996 and amortization of deferred income associated with the equity
method of accounting of acquired interests in HCP in 1996 of $119,000, offset by
a $69,000 increase in amortization expense.

Other income and expenses. Interest and other income increased $106,000
primarily as a result of increased income associated with investment of cash
reserves and interest received on CSLC's investment in the NHP Notes. Interest
expense decreased $57,000 primarily as a result of the retirement of the
mortgage loans associated with the properties sold on November 1, 1996. Equity
in earnings on investments was $459,000 in 1996 as a result of the application
of the equity method of accounting for CSLC's investment in

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<PAGE> 30

HCP in the first quarter of 1996. A gain of $438,000 was recorded on November 1,
1996 as a result of the sale of properties with no corresponding gains being
realized in 1995.

Provision for income taxes. Prior to February 1, 1995, one of the Company's
predecessor entities (Capital Senior Living, Inc.) incurred federal and state
income taxes. Effective February 1, 1995, Capital Senior Living, Inc. became an
S corporation and consequently, was not subject to income taxes after February
1, 1995. CSLC and HCP are not subject to Federal income taxes as the partners
are responsible for their respective shares of partnership net income or loss
for income tax purposes and the companies owned by HCP did not generate taxable
income for Federal income tax purposes. As a result, the provision for income
taxes decreased from $18,000 in 1995 to no tax provision in 1996.

Minority interest. Minority interest in combined partnerships increased
$464,000 in 1996 primarily as a result of increased earnings of CSLC offset by a
decrease in minority interest from 42.6% in 1995 to 37.2% in 1996.

Net income. As a result of the foregoing factors, net income increased
$1,050,000 or 104.7% to $2,053,000 for 1996 from $1,003,000 for 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

Revenues. Total revenues were $18,118,000 in 1995 compared to $17,909,000
in 1994, representing an increase of $209,000, or 1.2%. Resident and health care
revenue increased $477,000 as a result of increased rental rates in the CSLC's
properties. Affiliated management services revenue decreased $335,000 and is
comprised of: (i) a brokerage and sales commission fee of $220,000 earned in
April 1994 from an affiliate for assistance in the sale of a real estate
investment; (ii) reduced management fees of $179,000 earned from one HCP
property which was placed in receivership on December 1, 1994 and subsequently
transferred to the noteholder as an agreed upon settlement on July 19, 1995; and
(iii) a net overall increase in management fees earned from affiliated
properties of $65,000. Other income increased $71,000 and was attributable to
increased therapy income from Medicare.

Expenses. Total expenses were $16,427,000 in 1995 compared to $16,444,000
in 1995, representing a decrease of $17,000. Operating expenses increased
$145,000 which is related to the increase in resident and health care revenues.
General and administrative expenses decreased $231,000, primarily as a result of
reduced officers salaries of $467,000 offset by overall increases in other
administrative expenses of $236,000.

Other income and expenses. Interest and other income increased $262,000
primarily as a result of increased income associated with investment of cash
reserves and interest received on CSLC's investment in NHP Notes. Interest
expense increased $17,000 primarily as a result of the Company's purchasing
management contracts from an affiliate in exchange for a term loan in February
1995, which increased interest expense $31,000, offset by a decrease in mortgage
interest expense of $14,000.

Provision for income taxes. As discussed above, the decrease in the
provision for income taxes in 1995 was due to the change in tax status. Federal
and state income taxes decreased from $130,000 in 1994 to $18,000 in 1995.

Minority interest. Minority interest in combined partnerships increased
$126,000 in 1995 as a result of the increased earnings of CSLC offset by a
decrease in minority interest from 48.5% in 1994 to 42.6% in 1995.

Net income. As a result of the foregoing factors, net income increased
$457,000 or 83.7% to $1,003,000 for 1995 from $546,000 for 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has traditionally financed its activities primarily with
related party loans and cash flows from operations. Investments in start-up
costs, real estate and facilities have traditionally been financed with net
proceeds from private placements of equity interests, long-term mortgage
borrowing, and cash flows from operations.

Net cash provided by operating activities of $3,324,000 for the six months
ended June 30, 1997 increased $223,000 or 7.2% over that of the comparable six
months ended June 30, 1996, which was primarily comprised

29
<PAGE> 31

of an increased cash flow created by improved earnings (after non-cash
adjustments of $1,604,000 offset by increases in net operating assets of
$1,381,000). Net cash provided by operating activities of $3,902,000 for the
year ended December 31, 1996 increased $1,180,000 or 43.4% over that of the
comparable year ended December 31, 1995. This increase was primarily the result
of increased cash flow created by improved earnings (after non-cash adjustments,
including a gain on sale of properties of $438,000 and minority interest of
$465,000 and change in net operating assets of $908,000) of $272,000. Net cash
provided by operating activities of $2,722,000 for the year ended December 31,
1995 decreased $706,000 or 20.6% over that of the comparable year ended December
31, 1994. This decrease was primarily the result of increases in net operating
assets and payment of affiliate advances in 1995 of $1,446,000 offset by
increased cash flow created by improved earnings (after non cash adjustments and
minority interest) of $749,000.

Net cash used in investing activities of $5,723,000 for the six months
ended June 30, 1997 increased $2,901,000 or 102.8% over that of the comparable
six months ended June 30, 1996. This increase was comprised of an increase in
purchases of limited partnership interests in HCP of $2,562,000 (which is net of
acquired HCP cash of $8,995,000) combined with increases in capital expenditures
of $339,000. Net cash used in investing activities of $1,704,000 for the year
ended December 31, 1996 increased $407,000 or 31.4% over that in 1995 of
$1,297,000. This increase was comprised of an increase in purchases of limited
partnership interests in HCP of $2,505,000 combined with increases in capital
expenditures of $451,000 offset by the proceeds from the sale of the Company's
multi-family properties in November 1996 of $2,549,000. Net cash used in
investing activities of $1,297,000 for the year ended December 31, 1995
decreased $5,079,000 compared with net cash provided by investing activities of
$3,782,000 for the year ended December 31, 1994. This decrease was primarily due
to purchases of HCP limited partnership interests of $461,000, increases in
capital expenditures of $218,000, and the proceeds from sale of limited
partnership interests in 1994 of $4,400,000.

Net cash provided by financing activities of $4,778,000 for the six months
ended June 30, 1997 increased $5,569,000 or 704.0% over the net cash used in
financing activities of $791,000 for the comparable six months ended June 30,
1996. This increase is primarily due to $6,000,000 of borrowings under the
Company's revolving loan and loans from related parties to finance additional
purchases of NHP Notes and HCP limited partnership interests during the six
months ended June 30, 1997, offset by an increase in CSLC's purchases of
outstanding limited partnership interests from minority partners for treasury
purposes of $513,000. Net cash used in financing activities of $1,396,000 for
the year ended December 31, 1996 increased $1,189,000 or 574.4% over that of the
net cash used in financing activities of $207,000 for 1995. This increase is
primarily due to CSLC's purchases of outstanding limited partnership interests
from minority partners for treasury purposes of $1,262,000 in 1996; no such
purchases occurred in 1995. Net cash used in financing activities of $207,000
for the year ended December 31, 1995 decreased $269,000 or 56.5% over the net
cash used in financing activities of $476,000 for 1994. This decrease is
primarily due to a decrease in loan payments of $598,000 in 1995 offset by
$203,000 in dividend payments to shareholders in 1995 and a $126,000 decrease in
other financing activities in 1995.

At June 30, 1997, HCP was operating one of its properties and had leased
seven of its owned properties under triple net leases to third parties until
2000 or 2001. Four of these properties are leased until year 2001 to HealthSouth
Rehabilitation Corp. ("HealthSouth") which provides acute spinal injury
intermediate care at these properties. HealthSouth closed one of these
facilities in 1994 and closed another facility in February of 1997 due to low
occupancy. HealthSouth has continued to make lease payments on a timely basis
for all four properties. Should the operators of the leased properties default
on payment of their lease obligations prior to termination of the lease
agreements, six of the seven lease contracts contain a continuing guarantee of
payment and performance by the parent company of the operators, which the
Company intends to pursue in the event of default. Following termination of
these leases, the Company intends to convert and operate the facilities as
assisted living and Alzheimer's care facilities. These facilities are built in a
campus-like setting and are believed by the Company to be readily conducive to
conversion to senior living facilities. HCP's other facility leases are all
current in their lease obligations to HCP and, except for one property, are
generating sufficient cash flow from operations to fund their lease obligations
to HCP. The lessee for the remaining property continues to fund the deficit
between the required lease cash flow.

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<PAGE> 32

The Company believes that its current cash, expected cash flow from
operations and its available borrowing capacity against unencumbered properties
will be sufficient to meet its operating requirements.

For the longer term, the Company expects that its current cash and net
proceeds from the Offering, together with cash flow from operations and the
proceeds of borrowings that it expects will be available to it, will be
sufficient to meet its operating requirements and to fund its anticipated growth
through 1999. The Company expects to use a wide variety of financing sources to
fund its future growth, including public and private debt and equity,
conventional mortgage financing, and unsecured bank financing, among other
sources. There can be no assurance that financing will be available on terms
acceptable to the Company. The Company has arranged a $20.0 million, three year,
revolving line of credit with a major bank that is contingent upon the
successful completion of the Offering that will be secured by the Company's
Towne Centre, Canton Regency and Harrison at Eagle Valley properties. The line
of credit may be used for acquisition of additional interests in HCP and NHP,
acquisition of additional properties and general working capital purposes.
Outstanding borrowings under the line will bear interest at LIBOR plus 1.7%.

In addition, the Company has entered into a development agreement with Tri
Point, as described under "Certain Transactions -- Tri Point Development
Agreement," pursuant to which Tri Point will employ its capital to develop
Waterford communities. The Company will have an option to purchase each
community at a price equal to fair market value (based upon a third-party
appraisal) and an option to lease each community at a fair market value rental.
The Company believes that the arrangement with Tri Point provides it an
attractive mechanism to develop and lease new communities without employing its
own capital and which will not be dilutive to earnings during the development
and lease-up phases. Tri Point has received and accepted commitments for loan
facilities aggregating up to $100.0 million to fund its development activities.

On June 30, 1997, CSLC entered into the $77.0 million LBHI Loan and pledged
its four communities and its investments in HCP and NHP as collateral. The loan
agreement matures December 31, 1997. On July 1, 1997, $70.0 became outstanding
under this loan agreement; $5.5 million was used to repay an outstanding
mortgage loan commitment, and $64.5 million was used to fund the liquidity
requirement under the loan agreement through the purchase of three-month U.S.
Treasury bills. The remaining $7.0 million may be used to fund expenditures
associated with the expansion of one of the Company's communities. The U.S.
Treasury bills were sold under a repurchase agreement with a term equal to their
maturity. It is expected that upon completion of this Offering the repurchase
agreement will be canceled and that the outstanding debt under the loan
agreement will be assumed by the Company and will be repaid from net proceeds of
this Offering. See "The Company -- Formation Transactions." Upon such repayment,
the U.S. Treasury bills will revert to CSLC. Interest costs are based on 30-day
LIBOR plus 50 basis points. The Company intends to retire this loan after
completion of the Asset Acquisition with net proceeds from the Offering. Should
the Offering be delayed beyond December 31, 1997, the Company believes that the
U.S. Treasury bills combined with CSLC's ability to borrow from conventional
mortgage financing sources will be sufficient to retire the LBHI Loan when due
on December 31, 1997.

At June 30, 1997, the Company had $1,166,000 of related party debt
outstanding, including $900,000 of demand notes due Messrs. Beck and Stroud on
December 31, 1997, and a $266,000 note payable to a related party with fixed
maturities of $65,091 extending through December 31, 2001. These notes, plus
accrued interest, will be repaid from the proceeds of the Offering. See "Use of
Proceeds."

IMPACT OF INFLATION

To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.

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<PAGE> 33

BUSINESS

INDUSTRY BACKGROUND

As a senior's need for assistance increases, care in an assisted living
residence is often preferable and more cost-effective than home-based care or
nursing home care. Typically, assisted living represents a combination of
housing and 24-hour a day personal support services designed to aid elderly
residents with ADLs, such as ambulation, bathing, dressing, eating, grooming,
personal hygiene, and monitoring or assistance with medications. Certain
assisted living residences may also provide assistance to residents with low
acuity medical needs, or may offer higher levels of personal assistance for
incontinent residents or residents with Alzheimer's disease or other cognitive
or physical frailties. Generally, assisted living residents require higher
levels of care than residents of independent living residences and retirement
living centers, but require lower levels of care than patients in skilled
nursing facilities. For seniors who need the constant attention of a skilled
nurse or medical practitioner, a skilled nursing facility may be required.

The senior living services industry is highly fragmented and characterized
by numerous small operators. Moreover, the scope of senior living services
varies substantially from one operator to another. Many smaller senior living
providers do not operate purpose-built residences, do not have professional
training for staff and provide only limited assistance with ADLs. The Company
believes that few senior living operators provide the required comprehensive
range of senior living services, such as dementia care and other services
designed to permit residents to "age in place" within the community as they
develop further physical or cognitive frailties.

The Company believes that a number of demographic, regulatory, and other
trends will contribute to the continued growth in the senior living market, the
Company's targeted market for future development and expansion, including the
following:

Consumer Preference

The Company believes that senior living communities are increasingly
becoming the setting preferred by prospective residents and their families for
the care of the elderly. Senior living offers residents greater independence and
allows them to "age in place" in a residential setting, which the Company
believes results in a higher quality of life than that experienced in more
institutional or clinical settings.

The likelihood of living alone increases with age. Most of this increase is
due to an aging population in which women outlive men. In 1993, eight out of ten
noninstitutionalized elderly who lived alone were women. According to the United
States Bureau of Census, based on 1993 data, for women the likelihood of living
alone increases from 32% for 65- to 74-year-olds to 57% for those women aged
85-and-older. Men show similar trends with 13% of the 65- to 74-year-olds living
alone rising to 29% of the men aged 85 and older living alone. Societal changes,
such as rising divorce rates and the growing numbers of persons choosing not to
marry, have further increased the number of Americans living alone. This growth
in the number of elderly living alone has resulted in an increasing demand for
services that historically have been provided by a spouse, other family members
or live-in caregivers.

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<PAGE> 34

The table below shows the estimated breakdown of persons needing assistance
with ADLs as of 1990-1991.

PERCENTAGE OF PERSONS BY AGE COHORT NEEDING ASSISTANCE WITH
EVERYDAY ACTIVITIES: 1990-1991

[CHART TO COME]

Demographics

The primary market for the Company's senior living services is comprised of
persons aged 65 and older. This age group is one of the fastest growing segments
of the United States population and is expected to double by the year 2030.
According to United States Census Bureau information, the segment of the
population that is aged 75 and older is expected to increase from approximately
13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The
population of seniors aged 85 and over is expected to increase from
approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of
39%. As the number of persons aged 65 and over continues to grow, the Company
believes that there will be corresponding increases in the number of persons who
need assistance with ADLs. According to the United States General Accounting
Office, as of 1990 there are approximately 6.5 million people aged 65 and older
in the United States who needed assistance with ADLs, and the number of people
needing such assistance is expected to double by the year 2020. According to the
Alzheimer's Association the number of persons afflicted with Alzheimer's disease
is expected to grow from the current 4.0 million to 14.0 million by the year
2050.

Restricted Supply of Nursing Beds

The majority of states in the United States have adopted Certificate of
Need or similar statutes generally requiring that, prior to the addition of new
beds, the addition of new services, or the making of certain capital
expenditures, a state agency must determine that a need exists for the new beds
or the proposed activities. The Company believes that this Certificate of Need
process tends to restrict the supply and availability of licensed nursing
facility beds. High construction costs, limitations on government reimbursement
for the full costs of construction, and start-up expenses also act to constrain
growth in the supply of such facilities. At the same time, nursing facility
operators are continuing to focus on improving occupancy and expanding services
to subacute patients generally of a younger age and requiring significantly
higher levels of nursing care. As a result, the Company believes that there has
been a decrease in the number of skilled nursing beds available to patients with
lower acuity levels and that this trend should increase the demand for the
Company's senior living communities, including particularly the Company's
assisted living communities and skilled nursing communities.

Cost-Containment Pressures

In response to rapidly rising health care costs, governmental and private
pay sources have adopted cost containment measures that have reduced admissions
and encouraged reduced lengths of stays in hospitals and other acute care
settings. The federal government had previously acted to curtail increases in
health care costs under Medicare by limiting acute care hospital reimbursement
for specific services to pre-established fixed

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<PAGE> 35

amounts. Private insurers have begun to limit reimbursement for medical services
in general to predetermined charges, and managed care organizations (such as
health maintenance organizations) are attempting to limit hospitalization costs
by negotiating for discounted rates for hospital and acute care services and by
monitoring and reducing hospital use. In response, hospitals are discharging
patients earlier and referring elderly patients, who may be too sick or frail to
manage their lives without assistance, to nursing homes and assisted living
residences where the cost of providing care is typically lower than hospital
care. In addition, third-party payors are increasingly becoming involved in
determining the appropriate health care settings for their insureds or clients,
based primarily on cost and quality of care. Based on industry data, the annual
cost per patient for skilled nursing care averages approximately $40,000, in
contrast to the average annual per patient cost for assisted living care of
approximately $26,000.

Senior Affluence

The average net worth of senior citizens is higher than non-senior
citizens, primarily as a result of accumulated equity through home ownership.
The Company believes that a substantial portion of the senior population thus
has significant resources available for their retirement and long-term care
needs. The Company's target population is comprised of moderate- to upper-income
seniors who have, either directly or indirectly through familial support, the
financial resources to pay for senior living communities, including an assisted
living alternative to traditional long-term care.

Reduced Reliance on Family Care

Historically, the family has been the primary provider of care for seniors.
The Company believes that the increase in the percentage of women in the work
force, the reduction of average family size, and the increased mobility in
society is reducing the role of the family as the traditional caregiver for
aging parents. The Company believes that these factors will make it necessary
for many seniors to look outside the family for assistance as they age.

OPERATING STRATEGY

The Company's operating strategy is to provide high quality senior living
services at an affordable price to its residents, while achieving and sustaining
a strong, competitive position within its chosen markets, as well as to continue
to enhance the performance of its operations. The Company plans on implementing
its operating strategy principally through the following methods:

Continue to Provide Broad Range of High-Quality Personalized Care

Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The Company also maintains a comprehensive
quality assurance program designed to ensure the satisfaction of its residents
and their family members. The Company conducts annual resident satisfaction
surveys. In 1996, the Company achieved a 96% approval rating from its residents
in a polling of its residents' satisfaction.

Offer Services Across a Range of Pricing Options

The Company's range of products and services is continually expanding to
meet the evolving needs of its residents. The Company has developed a menu of
products and service programs which may be further customized to serve both the
moderate and upper income markets of a particular targeted geographic area. By
offering a range of pricing options that are customized for each target market,
the Company believes that it can develop synergies, economies of scale, and
operating efficiencies in its efforts to serve a larger percentage of the
elderly population within a particular geographic market.

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Maintain and Improve Occupancy Rates

The Company continually seeks to maintain and improve occupancy rates by:
(i) retaining residents as they "age in place" by extending optional care and
service programs; (ii) attracting new residents through the on-site marketing
program focus on residents and family members; and (iii) aggressively seeking
referrals from professional community outreach sources, including area churches,
senior social service programs, civic and business networks, as well as the
medical community.

Improve Operating Efficiencies

The Company will seek to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By having an
established national portfolio of communities with regional management in place,
the Company believes it has established a platform to achieve operating
efficiencies through economies of scale in the purchase of bulk items, such as
food, and in the spreading of fixed costs, such as corporate overhead, over a
larger revenue base, and to provide more effective management supervision and
financial controls.

Emphasize Employee Training and Retention

The Company devotes special attention to the hiring, screening, training,
supervising, and retention of its employees and caregivers to ensure that
quality standards are achieved. In addition to the normal on-site training, the
Company conducts annual national management meetings and encourages sharing of
expertise among managers. The Company's commitment to the total quality
management concept is emphasized throughout its training program. The Company
believes its commitment to and emphasis on employee training and retention
differentiates the Company from many of its competitors.

Utilize Comprehensive Information Systems

The Company employs comprehensive proprietary information systems to manage
financial and operating data in connection with the management of its
communities. Utilizing its computerized systems, the Company is able to collect
and monitor on a regular basis key operating data for its communities. Reports
are routinely prepared and distributed to on-site, district and regional
managers for use in managing the profitability of the communities. The Company's
management information systems provide senior management with the ability to
identify emerging trends, monitor and control costs and develop current pricing
strategies. The Company believes that its proprietary information systems are
sufficient to support future growth and that the Company will have adequate
resources to expand these systems to support the growth envisioned by the
Company's business plan.

CARE AND SERVICES PROGRAMS

The Company provides a wide array of senior living services to the elderly
at its communities, including independent living, assisted living (with special
programs and living units for residents with Alzheimer's and other forms of
dementia), skilled nursing, and home health care services. By offering a variety
of services and encouraging the active participation of the resident and the
resident's family and medical consultants, the Company is able to customize its
service plan to meet the specific needs and desires of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
and avoid the high cost of delivering unnecessary services to residents.

Independent Living Services

The Company provides independent living services to seniors who do not yet
need assistance or support with ADLs, but who prefer the physical and
psychological comfort of a residential community that offers health care and
other services. The Company currently has ownership interests in nine
communities and manages an additional 14 communities which provide independent
living services, with an aggregate capacity for 1,607 and 1,913 residents,
respectively.

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<PAGE> 37

Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings (such as blood pressure checks),
periodic special services (such as influenza inoculations), chronic disease
management (such as diabetes with its attendant blood glucose monitoring),
dietary and similar programs, as well as ongoing exercise and fitness classes.
Classes are given by health care professionals to keep residents informed about
health and disease management. Subject to applicable government regulation,
personal care and medical services are available to independent living residents
through either the community staff or through the Company's or independent home
health care agencies. The Company's independent living residents pay a fee
ranging from $1,250 to $2,400 per month, in general, depending on the specific
community, program of services, size of the units, and amenities offered. The
Company's contracts with its independent living residents are generally for a
term of one year and are typically terminable by the resident upon 30 days'
notice.

Assisted Living and Memory Impaired Services

The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services. The Company currently has ownership interests in seven
communities, leases a community from a third party, and manages an additional 10
communities which provide assisted living services, with an aggregate capacity
for 219, 38, and 399 residents, respectively. The residents of the Company's
assisted living residences generally need help with some or all ADLs, but do not
require the more acute medical care traditionally given in nursing homes. Upon
admission to the Company's assisted living communities, and in consultation with
the resident, the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services, and completes a lifestyles assessment to
determine the resident's preferences. From these assessments, a care plan is
developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each
resident's care plan is reviewed periodically to determine when a change in care
is needed.

The Company has adopted a philosophy of assisted living care that allows 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 for their well being as possible. The basic types of assisted
living services offered by the Company include the following:

Personal Care Services. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal hygiene,
and monitoring or assistance with medications.

Support Services. These services include meals, assistance with social
and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.

Supplemental Services. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine care
services, and special care services, such as services for residents with
Alzheimer's and other forms of dementia. Certain of these services require
an extra charge in addition to the pricing levels described below.

In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:

- Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,750 to $1,900, depending upon unit size and the project design
type. Typically, Level I residents need minimal assistance with ADLs.

- Level II provides for relatively higher levels and increased frequency of
care, for which the Company generally charges a monthly fee per resident
ranging from $1,900 to $2,250, depending upon the unit size and the
project design type. Typically, Level II residents require moderate
assistance with ADLs and may need additional personal care, support, and
supplemental services.

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<PAGE> 38

- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,250 to $2,400, depending upon the unit size and the project design
type. Typically, Level III residents are either very frail or impaired
and utilize many of the Company's services on a regular basis.

The Company maintains programs and special units at its assisted living
communities for residents with Alzheimer's and other forms of dementia, which
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
as they wish while keeping them safely contained within a secure area with a
minimum of disruption to other residents. Special nutritional programs are used
to help ensure caloric intake is maintained in residents. Resident fees for
these special units are dependent on the size of the unit, the design type, and
the level of services provided.

Skilled Nursing Services

In its skilled nursing communities, the Company provides traditional
long-term care through 24-hour per day skilled nursing care by registered
nurses, licensed practical nurses, and certified nursing assistants. The Company
also offers a comprehensive range of restorative nursing and rehabilitation
services in its communities including, but not limited to, physical,
occupational, speech, and medical social services. The Company currently has
ownership interests in seven communities, leases a community, and manages an
additional community which provides nursing services, with an aggregate capacity
for 746, 60, and 60 residents, respectively.

Home Health Care

The Company currently provides home health care services to clients at
certain of its senior living communities through an on-site home health care
agency. The Company believes that the provision of home health care services is
an attractive adjunct to its independent living services because it allows the
Company to provide more services to its residents as they age in place and
increase the length of stay in the Company's communities. The services and
products that the Company provides through its home health care agency include:
(i) general and specialty nursing services to clients with long-term chronic
health conditions, permanent disabilities, terminal illnesses and
post-procedural needs; (ii) rehabilitative therapy services including physical,
occupational and speech therapy through outside contractors; (iii) personal care
services and assistance with ADLs; (iv) enhanced hospice care for clients in the
final phases of incurable disease; and (v) extensive monitoring and educational
services relative to respiratory care, medication administration, medical
equipment, and medical supplies. The Company intends to expand its home health
care service business to additional senior living communities and to develop,
acquire, or manage home health care service businesses at other such
communities. In addition, the Company will make available to residents certain
customized physician, dentistry, podiatry, and other health-related services
that may be offered by third-party providers. The Company may elect to provide
these services directly or through participation in managed care networks.

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<PAGE> 39

OPERATING COMMUNITIES

The table below sets forth certain information with respect to the
independent, senior living, and continuum of care communities currently owned,
leased, and managed by the Company.

<TABLE>
<CAPTION>
RESIDENT CAPACITY(1) COMMENCE- OCCUPANCY RATE
------------------------- OWNER- MENT OF --------------------
COMMUNITY LOCATION IL AL SN TOTAL SHIP(2) OPERATIONS(3) 12-31-96 6-30-97
--------- -------- ----- --- --- ----- ------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED:
Amberleigh............. Buffalo, NY 365 29 -- 394 30% 1/92 98% 96%
Atrium of Carmichael... Sacramento, CA 156 -- -- 156 30% 1/92 98% 99%
Cambridge Nursing
Home................. Cambridge, MA -- -- 120 120 56% 7/93 94% 99%
Canton Regency......... Canton, OH 164 34 50 248 100% 3/91 94% 98%
Cottonwood Village..... Cottonwood, AZ 69 -- -- 69 100% 3/91 95% 100%
Crosswood Oaks......... Sacramento, CA 127 -- -- 127 30% 1/92 86% 88%
Harrison at Eagle
Valley............... Indianapolis, IN 138 -- -- 138 100% 3/91 83% 92%
Heatherwood............ Detroit, MI 188 -- -- 188 30% 1/92 81% 86%
Towne Centre........... Merrillville, IN 165 34 64 263 100% 3/91 92% 94%
Veranda Club........... Boca Raton, FL 235 -- -- 235 30% 1/92 96% 93%
----- --- --- ----- ---- ----
Subtotal............. 1,607 97 234 1,938 92% 95%
---- ----
OWNED AND LEASED TO
OTHERS:
Cane Creek............. Martin, TN -- 8 36 44 56% 7/93 100%(4) 100%(4)
Cedarbrook............. Nashville, TN -- 42 -- 42 56% 7/93 100%(4) 100%(4)
Crenshaw Creek......... Lancaster, SC -- 36 -- 36 56% 7/93 100%(4) 100%(4)
Hearthstone............ Austin, TX -- -- 120 120 56% 7/93 100%(4) 100%(4)
McCurdy................ Evansville, IN -- -- 236 236 56% 7/93 100%(4) 100%(4)
Sandybrook............. Orlando, FL -- 36 -- 36 56% 7/93 100%(4) 100%(4)
Trinity Hills.......... Fort Worth, TX -- -- 120 120 56% 7/93 100%(4) 100%(4)
----- --- --- -----
Subtotal............. -- 122 512 634
LEASED FROM OTHERS:
Maryland Gardens(5).... Phoenix, AZ -- 38 60 98 6/97 -- 95%
----- --- --- -----
Subtotal............. -- 38 60 98
MANAGED:
Buckner Haven.......... Houston, TX 16 69 60 145 4/97 (6) (6)
Buckner Westminster
Place................ Longview, TX 117 -- -- 117 6/96
Crown Pointe........... Omaha, NE 163 -- -- 163 8/96 100% 100%
Crown Villa............ Omaha, NE -- 73 -- 73 8/96 97% 96%
Independence Village... East Lansing, MI 162 -- -- 162 8/96 84% 92%
Independence Village... Peoria, IL 173 -- -- 173 8/96 93% 97%
Independence Village... Raleigh, NC 155 22 -- 177 8/96 100% 95%
Independence Village... Winston-Salem, NC 145 16 -- 161 8/96 93% 95%
Overland Park Place.... Kansas City, KS 126 25 -- 151 8/96 96% 96%
The Palms.............. Fort Myers, FL 235 20 -- 255 8/96 100% 96%
Rio Las Palmas......... Stockton, CA 142 50 -- 192 8/96 87% 85%
Sedwick Plaza.......... Wichita, KS 117 54 -- 171 8/96 81% 95%
Villa at Riverwood..... St. Louis, MO 140 -- -- 140 8/96 98% 95%
Villa Santa Barbara.... Santa Barbara, CA 87 38 -- 125 8/96 93% 94%
West Shores............ Hot Springs, AR 135 32 -- 167 8/96 96% 98%
----- --- --- ----- ---- ----
Subtotal/Average..... 1,913 399 60 2,372 94% 95%
----- --- --- ----- ---- ----
93% 95%
Grand Total.......... 3,520 656 866 5,042
===== === === ===== ==== ====
</TABLE>

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

(1) Independent living (IL) residences, assisted living (AL) residences
(including areas dedicated to residents with Alzheimer's and other forms of
dementia), and skilled nursing (SN) beds.

(2) In the case of those communities shown as 30% owned by the Company, this
represents ownership of approximately 30% of the outstanding NHP Notes.
Based on appraised values, the aggregate principal and accrued interest of
the NHP Notes is believed to be comparable to the appraised value of the NHP

38
<PAGE> 40

properties. In the case of those communities shown as approximately 56%
owned, this represents the Company's ownership of approximately 56% of the
limited partner interests in HCP.

(3) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.

(4) Represents communities owned by the Company and leased to third parties
pursuant to master leases under which the Company receives rent regardless
of whether the units are occupied. Does not represent occupancy rate, but
rather percentage of property leased pursuant to the master lease. These
leases were in place at the time the Company acquired its interest in these
communities.

(5) This community is leased pursuant to a 14-month operating lease entered into
by the Company on June 1, 1997, under which the Company has an option to
purchase the community.

(6) It is anticipated that this community will be closed in 1998 and the
residents transferred to Buckner Parkway Place upon its completion in the
first quarter of 1998.

(7) This community was in the initial lease-up phase during the periods
presented above.

(8) Excludes communities owned and leased to others.

THIRD-PARTY MANAGEMENT CONTRACTS

The Company is a party to two separate property management agreements (the
"ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, corporations formed by ILM Senior Living, Inc. and ILM Senior
Living II, Inc. (collectively, "ILM") that operate 13 senior living communities.
The ILM Management Agreements commenced on July 29, 1996 and will expire on
December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Under the terms of
the ILM Management Agreements, the Company earns a base management fee equal to
4% of the gross operating revenues of the facilities under management (as
defined), and is also eligible to receive an incentive management fee equal to
25% of the amount by which the average monthly net cash flow of the facilities
(as defined) for the 12-month period ending on the last day of each calendar
month exceeds a specified base amount. The ILM Management Agreements are
terminable upon the sale of the related facilities, subject to the Company's
rights to offer to purchase the facilities. In the event of a sale, the Company
has the right to make the first and last offer with respect to the purchase of
the facilities subject to the ILM Management Agreements. The Company earned a
total of $549,000 and $637,000 under the two ILM Management Agreements for the
nine months ended May 31, 1997, which includes the incentive management fee. The
Company believes there is a reasonable likelihood that it will earn such
incentive fee in the future. See "Certain Transactions -- ILM Management
Contracts."

The Company is also a party to two separate property management agreements
(the "Buckner Agreements") with Buckner Retirement Services, Inc. ("Buckner"), a
not-for-profit corporation that operates two senior living communities. The
Buckner Agreements commenced on April 1, 1996 and 1997 and expire on March 31,
2001 and 2002, respectively, except that either party may terminate the
agreements for cause under limited circumstances. Under the terms of the Buckner
Agreements, the Company earns a base management fee equal to 5% of the gross
revenues of the facility (as defined) or $5,000 per month, whichever is greater.
In the case of one of the two Buckner Agreements, the Company is also entitled
to a marketing lease-up fee of $500 for each unit at the time it is initially
occupied. Each agreement provides that the Company is also eligible to receive
an incentive fee equal to 25% of the excess cash flow over budgeted amounts. The
Company earned this incentive fee in each of the last two years and believes
that there is a reasonable likelihood that it will earn such incentive fee in
the future. Pursuant to the terms of the Buckner Agreements, the Company has a
right of first refusal with respect to purchasing the communities subject to
these agreements.

GROWTH STRATEGIES

The Company believes that the fragmented nature of the senior living
services industry and the limited capital resources available to many small,
private operators provide an attractive opportunity for the Company to expand
its existing base of senior living operations. The Company believes that its
current operations

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<PAGE> 41

throughout the United States serve as the foundation on which the Company can
build senior living networks in targeted geographic markets and thereby provide
a broad range of high quality care in a cost-efficient manner.

The following are the principal elements of the Company's growth strategy:

Expand Existing Communities

The Company plans to expand certain of its existing communities to include
additional independent living, assisted living residences (including special
programs and living units for residents with Alzheimer's and other forms of
dementia), and, possibly skilled nursing beds. The Company currently has one
expansion project under construction and 11 expansion projects under
development, representing an aggregate increase in capacity to accommodate an
additional 994 residents. Of these 12 expansion projects, one is at a community
which is owned by the Company, four are at communities in which the Company owns
an interest and manages under multi-year agreements, and seven are at
communities which the Company manages for third parties. The costs of the
expansion of managed communities is borne by the community owner and not by the
Company. However, with respect to the four expansion projects in which the
Company has a partial ownership interest, the Company will manage the expansion
and have rights to lease and purchase the expansion facilities. The expansion of
existing senior living communities allows the Company to create operating
efficiencies and capitalize on its local presence, community familiarity, and
reputation in markets in which the Company currently operates.

The table below summarizes information regarding the expansion of certain
of the Company's existing senior living communities currently in process.

EXPANSION PROJECTS:

<TABLE>
<CAPTION>
SCHEDULED
COMMUNITY LOCATION COMPLETION IL AL TOTAL STATUS(1)
--------- -------- ------------- --- --- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Cottonwood Village................ Cottonwood, AZ 1st half 1998 66 47 113 Construction
Hearthstone....................... Austin, TX 2nd half 1998 -- 50 50 Development
Buckner Westminister Village...... Longview, TX 2nd half 1998 -- 60 60 Development
Towne Centre...................... Merrillville, IN 1st half 1999 66 70 136 Development
Canton Regency.................... Canton, OH 1st half 1999 100 30 130 Development
Independence Village.............. Raleigh, NC 2nd half 1998 -- 50 50 Development
West Shores....................... Hot Springs, AR 2nd half 1998 -- 65 65 Development
The Palms......................... Ft. Myers, FL 2nd half 1998 -- 48 48 Development
Independence Village.............. Peoria, IL 1st half 1999 46 30 76 Development
Crown Point/Crown Villa........... Omaha, NE 1st half 1999 102 24 126 Development
Amberleigh........................ Buffalo, NY 1st half 1999 -- 80 80 Development
Independence Village.............. East Lansing, MI 2nd half 1999 -- 60 60 Development
--- --- ---
Total......................... 380 614 994
=== === ===
</TABLE>

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

(1) "Development" indicates that development activities, such as site surveys,
preparation of architectural plans, or initiation of zoning processes, have
commenced (but construction has not commenced). "Construction" indicates
that construction activities, such as ground-breaking activities, exterior
construction, or interior build-out have commenced.

Develop New Senior Living Communities

General. The Company intends to continue to expand its operations through
the development and construction of new senior living communities in selected
markets which provide a quality lifestyle that is affordable to a large segment
of seniors. The Company's national presence provides it with extensive research
and experience in various markets which serve as the basis for the formulation
of its development strategy in the selection of new markets. The Company's
development plan calls for the identification of multiple markets

40
<PAGE> 42

in which construction can occur within the Company's targeted time frame and
budget. The Company has developed a list of target markets and submarkets based
upon local market conditions, the availability of development sites and local
construction capabilities, the existence of development barriers to entry, the
overall health and growth trends of the local economies, and the presence of a
significant elderly population.

The Company's senior management has extensive experience in real estate
development, having developed in excess of $350 million of senior living
communities. The Company has an integrated internal development approach
pursuant to which the Company's management and other personnel (including
designers and architects, market analysts, and construction managers) locate
sites for, develop, and open its communities. Personnel who are experienced in
site selection conduct extensive market and site-specific feasibility studies
prior to the Company's committing significant financial resources to new
projects. The Company believes it can rapidly expand its operations into new
markets and strengthen its presence within its existing markets utilizing its
existing residence models, such as the Waterford model.

Development with Tri Point. Eleven of the 17 senior living communities
referred to in the table below will be Waterford communities, and will be
developed pursuant to an arrangement with Tri Point, an affiliate of the
Company, under which Tri Point will pay development and management fees to the
Company for development and management services and the Company will have
options to lease or purchase the communities upon their completion. Tri Point
will be responsible for funding the construction and lease-up costs. These
communities will have an aggregate capacity for approximately 1,496 residents at
an aggregate estimated cost of completion and lease-up of approximately $80.0
million to $100.0 million. Tri Point has outstanding commitments for loan
facilities from institutional lenders aggregating up to $100.0 million to fund
these development activities. The Waterford community model is designed to
provide middle income residents with a senior living community having amenities
typical of higher-priced communities through more efficient space design,
emphasizing common areas and providing more efficient layouts of the living
areas. See "Certain Transactions-Tri Point Development Agreement."

The Waterford design may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, or site. In addition, the Waterford design has
been developed to facilitate the prompt, efficient, cost-effective delivery of
health care and personal services. Site requirements for the various designs
range from 4.5 to 6.0 acres. The Waterford design may also provide for specially
designed residential units, common areas, and dining rooms for residents with
Alzheimer's and other forms of dementia.

The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including: (i) lessening the trauma of change
for residents and their families; (ii) facilitating resident mobility and
caregiver access; (iii) enhancing operating efficiencies; (iv) enhancing the
Company's ability to match its products to targeted markets; and (v)
differentiating the Company from its competitors.

Development through Other Strategic Alliances. The Company has also formed
strategic alliances with for-profit and not-for-profit organizations (such as
Buckner Retirement Services, Inc.) to develop, lease-up and manage additional
communities while reducing the investment of, and associated risks to, the
Company. The Company's alliances are with established development companies or
not-for-profit owner/operators of senior living communities. Six of the 17
senior living communities referred to in the table below will be developed
through strategic alliances. The for-profit entities generally provide
construction management experience, existing relationships with local
contractors, suppliers, and municipal authorities, knowledge of local and state
building codes and building laws, and assistance with site selection for new
communities. The not-for-profit organizations generally provide existing
relationships with church and other religious organizations, a community
reputation of caring for seniors, a tax-exempt status that permits tax- exempt
bond financing, and in certain instances, home health care services. The Company
contributes its operational and industry expertise, has had, in most cases,
leasing and management responsibilities for communities owned by these
organizations, as well as has the right of first refusal to acquire the
communities in most cases. Through June 30, 1997, the Company had one new
community with a 385-resident capacity under construction and six

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<PAGE> 43

communities with 1,445 resident capacity under development with these
organizations. The Company intends to continue to evaluate opportunities to form
similar joint ventures and strategic alliances in the future.

The Company is currently evaluating a number of potential development
projects. The table below summarizes information regarding those developments
which the Company expects to complete by 1999.

<TABLE>
<CAPTION>
SCHEDULED
LOCATION OF DEVELOPMENT PROJECTS: COMPLETION IL AL SN TOTAL STATUS(1)
- --------------------------------- ------------- ----- --- --- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Houston, TX...................... 1st half 1998 243 82 60 385 Construction
Carrollton, TX................... 2nd half 1998 136 -- -- 136 Development
Mesquite, TX..................... 1st half 1999 136 -- -- 136 Development
Duncanville, TX.................. 1st half 1999 136 -- -- 136 Development
Jacksonville, FL................. 1st half 1999 136 -- -- 136 Development
N. Richland Hills, TX............ 1st half 1999 136 -- -- 136 Development
Euless, TX....................... 1st half 1999 136 -- -- 136 Development
Shreveport, LA................... 1st half 1999 136 -- -- 136 Development
Brownwood, TX.................... 1st half 1999 125 30 -- 155 Development
Oklahoma City, OK................ 1st half 1999 136 -- -- 136 Development
San Antonio, TX.................. 1st half 1999 136 -- -- 136 Development
Las Vegas, NV.................... 1st half 1999 136 -- -- 136 Development
Beaumont, TX..................... 1st half 1999 156 54 30 240 Development
Oklahoma City, OK................ 1st half 1999 136 -- -- 136 Development
Trumbull, CT (2)................. 1st half 1999 120 30 -- 150 Development
Dallas, TX (2)................... 1st half 1999 270 40 -- 310 Development
Georgetown, TX................... 2nd half 1999 270 84 40 394 Development
----- --- --- -----
Total....................... 2,680 320 130 3,130
===== === === =====
</TABLE>

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

Development of Joint Venture Operations in China

The Company has recently entered into a joint venture agreement with New
World Development, Ltd. ("New World") for the purpose of investing, developing
and managing senior living communities in several cities in mainland China. New
World is a publicly traded property development company based in Hong Kong that
currently develops condominium and office projects in China. To date, New World
estimates that it has invested approximately $2.6 billion in real estate
ventures in China. Pursuant to the agreement with New World, the Company and New
World will form an entity which will develop and operate senior living
communities in major cities in China. New World will contribute its expertise in
constructing properties in China and will bear substantially of all of the
construction costs. The Company will be responsible for development of senior
living communities and for property management services. The Company currently
expects that following its initial development of senior living communities in
China, the joint venture will sell individual units in the communities to
prospective residents, and the Company will retain the operating
responsibilities in such communities. The Company's target cities currently
include Shanghai, Guangzhou and Beijing.

Pursue Strategic Acquisitions

The Company intends to continue to pursue single or portfolio acquisitions
of senior living communities and, to a lesser extent, other assisted living and
long-term care communities. Through strategic acquisitions, the Company plans to
enter new markets or acquire communities in existing markets as a means to
increase market share, augment existing clusters, strengthen its ability to
provide a broad range of care, and create

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<PAGE> 44

operating efficiencies. As the industry continues to consolidate, the Company
believes that opportunities will arise to acquire other senior living companies.
The Company believes that the current fragmented nature of the senior living
industry, combined with the Company's financial resources, national presence,
and extensive contacts within the industry, should provide it with the
opportunity to evaluate a number of potential acquisition opportunities. In
reviewing acquisition opportunities, the Company will consider, among other
things, geographic location, competitive climate, reputation and quality of
management and communities, and the need for renovation or improvement of the
communities.

Develop and Acquire Additional Home Health Care Agencies

The Company intends to expand its home health care services by developing,
acquiring, and managing new home health care agencies and expanding its range of
existing home health care services. The Company currently anticipates that its
home health care agencies will be based at the Company's communities, and will
serve both the Company's communities and the surrounding area. The Company
believes that the expansion of its home health care services will enhance its
ability to provide a broad range of health care services, increase its market
visibility, augment the creation of senior living networks in targeted areas,
and further enhance efforts to coordinate with managed care networks, increase
company profitability, as well as aid in the maintaining of current occupancy
levels. The Company currently operates one home health care agency, and intends
to establish approximately five new home health care agencies at its owned
properties by the fourth quarter 1998.

Expand Referral Networks

The Company intends to continue to develop relationships (which, in certain
instances, may involve strategic alliances or joint ventures) with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.

OPERATIONS

Centralized Management

The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Dallas, Texas. The Company's corporate office is generally responsible
for: (i) establishing Company-wide policies and procedures relating to, among
other things, resident care and operations; (ii) performing accounting
functions; (iii) developing employee training programs and materials; (iv)
coordinating human resources; (v) coordinating marketing functions; and (vi)
providing strategic direction. In addition, financing, development, construction
and acquisition activities, including feasibility and market studies, and
community design, development, and construction management, are conducted by the
Company's corporate offices.

The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional and district managers who are accountable for the resident satisfaction
and financial performance of the communities in their region.

Community-Based Management

An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. In most cases,
each community also has department managers who

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<PAGE> 45

direct the environmental services, nursing or care services, business management
functions, dining services, activities, transportation, housekeeping, and
marketing functions.

The assisted living and skilled nursing components of the senior living
communities are managed by licensed professionals, such as a nurse and/or a
licensed administrator. These licensed professionals have many of the same
operational responsibilities as the Company's executive directors, but their
primary responsibility is to oversee resident care. Many of the Company's
assisted living communities and some of its skilled nursing facilities are part
of a campus setting, which includes independent living. This campus arrangement
allows for cross-utilization of certain support personnel and services,
including administrative functions, which results in greater operational
efficiencies and lower costs than free-standing facilities.

The Company actively recruits personnel to maintain adequate staffing
levels at its existing communities as well as new staff for new or acquired
communities prior to opening. The Company has adopted comprehensive recruiting
and screening programs for management positions that utilize corporate office
team interviews and thorough background and reference checks. The Company offers
system-wide training and orientation for all of its employees at the community
level through a combination of Company-sponsored seminars and conferences.

Home Health Management

The Company collects all home health care financial data through the use of
an electronic data system. This system gives senior management the ability to
identify emerging trends, monitor cost controls and develop current pricing
strategies. All accounting functions are performed at the corporate office.

The Company's home health care agency is managed under the auspices of the
executive director of the community where that agency is located and under the
direct control of an agency director who is a registered nurse. This director
and his or her team of registered nurses, licensed practical nurses, home health
care aides and various allied medical professionals focus on assessing and
subsequently managing the health care needs of residents in that senior living
community.

Quality Assurance

Quality assurance programs are coordinated and implemented by the Company's
corporate and regional staff. The Company's quality assurance is targeted to
achieve maximum resident and resident family member satisfaction with the care
and services delivered by the Company. The Company's primary focus in quality
control monitoring includes routine in-service training and performance
evaluations of care givers and other support employees. Additional quality
assurance measures include:

Resident and Resident Family Input. On a routine basis the Company provides
residents and family members the opportunity to provide valuable input regarding
the day-to-day delivery of services. On-site management at each community has
fostered and encouraged active resident councils and resident committees who
meet independently. These resident bodies meet with on-site management on a
monthly basis to offer input and suggestions to the quality and delivery of
services. Additionally, at each community the Company conducts annual resident
satisfaction surveys to further monitor the satisfaction levels of both
residents and family members. These surveys are sent directly to the corporate
headquarters for tabulation and distribution to on-site staff and residents. For
any departmental area of service scoring below a 90%, a plan of correction is
developed jointly by on-site, regional and corporate staff for immediate
implementation.

Regular Community Inspections. On a monthly basis a community inspection is
conducted by regional and/or corporate staff. Included as part of this
inspection is the monitoring of the overall appearance and maintenance of the
community interiors and grounds. The inspection also includes monitoring staff
professionalism and departmental reviews of maintenance, housekeeping,
activities, transportation, marketing, administration and food service as well
as health care, if applicable. The monthly inspection also includes the
observation of residents in their daily activities and community compliance with
government regulations.

Independent Service Evaluations. The Company engages the services of
outside professional independent consulting firms to evaluate various components
of the community operations. These services include

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<PAGE> 46

"mystery shops," competing community analysis, pricing recommendations and
product positioning. This provides management with valuable unbiased product and
service information. A plan of action regarding any areas requiring improvement
or change is implemented based on information received. At communities where
health care is delivered, these consulting service reviews include the on-site
handling of medications, record-keeping, and general compliance with all
governmental regulations.

Marketing

Each community is staffed by on-site marketing directors and additional
marketing staff depending on the community size. The primary focus of the
on-site marketing staff is to create awareness of the Company and its services
among prospective residents and family members, professional referral sources
and other key decision makers. The marketing efforts incorporate an aggressive
marketing plan to include monthly and annual goals for leasing, new lead
generation, prospect follow up, community outreach, and resident and family
referrals. Additionally, the marketing plan includes a calendar of promotional
events and a comprehensive media program. On-site marketing departments perform
a competing community assessment twice annually. Corporate and regional
marketing directors monitor the on-site marketing departments' effectiveness and
productivity on a monthly basis. Routine detailed marketing department audits
are performed on an annual basis or more frequently if deemed necessary.
Corporate and regional personnel assist in the development of marketing
strategies for each community and produce creative media, assist in direct mail
programs and necessary marketing collateral materials. Ongoing sales training of
on-site marketing staff is implemented by corporate and regional marketing
directors.

In the case of new development, the corporate and regional staff develop a
comprehensive community outreach program that is implemented at the start of
construction. A marketing pre-lease program is developed and on-site marketing
staff are hired and trained to begin the program implementation six to nine
months prior to the community opening. Extensive use of media to include radio,
television, print, direct mail and telemarketing is implemented during this
pre-lease phase.

After the community is opened and sustaining occupancy levels are attained,
the on-site marketing staff is more heavily focused on resident and resident
family referrals, as well as professional referrals. A maintenance program of
print media and direct mail is then implemented.

GOVERNMENT REGULATION

Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could have
a material effect on the Company's operations. Failure by the Company to comply
with applicable regulatory requirements could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Accordingly, the Company monitors legal and regulatory developments on local and
national levels.

The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, Certificate of Need and
permitting by state and local health and social service agencies and other
regulatory authorities. While such requirements vary from state to state, they
typically relate to staffing, physical design, required services, and resident
characteristics. The Company believes that such regulation will increase in the
future. In addition, health care providers are receiving increased scrutiny
under anti-trust laws as integration and consolidation of health care delivery
increases and affects competition. The Company's communities are also subject to
various zoning restrictions, local building codes, and other ordinances, such as
fire safety codes. Failure by the Company to comply with applicable regulatory
requirements could have a material adverse effect on the Company's business,
financial condition, and results of operations. Regulation of the assisted
living industry is evolving. The Company is unable to predict the content of new
regulations and their effect on its business. There can be no assurance that the
Company's operations will not be adversely affected by regulatory developments.

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<PAGE> 47

The Company believes that its communities are in substantial compliance
with applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently pending
with respect to any of the Company's communities.

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 that also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities 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.

In addition, 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 adversely affect 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 a 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. The Company has completed Phase I environmental audits of the
communities in which the Company owns interests, and such surveys have not
revealed any material environmental liabilities that exist with respect to these
communities.

The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environments change. 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.

COMPETITION

The senior living services industry is highly competitive, and the Company
expects that all segments of the industry will become increasingly competitive
in the future. Although there are a number of substantial companies active in
the senior living services industry and in the markets in which the Company
operates, the industry continues to be very fragmented and characterized by
numerous small operators. For example, the Company competes with American
Retirement Corporation in Texas, Sunrise Assisted Living, Inc. in North Carolina
and New York, Atria Communities in New York, and Marriott Senior Living Services
in Florida. The Company believes that the primary competitive factors in the
senior living services industry are: (i) reputation for and commitment to a high
quality of 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 communities; and (v) location. The Company
competes with other companies providing independent living, assisted living,
skilled nursing, home health care, and other similar service and care
alternatives, some of whom may have greater financial resources than the
Company. Because seniors tend to choose senior living communities near their
homes, the Company's principal competitors are other senior living and long-term
care communities in the same geographic areas as the Company's communities. The
Company also competes with

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<PAGE> 48

other health care businesses with respect to attracting and retaining nurses,
technicians, aides, and other high quality professional and non-professional
employees and managers.

INSURANCE AND LEGAL PROCEEDINGS

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which 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 and managed communities under a
master insurance program in amounts and with such coverages and deductibles that
the Company believes are within normal industry standards based upon the nature
and risks of the Company's business, and the Company believes that such
insurance coverage is adequate. The Company also has an umbrella excess
liability protection policy in the amount of $10.0 million per location. There
can be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company. In
addition, the Company's insurance policies must be renewed 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.

Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.

On July 29, 1996, ILM terminated management agreements with Angeles Housing
Concepts, Inc. ("AHC") covering the management of its senior living communities
and entered into the ILM Management Agreements described herein under
"Business -- Third-Party Management Contracts." On February 4, 1997, AHC filed a
lawsuit in the Superior Court of the State of California against Capital Senior
Management 2, Inc., one of the Contributed Entities, and others alleging that
the defendants intentionally interfered with AHC's property management
agreements with ILM by inducing ILM to terminate the agreements. The complaint
seeks damages of at least $2 million. On March 4, 1997, the defendants removed
the case to the U.S. District Court for the Central District of California.
Trial in the action has been set for January 12, 1998, and discovery in the
action has begun. The Company is vigorously defending the claims and believes
that it has adequate insurance to cover the claim if the matter is determined
adversely to the Company. In an action pending in the U.S. District Court for
the Eastern District of Virginia that the Company is not a party to, ILM
initiated a lawsuit against AHC for breach of contract and other claims, and AHC
filed a counterclaim against ILM. AHC has obtained a judgment against ILM in
this action in the amount of $1 million based on claims that ILM breached its
management agreements with AHC, which judgment ILM has appealed.

EMPLOYEES

As of June 30, 1997, the Company employed approximately 1,558 persons, of
which approximately 882 are full-time employees (approximately 32 of whom are
located at the Company's corporate offices) and 676 are part-time employees.
None of the Company's employees is currently represented by a labor union and
the Company is not aware of any union organizing activity among its employees.
The Company believes that its relationship with its employees is good.

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<PAGE> 49

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information concerning each of the
Company's executive officers, directors and key employees:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Jeffrey L. Beck...................... 52 Co-Chairman and Chief Executive Officer
Co-Chairman, Chief Operating Officer, and
James A. Stroud...................... 47 Secretary
Lawrence A. Cohen.................... 43 Vice Chairman and Chief Financial Officer
Keith N. Johannessen................. 40 President
Rob L. Goodpaster.................... 44 Vice President -- National Marketing
David W. Beathard, Sr................ 50 Vice President -- Operations
Charles W. Allison................... 48 Vice President -- Development
David R. Brickman.................... 39 Vice President and General Counsel
Kathleen L. Granzberg................ 36 Controller -- Corporate
Robert F. Hollister.................. 41 Controller -- Property
Dr. Gordon I. Goldstein.............. 60 Director -- Nominee
Dr. Victor W. Nee.................... 62 Director -- Nominee
J. Frank Miller, III................. 45 Director -- Nominee
James A. Moore....................... 63 Director -- Nominee
</TABLE>

Messrs. Nee and Miller have agreed to become members of the Board of
Directors of the Company effective upon completion of the Offering. Prior to the
consummation of the Offering, the Company will identify two additional
independent directors who will be appointed to the Board effective upon the
completion of the Offering.

JEFFREY L. BECK has served as a director and Chief Executive Officer of the
Company and its predecessors since January 1986. He currently serves as
Co-Chairman and Chief Executive Officer of the Company. Mr. Beck also serves on
the boards of various educational, religious and charitable organizations and in
varying capacities with several trade associations. Mr. Beck served as Vice
Chairman of the American Seniors Housing Association from 1992 to 1994, and as
Chairman from 1994 to 1996, and remains a member of its Executive Board, and is
a council member of the Urban Land Institute. Mr. Beck is Chairman of the Board
of Directors of United Texas Bank of Dallas and is Chairman and President of
Beck Properties Trophy Club.

JAMES A. STROUD has served as a director and Chief Operating Officer of the
Company and its predecessors since January 1986. He currently serves as
Co-Chairman and Chief Operating Officer of the Company. Mr. Stroud also serves
on the boards of various educational and charitable organizations, and in
varying capacities with several trade organizations, including as a member of
the Founder's Council and Board of Directors of the Assisted Living Federation
of America, and as Housing Commissioner, President-Elect, and as a member of the
Board of Directors of the National Association For Senior Living Industries. Mr.
Stroud also serves as an Advisory Group member to the National Investment
Conference. Mr. Stroud was a Founder of the Texas Assisted Living Association
and serves as a member of its Board of Directors. Mr. Stroud has earned a
Masters in Law, is a licensed attorney and is also a Certified Public
Accountant.

LAWRENCE A. COHEN has served as a director and Vice Chairman and Chief
Financial Officer of the Company since November 1996. From 1991 to 1996, Mr.
Cohen served as President and Chief Executive Officer of Paine Webber Properties
Incorporated, which controlled a real estate portfolio having a cost basis of
approximately $3.0 billion, including senior living facilities of approximately
$110.0 million. Mr. Cohen is also president and a member of the boards of
directors of ILM Senior Living, Inc. and ILM Senior Living II, Inc., and is a
member of the boards of directors of ILM I Lease Corporation and ILM II Lease
Corporation. In

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<PAGE> 50

addition, he serves as a member of the Corporate Finance Committee and chairman
of the Direct Participation Programs Subcommittee of the NASD Regulation, Inc.,
and was a founding member of the executive committee of the Board of the
American Seniors Housing Association. Mr. Cohen has earned a Masters in Law, is
a licensed attorney and is also a Certified Public Accountant. Mr. Cohen has had
positions with businesses involved in senior living for 12 years.

KEITH N. JOHANNESSEN has served as President of the Company and its
predecessors since March 1994, and previously served as Executive Vice-President
since May 1993. From 1992 to 1993, Mr. Johannessen served as Senior Manager in
the health care practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen
was Executive Vice President of Oxford Retirement Services, Inc. Mr. Johannessen
has served on the State of the Industry and Model Assisted Living Regulations
Committees of the American Seniors Housing Association. Mr. Johannessen has been
active in operational aspects of senior housing for 19 years.

ROB L. GOODPASTER has served as Vice President -- National Marketing of the
Company and its predecessors since December 1992. From 1990 to 1992, Mr.
Goodpaster was National Director for Marketing for Autumn America, an owner and
operator of senior housing facilities. Mr. Goodpaster is a member of the Board
of Directors of the National Association For Senior Living Industries. Mr.
Goodpaster has been active in the operational, development and marketing aspects
of senior housing for 21 years.

DAVID W. BEATHARD, SR. has served as Vice President -- Operations of the
Company and its predecessors since August 1996. From 1992 to 1996, Mr. Beathard
owned and operated a consulting firm which provided operational, marketing and
feasibility consulting regarding senior housing facilities. Mr. Beathard serves
as a Designated Alternate member of the Board of Directors of the Texas Assisted
Living Association. Mr. Beathard has been active in the operational, sales and
marketing, and construction oversight aspects of senior housing for 23 years.

CHARLES W. ALLISON has served as Vice President -- Development of the
Company and its predecessors since February 1997. From 1996 to 1997, Mr. Allison
served as Vice President of Development with Greenbriar Corporation, and from
1993 to 1996 as Regional Director of Development for Sterling House Corporation,
both of which are in the senior housing and health care development and
operational business. Mr. Allison has been active in site selection, feasibility
phase, design phase, and construction of senior housing properties and
multi-family commercial real estate for 29 years. Mr. Allison has earned a
Masters Degree in Business Administration.

DAVID R. BRICKMAN has served as Vice President and General Counsel of the
Company and its predecessors since July 1992. From 1989 to 1992, Mr. Brickman
served as in-house counsel with LifeCo Travel Management Company, a corporation
which provided travel services to U.S. corporations. Mr. Brickman has earned a
Masters of Business Administration and a Masters in Health Administration. Mr.
Brickman has either practiced law or performed in-house counsel functions for 11
years.

KATHLEEN L. GRANZBERG, a Certified Public Accountant, has served as the
Corporate Controller for the Company and its predecessors since December 1991,
and as Property Controller since 1987. Ms. Granzberg is a member of the American
Institute of Certified Public Accountants and is also a member of the Texas
Society of Certified Public Accountants.

ROBERT F. HOLLISTER, a Certified Public Accountant, has served as Property
Controller for the Company and its predecessors since April 1992. From 1985 to
1992, Mr. Hollister was Chief Financial Officer and Controller of Kavanaugh
Securities, Inc., a NASD broker dealer. Mr. Hollister is a Certified Financial
Planner. Mr. Hollister is a member of the American Institute of Certified Public
Accountants and is also a member of the Texas Society of Certified Public
Accountants.

DR. GORDON I. GOLDSTEIN has been an attending anesthesiologist at
Presbyterian Hospital in Dallas, Texas since 1967 and at the Surgery Center
Southwest since 1990. He is board certified by the American Board of
Anesthesiology and has been a Fellow of the American College of Anesthesiology
since 1966. Dr. Goldstein has published Diagnosis and Treatment of Reactions of
Chymopapain and Successful Treatment of Cafe Coronary. Dr. Goldstein received
his undergraduate degree in biology and chemistry from East Tennessee State
University, his M.D. from the University of Tennessee Medical School and has
served in the medical

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<PAGE> 51

profession in the northeast and currently in the southwest. Dr. Goldstein served
as the Chairman of the Department of Anesthesiology at Presbyterian Hospital in
Dallas, Texas from 1994 to 1997, and currently serves as Chairman of Dallas
Anesthesiology Associates.

DR. VICTOR W. NEE, has been a Professor in the Department of Aerospace and
Mechanical Engineering at the University of Notre Dame since 1965. In addition
to his professorial duties, Dr. Nee served as Director of the Advanced
Technology Center at the University of Massachusetts, Dartmouth from 1993 to
1995, and as Director of the Advanced Engineering Research Laboratory at the
University of Notre Dame from 1991 to 1993. Dr. Nee received a Bachelors of
Science from the National Taiwan University in Civil Engineering and a Ph.D. in
Fluid Mechanics from The Johns Hopkins University. Dr. Nee holds international
positions as an advisor to governmental, educational and industrial
organizations in China. Dr. Nee has an ongoing relationship with New World and
will continue as Company's principal liaison with New World in connection with
the Company's China development operations.

J. FRANK MILLER, III, is currently the President and Chief Executive
Officer of JPI, the largest multi-family developer in the United States. Mr.
Miller has served in this capacity from 1989 to the present. Mr. Miller has over
20 years of experience in real estate investment management and development. As
managing partner and president of JPI, he is responsible for the ongoing
operations of JPI's acquisitions, development, construction and management
activities and establishes and maintains JPI's financial relationship. Mr.
Miller was recognized as Builder of the Year for 1997 by Multifamily Executive
Magazine. Prior to joining JPI, Mr. Miller was President of Southland Financial
Corporation.

JAMES A. MOORE is currently President of Moore Diversified Services, Inc.,
a senior living consulting firm engaged in market feasibility studies,
investment advisory services, and marketing and strategic consulting in the
senior living industry. Mr. Moore has 35 years of industry experience and has
conducted over 1,600 senior living consulting engagements in approximately 475
markets, in 46 states and six countries. Mr. Moore has authored numerous senior
living and health care industry technical papers and trade journal articles, as
well as the book Assisted Living -- Pure & Simple Development and Operating
Strategies, which is required assisted living certification course material for
the American College of Health Care Administrators. Mr. Moore is the immediate
past president of The National Association for Senior Living Industries and is
the current chairman of The National Foundation for Retirement Living.

Mr. Stroud experienced personal difficulties in 1993 surrounding a
prolonged terminal illness of his daughter. In 1994, Mr. Stroud pled guilty to
felony charges of driving while intoxicated, and was sentenced to, among other
obligations, five years probation and after care obligations, and as a result, a
probated sentence in 1992 of convictions of driving while intoxicated charges
was extended. If Mr. Stroud were to be convicted of similar charges in the
future, the risk exists that he would be unable to continue his employment with
the Company. In 1993, Mr. Stroud pled guilty to misdemeanor possession of
marijuana and paid a minor fine. The Board of Directors has concluded that these
matters do not adversely affect his fitness to serve as an officer or director
of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors, which will consist of seven members upon
consummation of the Offering, is divided into three classes of as nearly equal
size as possible. At each annual meeting of stockholders, directors constituting
one class are elected for a three-year term. The terms of Messrs. Miller, Moore,
and Nee will expire at the 1998 Annual Meeting of Stockholders, the terms of
Messrs. Cohen and Goldstein will expire at the 1999 Annual Meeting of
Stockholders, and the terms of Messrs. Beck and Stroud will expire at the 2000
Annual Meeting of Stockholders. See "Description of Capital Stock -- Certain
Charter and Bylaw Provisions."

The Board of Directors has established a policy of holding meetings on a
regular monthly basis and on other occasions when required by special
circumstances. Certain directors also devote their time and attention to the
Board's principal standing committees. The committees and their primary
functions are as follows:

Executive Committee. The members of the Executive Committee are Messrs.
Beck, Stroud and Cohen. The Executive Committee has been delegated all of the
powers of the Board of Directors to the extent

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<PAGE> 52

permitted under the Delaware General Corporation Law, other than those powers
delegated to other committees of the Board of Directors.

Audit Committee. The members of the Audit Committee will be Messrs.
Goldstein, Miller, and Moore, all of whom are non-employee directors. The Audit
Committee, among other things, will make recommendations concerning the
engagement of independent auditors, reviews the results and scope of the annual
audit and other services provided by the Company's independent auditors and
reviews the adequacy of the Company's internal accounting controls.

Compensation Committee. The members of the Compensation Committee will be
Messrs. Goldstein, Moore, and Nee, all of whom are non-employee directors. The
Compensation Committee will make recommendations to the full Board of Directors
concerning salary and bonus compensation and benefits for executive officers of
the Company. The Compensation Committee has the power and authority to take all
actions and make all determinations under the Company's 1997 Stock Incentive
Plan, including the grant of options thereunder.

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and each of the other
three most highly compensated executive officers whose salary exceeded $100,000
in 1996 for services rendered in all capacities to the Company for fiscal 1996.
All of the executive officers named below are referred to herein as the "named
executive officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION(1) SALARY BONUS
------------------------------ -------- ----------
<S> <C> <C>
Jeffrey L. Beck............................................. $175,000(2) $1,483,300(2)
Co-Chairman and Chief Executive Officer
James A. Stroud............................................. $175,000(2) $1,483,300(2)
Co-Chairman, Chief Operating Officer, and Secretary
Keith N. Johannessen........................................ $128,750 $ 20,000
President
David R. Brickman........................................... $ 85,000 $ 52,857(3)
Vice President and General Counsel
</TABLE>

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

(1) The Company has entered into an Employment Agreement with Mr. Lawrence A.
Cohen to be the chief financial officer of the Company. Pursuant to the
terms of such agreement, Mr. Cohen's annual salary will be $250,000 plus a
minimum annual bonus of 25% of Mr. Cohen's base salary. See "-- Employment
Agreements."

(2) Following the consummation of the Offering, the annual salary of Messrs.
Beck and Stroud will be $175,000 each, subject to annual adjustments and
bonuses as approved by the Compensation Committee. Bonus distributions in
1995 were paid based in part on Federal income tax regulations relating to
distributions of closely held corporations and S corporations that will not
apply to the Company after the Offering. See note (2) to the table under
"Selected Financial Data" and "-- Employment Agreements."

(3) The bonus amount includes a commission of $33,000 paid on the sale of CSLC's
multi-family properties in 1996.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its named
executive officers. Messrs. Beck and Stroud entered into employment agreements
with the Company in May 1997; and Mr. Cohen, Mr. Brickman, and Mr. Johannessen
entered into employment agreements with the Company in November 1996. Messrs.
Beck and Stroud's employment agreements contain terms that renew annually for

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<PAGE> 53

successive four-year periods, and the compensation thereunder consists of a
minimum base salary of $175,000 and a bonus that may be given at the option of
the Compensation Committee, in an amount that is at the Compensation Committee's
discretion. Mr. Cohen's employment agreement is for a term of three years, and
the compensation thereunder consists of a minimum annual base salary of $250,000
and a minimum annual bonus of 25% of Mr. Cohen's base salary. Messrs. Brickman
and Johannessen's employment agreements are for a term of three years and
automatically extend for a two-year term on a consecutive basis, and the
compensation thereunder consists of an annual base salary of $140,000 in the
case of Mr. Johannessen, and $100,000 in the case of Mr. Brickman, and an annual
bonus as determined by the Board of Directors or Compensation Committee.
Included in each employment agreement is a covenant of the employee not to
compete with the Company during the term of his employment and for a period of
one year thereafter (two years in the case of Mr. Cohen).

Messrs. Beck and Stroud's employment agreements also provide that if they
are terminated by the Company other than for cause or for reasons of death or
disability or if they voluntarily resign for good reason, then the Company will
pay their base salary plus their minimum annual bonus for the balance of the
term of the agreement, but not less than two years (base salary plus minimum
annual bonus for three years if the termination is due to a Fundamental Change,
as defined therein). Mr. Cohen's employment agreement provides that if Mr. Cohen
is terminated by the Company other than for cause or for reasons of death or
disability or Mr. Cohen voluntarily resigns for good reason, then the Company
will pay to Mr. Cohen his base salary plus his minimum annual bonus for the
balance of the term of his employment agreement, but not less than one year
(base salary plus minimum annual bonus for two years if the termination is due
to a Fundamental Change, as defined therein). Messrs. Brickman and Johannessen's
employment agreements provide that if the employee is terminated by the Company
other than for cause or for reasons of death or disability or the employee
voluntarily resigns for good reason, then the Company will pay the employee his
base salary for the balance of the term of the employment agreement, but in any
event not to exceed two years, and not less than one year from the date of
notice of the termination.

Mr. Beck and Mr. Stroud's employment agreements also contain provisions
that allow them, in the event of their termination without cause, to require the
Company to register under the Securities Act and the right to include in a
Company initiated registration statement the shares of Common Stock that are
owned by them on the date of their termination plus all shares of Common Stock
that they may acquire after their termination pursuant to the exercise of
options.

DIRECTOR COMPENSATION

Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors are
entitled to an annual retainer of $7,000 payable, in arrears, on the date of
each annual meeting of stockholders, commencing with the 1998 Annual Meeting of
Stockholders. Non-employee directors are also entitled to a fee of $500 for each
board meeting attended by such director, and $200 for each committee meeting
attended by such director that is not on the same day as a meeting of the Board
of Directors. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors receive options to purchase shares of Common
Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See
"-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."

COMPENSATION PURSUANT TO PLANS

1997 Stock Incentive Plan

The Company has adopted the 1997 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation (the "1997 Stock Incentive Plan"). The Stock
Incentive Plan was approved by the Board of Directors and stockholders of the
Company in August 1997. Under the 1997 Stock Incentive Plan, the Compensation
Committee has the authority to grant to key employees and consultants of the
Company the following types of awards: (i) stock options in the form of
incentive stock options ("ISO") or non-qualified stock options, or both; (ii)
stock appreciation rights; (iii) restricted stock; and/or (iv) other stock-based

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<PAGE> 54

awards. Pursuant to the 1997 Stock Incentive Plan, the maximum number of shares
of Common Stock which may be issued is 1,565,000 shares, plus shares which are
reacquired pursuant to the share repurchase plan. Under the share repurchase
plan, which is expressly set forth in the 1997 Stock Incentive Plan, shares may
be repurchased by the Company in the open market with the cash proceeds received
by the Company with respect to options exercised and shares (restricted) sold
under the 1997 Stock Incentive Plan, up to a maximum of 50% of the total shares
authorized for grant under the 1997 Stock Incentive Plan (determined by taking
into account any increase based on new issuance of shares, but without regard to
the share repurchase plan). The shares issued with respect to the 1997 Stock
Incentive Plan may include authorized and unissued shares or treasury shares.
The maximum number of shares for which ISOs may be granted is 1,565,000. The
maximum number of shares of Common Stock for which awards may be made under the
1997 Stock Incentive Plan to an officer of the Company or other person whose
compensation may be subject to the limitations on deductibility under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), is 100,000
during any single year. Any shares as to which an option or other award expires,
lapses unexpired, or is forfeited, terminated, or canceled may become subject to
a new option or other award. The 1997 Stock Incentive Plan will terminate on,
and no award may be granted later than, the tenth anniversary of the date of
adoption of the 1997 Stock Incentive Plan, but the exercise date of awards
granted prior to such tenth anniversary may extend beyond that date.

The 1997 Stock Incentive Plan provides for automatic grants of
non-qualified stock options to purchase shares of Common Stock to Outside
Directors. Options to purchase 9,000 shares of Common Stock have been
automatically granted to each person serving as an Outside Director as of the
consummation of the Offering at an exercise price equal to the initial public
offering price. If any person who was not previously a member of the Board of
Directors is elected or appointed an Outside Director following the consummation
of the Offering but prior to the date of the annual meeting of stockholders of
the Company in the year 2000, such Outside Director will automatically be
granted an option to purchase 7,000 shares of Common Stock if such Outside
Director's service begins prior to the second anniversary of the Offering and
5,000 shares of Common Stock if such Outside Director's service begins after the
second anniversary of the Offering. The Board of Directors may, in its
discretion, increase or decrease the number of shares subject to such option to
reflect the extent to which such Outside Director's expected service may exceed
two years or may be less than one year. Such options shall vest with respect to
3,000 shares on the date of the first annual meeting of stockholders following
the date of grant, 3,000 shares on the date of the second annual meeting of
stockholders following the date of grant, and any remaining shares on the date
of the third annual meeting of stockholders following the date of grant.

On the date of each annual meeting of the stockholders of the Company
beginning with the annual meeting of stockholders held in the year 2000, unless
the 1997 Stock Incentive Plan has been terminated, each Outside Director who
will continue as a director following such meeting will receive an option to
purchase 3,000 shares of Common Stock. Such options will vest with respect to
all 3,000 shares on the date of the next annual meeting of stockholders. All
options automatically granted to an Outside Director will enable the optionee to
purchase shares of Common Stock at the fair market value of the Common Stock on
the date of grant. Outside Director optionees will not be able to transfer or
assign their options without the prior written consent of the Board of Directors
other than (i) transfers by the optionee to a member of his or her immediate
family or a trust for the benefit of the optionee or a member of his or her
immediate family, or (ii) transfers by will or by the laws of descent and
distribution. Options automatically granted to Outside Directors will have a
term of ten years from the date of grant. The exercise price may be paid in
cash, shares of Common Stock, or a combination thereof. The Board of Directors
has the discretion to reduce, but not increase, the number of shares awardable
to Outside Directors and to postpone, but not accelerate, the vesting of such
options.

ISOs and non-qualified stock options may be granted to employees for such
number of shares as the Board of Directors or Compensation Committee may
determine and may be granted alone, in conjunction with, or in tandem with other
awards under the 1997 Stock Incentive Plan or cash awards outside the 1997 Stock
Incentive Plan. A stock option will be exercisable at such times and subject to
such terms and conditions as the Compensation Committee will determine, but the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% stockholders). The option price for an ISO

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<PAGE> 55

will not be less than 100% (110% in the case of certain 10% stockholders) of the
fair market value of the Common Stock as of the date of grant. ISOs granted
under the 1997 Stock Incentive Plan may not be transferred or assigned other
than by will or by the laws of descent and distribution. Non-qualified stock
options, restricted stock awards and stock appreciation rights may not be
transferred or assigned without the prior written consent of the Compensation
Committee, other than (i) transfer by the optionee to a member of his or her
immediate family or a trust for the benefit of the optionee or a member of his
or her immediate family, or (ii) transfers by will or by the laws of descent and
distribution.

Stock appreciation rights may be granted under the 1997 Stock Incentive
Plan alone, or in conjunction with all or part of a stock option. If issued in
conjunction with a stock option, it will be exercisable only when the underlying
stock option is exercisable and once a stock appreciation right has been
exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Company will pay to the employee or consultant in cash, Common Stock,
or a combination thereof (the method of payment to be at the discretion of the
Compensation Committee), an amount equal to the excess of the fair market value
of the Common Stock on the exercise date over the option price, multiplied by
the number of stock appreciation rights being exercised.

Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the 1997 Stock Incentive Plan or cash awards made
outside the 1997 Stock Incentive Plan. The provisions attendant to a grant of
restricted stock may vary from participant to participant. In making an award of
restricted stock, the Compensation Committee will determine the periods during
which the restricted stock is subject to forfeiture. During the restriction
period, the employee or consultant may not sell, transfer, pledge, or assign the
restricted stock, but will be entitled to vote the restricted stock and to
receive, at the election of the Compensation Committee, cash or deferred
dividends.

The Compensation Committee also may grant other types of awards such as
performance shares, convertible preferred stock, convertible debentures, or
other exchangeable securities that are valued, as a whole or in part, by
reference to or otherwise based on the Common Stock. These awards may be granted
alone, in addition to, or in tandem with stock options, stock appreciation
rights, restricted stock, or cash awards outside of the 1997 Stock Incentive
Plan. Awards will be made upon such terms and conditions as the Compensation
Committee may determine.

If there is a change in control or a potential change in control of the
Company (as defined in the 1997 Stock Incentive Plan), unless otherwise
determined by the Compensation Committee in its sole discretion, stock
appreciation rights and limited stock appreciation rights, and any stock options
which are not then exercisable, will become fully exercisable and vested and the
restrictions and deferral limitations applicable to restricted stock and other
stock-based awards may lapse and such shares and awards will be deemed fully
vested. Stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock and other stock-based awards, will, unless otherwise
determined by the Compensation Committee in its sole discretion, be cashed out
on the basis of the change in control price (as defined in the 1997 Stock
Incentive Plan and as described below). The change in control price will be the
highest price per share paid in any transaction reported on the NYSE or paid or
offered to be paid in any bona fide transaction relating to a change in control
or potential change in control at any time during the immediately preceding
60-day period, as determined by the Compensation Committee.

Effective upon the completion of the Offering, options to purchase up to
782,500 shares of Common Stock, exercisable at the initial public offering
price, will be awarded to 60 key employees and directors of the Company. Each
such option will become exercisable over a five-year period and will expire on
the tenth anniversary of the date of grant.

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<PAGE> 56

CERTAIN TRANSACTIONS

ILM MANAGEMENT CONTRACTS

The Company is a party to two separate property management agreements (the
"ILM Management Agreements") with ILM I Lease Corporation and ILM II Lease
Corporation, two finite-life corporations formed by ILM Senior Living, Inc. and
ILM Senior Living II, Inc. (collectively, "ILM") that operate 13 senior living
communities. The ILM Management Agreements commenced on July 29, 1996 and expire
on December 31, 1999 and December 31, 2000, respectively, subject to extension
under certain circumstances, but not beyond July 29, 2001. Lawrence A. Cohen is
a director of ILM I Lease Corporation and ILM II Lease Corporation and is the
president and a director of ILM. Effective in November 1996, Mr. Cohen was
elected Vice Chairman and Chief Financial Officer of the Company. The Company
earned a total of $549,000 and $637,000 under the two ILM Management Agreements
for the nine months ended May 31, 1997. The Company has an agreement with Mr.
Cohen whereby he has agreed that, without the Company's prior consent, he will
not spend a significant portion of his time on matters not related to his duties
with the Company. See "Business -- Third-Party Management Contracts."

The Company has discussed various strategic transactions with ILM, although
there can be no assurance that these discussions will result in a transaction
that is acceptable to the parties.

TRI POINT DEVELOPMENT AGREEMENT

On September 16, 1997, the Company and Tri Point Communities, L.P. ("Tri
Point"), a limited partnership owned by the Company's founders, Jeffrey L. Beck
and James A. Stroud and their affiliates, entered into a Development and Turnkey
Agreement (the "Tri Point Agreement") in connection with the development and
management of Waterford communities by the Company for Tri Point. The Company
believes that the arrangement with Tri Point provides it with an attractive
mechanism to develop and lease new communities without employing its own capital
and which will not be dilutive to earnings during the development and lease-up
phases. Further, the Company has the right and expects to purchase communities
developed by Tri Point upon their completion pursuant to a purchase option under
the Tri Point Agreement.

Pursuant to the Tri Point Agreement, upon the closing of the purchase of
the real estate by Tri Point and the receipt of final, non-appealable zoning
approvals for the community to be developed, the parties expect to enter into a
development agreement for the construction of the community. The development
agreement provides for a development fee payable to the Company that the Company
expects will range between 4% and 7% of total project costs, depending on the
individual transaction and determined on the date of signing. Upon completion of
the construction of a community and pursuant to the development agreement, the
parties will enter into a management agreement, pursuant to which the Company
expects to earn a management fee equal to the greater of 5% of gross revenues or
$5,000 per month and a lease-up fee equal to approximately $500 for each unit
leased and occupied. The Company believes that the development and management
fees to be paid to the Company approximate fair market fees. The Company expects
that each management agreement will have a 10-year term with a five-year renewal
option in favor of the Company. The Company will have an option to purchase each
community at a price equal to the then fair market value (to be determined by a
third-party appraisal). Each management agreement is also expected to contain an
option granting the Company the right to lease each community at a fair market
value (the "Lease Option"). The Lease Option will have an initial 10-year term
and will grant the Company three five-year fair market value renewal options.
The Company has implemented a policy requiring any material transaction (or
series of related transactions) between the Company and Tri Point to be approved
by all of the directors who have no beneficial or economic interest in Tri Point
upon such directors' determination that the terms of the transaction are no less
favorable to the Company than those that could have been obtained from third
parties.

Tri Point has received and accepted commitments for loan facilities from
institutional lenders aggregating up to $100.0 million to fund its development
activities.

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<PAGE> 57

PRIOR TRANSACTIONS INVOLVING CSLC, HCP AND NHP

Set forth below is a summary of prior transactions involving CSLC, HCP, and
NHP pursuant to which the founders of the Contributed Entities derived economic
benefits through their ownership of the Contributed Entities. As a result of the
Formation Transactions, the Company will succeed to the founders' interests in
these entities.

Project and Partnership Management

Capital Senior Living, Inc. ("CSL") (one of the Contributed Entities) and
until February 1, 1995, Capital Realty Group Senior Housing, Inc. ("Senior
Housing"), each an affiliate of Messrs. Beck and Stroud, have provided community
management services to CSLC, HCP and NHP pursuant to separate management
agreements and were paid management fees pursuant to the terms of the management
agreements. The management agreements provide for reimbursement of all expenses
of managing the communities owned by these entities, including salaries of
on-site managers and out-of-pocket expenses of CSL, and provide for payment of a
property management fee to CSL equal to 5% of the gross revenues of each
project. For the periods ended December 31, 1996, 1995 and 1994, and the six
months ended June 30, 1997, CSLC paid CSL and Senior Housing $987,104, $986,877,
$975,710, and $516,000 respectively, in property management fees for managing
the projects, and CSL and Senior Housing were paid $332,438 in 1996, $430,329 in
1995 and $354,313 in 1994 and $179,000 in the six months ended June 30, 1997 for
the reimbursement of expenses under the management agreements. For the periods
ended December 31, 1996, 1995 and 1994, and the six months ended June 30, 1997,
HCP paid CSL and Senior Housing $208,000, $252,000, $472,000, and $170,000,
respectively, in property management fees for managing the projects, and was
paid $256,000 in 1996, $235,000 in 1995 and $266,000 in 1994 and $86,000 in the
six months ended June 30, 1997 for reimbursable expenses under the management
agreements. For the periods ended December 31, 1996, 1995 and 1994 and the six
months ended June 30, 1997, NHP paid CSL and Senior Housing $1,351,527,
$1,326,188, $1,312,855 and $709,000, respectively in management fees, dietary
services fees and other operating expense reimbursements related to services
provided to NHP, and paid $3,816,530 in 1996, $3,925,369 in 1995, $3,858,879 in
1994 and $2,019,388 in the six months ended June 30, 1997 for reimbursable
expenses, including reimbursements for salaries, related benefits and overhead
reimbursements, under the management agreements. Messrs. Beck and Stroud are the
beneficial owners of all of the capital stock of CSL and Senior Housing, and
consequently, had an indirect interest in such payments.

The general partners of CSLC, HCP and NHP are affiliates of Messrs. Beck
and Stroud. These general partners are not paid a fee for serving as such. All
property employees of each of CSLC, HCP and NHP are paid by an affiliate of the
general partner of these partnerships, which in turn is reimbursed by the
applicable partnership. Reimbursed gross payroll and health insurance premiums
paid by CSLC in 1996, 1995, 1994 and the six months ended June 30, 1997 was
$5,254,000, $5,213,000, $5,104,000, and $2,493,000, respectively. Reimbursed
gross payroll and health insurance premiums paid by HCP in 1996, 1995, 1994 and
the six months ended June 30, 1997 was $2,068,000, $2,491,000, $4,048,000, and
$1,548,000, respectively. Reimbursed gross payroll and health insurance premiums
paid by NHP in 1996, 1995, and the six months ended June 30, 1997 was
$3,538,657, $3,561,140, $3,552,630, and $1,744,000, respectively.

Transactions with CSLC

In connection with obtaining a $12 million mortgage loan for CSLC, an
affiliate of Messrs. Beck and Stroud received a 2% financing fee of $240,000 in
1994. In 1995, an affiliate of Messrs. Beck and Stroud received a 2% financing
fee of $110,000 in connection with increasing CSLC's mortgage loan commitment
from $12 million to $17.5 million. In connection with the extension of one of
CSLC's mortgages, an affiliate of Messrs. Beck and Stroud received $40,453 and
$20,830 in 1996 and 1995, respectively, as a financing fee.

In April 1996, an affiliate of Messrs. Beck and Stroud sold to CSLC
$1,269,000 of limited partnership interests in HCP at the then current fair
market value and recognized a $878,592 gain on such transaction.

Upon the sale by CSLC of the two communities in November 1996, an affiliate
of Messrs. Beck and Stroud received a $79,883 brokerage fee.

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<PAGE> 58

On December 10, 1996, CSLC entered into contract with Capital Senior
Development, Inc., an affiliate of Messrs. Beck and Stroud (one of the
Contributed Entities), to construct a 97 unit expansion of the Cottonwood
community, consisting of 49 units for independent living and 48 units for
assisted living. The budgeted cost for the expansion is approximately
$6,756,000.

Transactions with HCP

HCP may pay to Senior Housing or its affiliates, for services rendered in
connection with the sale of an HCP community, and shall be entitled to receive
the lesser of the following: (i) 3% of the sale price of HCP's community or (ii)
an amount not to exceed 50% of the standard real estate commission. Amounts
earned by Senior Housing in 1996 for the sale of HCP communities were $66,000
and $92,250 in 1996 and 1995, respectively.

For property management services, Senior Housing or its affiliates are
entitled to receive leasing and property management fees. Since most of HCP's
communities have long-term, triple-net leases and others have independent fee
management engagements for most services, Senior Housing or its affiliates
received 1% of the monthly gross rental or operating revenues, totaling
approximately $72,000, $80,000, and $113,000 in 1996, 1995, and 1994,
respectively. Asset management fees paid to Senior Housing were approximately
$740,000, $712,000, and $731,000 in 1996, 1995, and 1994, respectively.

ORGANIZATION OF THE COMPANY

The Company was incorporated in October 1996 in anticipation of the
Offering. In connection with the organization of the Company, Messrs. Beck,
Stroud and Cohen contributed cash to the Company in the following amounts in
return for Common Stock in the Company as follows: Mr. Beck -- $5,600 paid for
560,000 shares; Mr. Stroud (through a trust) -- $5,600 paid for 560,000 shares;
and Mr. Cohen -- $5,600 paid for 560,000 shares. In August 1997, Mr. Cohen
transferred 110,000 of his shares of Common Stock to Messrs. Beck and Stroud in
exchange for shares of capital stock of Quality Home Care, Inc., one of the
Contributed Entities. In connection with the organization of the Company, Mr.
Cohen entered into a certain stock purchase and shareholders' agreement (the
"Shareholders' Agreement") with Messrs. Beck and Stroud (through a trust)
pursuant to which Messrs. Beck and Stroud were granted rights of first refusal
and certain specified call rights. The Shareholders' Agreement will terminate
according to its terms upon the completion of the Offering. See "The
Company -- Formation Transactions."

FORMATION TRANSACTIONS

In connection with the Formation Transactions, Messrs. Beck, Stroud (and
his affiliate), and Cohen will contribute the capital stock of the Contributed
Entities to the Company and will receive in exchange shares of Common Stock and
the issuance of the Formation Note, which will be repaid upon completion of the
Offering as set forth in the table below. See "Use of Proceeds."

<TABLE>
<CAPTION>
PROCEEDS FROM
NUMBER OF SHARES THE FORMATION
NAME OF COMMON STOCK(1) NOTE($)
---- ------------------ -------------
<S> <C> <C>
Jeffery L. Beck...................................... 3,843,673 $5,833,026
James A. Stroud...................................... 3,843,673 $5,833,026
Lawrence A. Cohen.................................... -- $1,000,000
</TABLE>

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

(1) See Notes to "Principal Stockholders" for certain beneficial ownership
information.

The number of shares of Common Stock to be issued and the principal amount
of the Formation Notes were established by Messrs. Beck and Stroud and the
Company based upon independent appraisals of the value of the Acquired Assets
and an assessment of the combined value of the Company after giving effect to
the Formation Transactions by reference to the market value of comparable
publicly-traded senior living companies. The shares of the Contributed Entities
were issued to Messrs. Beck and Stroud for nominal consideration, totalling less
than $50,000, in connection with the formation of the Contributed Entities. Also

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<PAGE> 59

as part of the Formation Transactions, the Company will purchase the Acquired
Assets (which are described herein under "The Company -- Formation
Transactions") from CSLC for the assumption of the LBHI Loan, which will be
reduced promptly following the consummation of the Offering. Messrs. Beck and
Stroud (through a trust) beneficially own approximately 67% of the limited
partnership interests in CSLC and own the general partner of CSLC, and
consequently have an indirect interest in the debt assumption and repayment of
CSLC's debt through net proceeds of this Offering.

LBHI LOAN

On June 30, 1997, CSLC entered into a mortgage loan agreement with an
affiliate of Lehman Brothers, LBHI, pursuant to which LBHI agreed to make a
mortgage loan of $77.0 million to CSLC which is secured by four senior living
communities owned by CSLC and CSLC's investment in HCP and NHP. The loan
agreement matures on December 31, 1997. On July 1, 1997, $70.0 million was
outstanding under this loan agreement of which $5.5 million was used to repay
outstanding amounts under CSLC's prior credit facility, and the balance was used
to purchase U.S. Treasury securities. The remaining $7.0 million is being used
to fund expenditures associated with the expansion of one of CSLC's communities.
The U.S. Treasury securities were sold under a repurchase agreement with a term
equal to their maturity. It is expected that at consummation of the Offering,
and as part of the Formation Transactions, the Acquired Assets of CSLC will be
acquired by the Company through assumption of the LBHI Loan, the repurchase
agreement will be canceled and the LBHI Loan will be reduced by the Company with
net proceeds of the Offering. See "Use of Proceeds." The U.S. Treasury
securities will revert to CSLC. Through their ownership interests in CSLC,
Messrs. Beck and Stroud will indirectly derive financial benefits from CSLC's
sale of the Acquired Assets to the Company and the reversion of the U.S.
Treasury securities to CSLC.

OTHER

During the years ended December 31, 1996 and 1995 and the six months ended
June 30, 1997, the Company was advanced $400,000, $250,000 and $500,000,
respectively, by Messrs. Beck and Stroud. Such funds were advanced pursuant to
separate demand notes bearing interest at 10% per annum. As of June 30, 1997,
$900,000 remains outstanding under such notes. In addition, at June 30, 1997,
the Company owed $266,481 to an affiliate of Messrs. Beck and Stroud pursuant to
a promissory note, dated February 1, 1995 in the original principal amount of
$467,164, bearing interest at 10% per annum and payable in seven annual
installments of $65,091 on December 31, plus accrued interest. This indebtedness
will be repaid by the Company upon completion of the Offering. See "Use of
Proceeds."

Jeffrey L. Beck is the chairman of the board and principal stockholder of a
bank where the majority of the Company's and CSLC, HCP and NHP's operating cash
accounts are maintained.

POLICY OF THE BOARD OF DIRECTORS

The Company has implemented a policy requiring any material transaction (or
series of related transactions) between the Company and related parties to be
approved by a majority of the directors (all of the directors in the case of any
such transaction between the Company and Tri Point) who have no beneficial or
economic interest in such related party, upon such directors' determination that
the terms of the transaction are no less favorable to the Company than those
that could have been obtained from third parties. There can be no assurance that
these policies will always be successful in eliminating the influence of
conflicts of interest.

The Bylaws of the Company provide that at least from the period from the
closing of the Offering until the first anniversary thereof, except during a
period not to exceed 90 days following the death, resignation, incapacity or
removal of a director prior to the expiration of each director's term of office,
a majority of the board of directors shall be comprised of persons who are not
related to any members of the families of Jeffrey L. Beck or James A. Stroud and
not officers or employees of the Company.

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<PAGE> 60

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of June 30, 1997, after giving
effect to the 7,687,347 shares of Common Stock to be issued in the Formation
Transactions as described under "The Company -- Formation Transactions," and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each person
known by the Company to be the beneficial owner of more than five percent of the
Common Stock; (ii) each director, and persons nominated to become a director, of
the Company; (iii) each named executive officer of the Company; and (iv) all
executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Jeffrey L. Beck.............................. 4,458,673 47.6 4,458,673 24.3
James A. Stroud(2)........................... 4,458,674 47.6 4,458,674 24.3
Lawrence A. Cohen............................ 450,000 4.8 450,000 2.4
Executive officers as a group (11 persons)... 9,367,347 100.0% 9,367,347 51.0%
</TABLE>

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

* Less than one percent.

(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or indirectly,
through any contract, arrangement, undertaking, relationship or otherwise
has or shares voting power and/or investment power and as to which such
person has the right to acquire such voting and/or investment power within
60 days. Percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing the number of shares beneficially
owned by such person by the sum of the number of shares outstanding as of
such date and the number of shares as to which such person has the right to
acquire voting and/or investment power within 60 days.

(2) Includes 4,366,843 shares beneficially owned by a family trust of which Mr.
Stroud is beneficiary.

DESCRIPTION OF CAPITAL STOCK

Upon completion of the Offering, the Company's authorized capital stock
will consist of 65,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), and 15,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock"). At June 30, 1997, after giving pro forma effect
to the Formation Transactions, there were outstanding 9,367,347 shares of Common
Stock. All of the currently outstanding shares of Common Stock are validly
issued, fully paid and nonassessable under the Delaware General Corporation Law
(the "DGCL").

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") and by the provisions of
applicable law. A copy of the form of Certificate is included as an exhibit to
the Registration Statement of which this Prospectus is a part.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate does not provide
for cumulative voting, and accordingly, the holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. The Certificate provides that whenever
there is paid, or declared and set aside for payment, to the holders of the
outstanding shares of any class of stock having preference over the Common Stock
as to the payment of dividends, the full amount of dividends and of sinking fund
or retirement fund or other retirement payments, if any, to which such holders
are entitled, then dividends may be paid on the Common Stock out of any assets
legally available therefor, but only when and as declared by the Board of
Directors. The Certificate also provides that in the event of any liquidation,
dissolution or winding up of the

59
<PAGE> 61

Company, after there is paid to or set aside for the holders of any class of
stock having preference over the Common Stock the full amount to which such
holders are entitled, then the holders of the Common Stock, shall be entitled,
after payment or provision for payment of all debts and liabilities of the
Company, to receive the remaining assets of the Company available for
distribution, in cash or in kind. The holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of Common Stock will be subject to the
rights of the holders of any shares of any series of Preferred Stock that the
Company may issue in the future.

PREFERRED STOCK

The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights of the shares of
each such series and the qualifications, limitations and restrictions thereof.
Such action may be taken by the Board without stockholder approval. Under the
Certificate, each share of each series of Preferred Stock is to have the same
relative rights as, and be identical in all respects with, all other shares of
the same series. While providing flexibility in connection with possible
financings, acquisitions and other corporate purposes, the issuance of Preferred
Stock, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change in control of the Company. There
will be no shares of Preferred Stock outstanding upon completion of the Offering
and the Company has no present plan to issue shares of its Preferred Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 102(b)(7) of the DGCL authorizes corporations to limit or eliminate
the personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b)(7) does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Certificate limits the liability of directors to the Company
or its stockholders to the full extent permitted by Section 102( b)(7).
Specifically, directors of the Company are not personally liable for monetary
damages to the Company or its stockholders for breach of the director's
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.

To the maximum extent permitted by law, the Certificate provides for
mandatory indemnification of directors and officers of the Company against any
expense, liability and loss to which they may become subject, or which they may
incur as a result of being or having been a director or officer of the Company.
In addition, the Company must advance or reimburse directors and officers for
expenses incurred by them in connection with indemnifiable claims.

The Company also maintains directors' and officers' liability insurance.

CERTAIN CHARTER AND BYLAW PROVISIONS

Upon completion of the Offering, the Certificate and the Bylaws will
contain, among other things, certain provisions described below that may reduce
the likelihood of a change in the Board of Directors or voting control of the
Company without the consent of the Board of Directors. These provisions could
have the effect of discouraging, delaying or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider to
be in the stockholders' best interest, including offers or attempts that might
result in a premium over the market price for the Common Stock.

Classified Board. The number of directors of the Company shall be such
number as from time to time fixed by, or in the manner provided in, the Bylaws
within the range of a minimum of three and a maximum of nine directors specified
in the Certificate. Pursuant to the Bylaws, the number of directors within the
range set

60
<PAGE> 62

forth in the Certificate shall be determined by resolution of the Board passed
by at least two-thirds of the directors then in office. Directors are divided
into three classes, each consisting of approximately one-third of the total
number of directors. The term of office of each class is three years and expires
in successive years at the time of the annual meeting of stockholders.

Filling of Board Vacancies; Removal. Any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled for the unexpired term by the concurring vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Directors
may only be removed with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of capital stock then entitled to
vote at an election of directors.

Stockholder Action by Unanimous Written Consent. Any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders, unless such consent is unanimous.

Call of Special Meeting. Special meetings of stockholders may be called at
any time but only by the Chairman of the Board, by a majority of the directors
then in office or by stockholders possessing at least 25% of the voting power of
the issued and outstanding voting stock entitled to vote generally in the
election of directors.

Bylaw Amendments. The stockholders may amend the Bylaws by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. Directors may also amend the Bylaws by a
majority vote of the directors then in office.

Certificate Amendments. Except as set forth in the Certificate or as
otherwise specifically required by law, no amendment of any provision of the
Certificate shall be made unless such amendment has been first proposed by the
Board of Directors upon the affirmative vote of at least two-thirds of the
outstanding shares of stock of the Company entitled to vote thereon; provided,
however, if such amendment is to the provisions described above or the
provisions in the Certificate relating to the Company's name, business purpose
or authorized number of shares of Common Stock, such amendment must be approved
by the affirmative vote of the holders of a majority of the outstanding shares
of stock entitled to vote thereon.

Stockholder Nominations and Proposals. Notice of stockholder proposals and
director nominations must be timely given in writing to the Secretary of the
Company prior to the meeting at which the matters are to be acted upon or the
directors are to be elected. To be timely, notice must be received at the
principal offices of the Company not less than 60, nor more than 90, days prior
to the meeting of stockholders; provided, that if less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made, notice by
the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which notice of the date of the
meeting was mailed or the day on which public disclosure was made, whichever
first occurs. The purpose of requiring advance notice is to afford the Board of
Directors an opportunity to consider the qualifications of the proposed nominees
or the merits of other stockholder proposals and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders about those
matters.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

Section 203 of the DGCL provides, in general, that a stockholder acquiring
more than 15% of the outstanding voting shares of a corporation subject to the
statute (an "Interested Stockholder"), but less than 85% of such shares, may not
engage in certain "Business Combinations" with the corporation for a period of
three years subsequent to the date on which the stockholder became an Interested
Stockholder unless: (i) prior to such date the corporation's board of directors
approved either the Business Combination or the transaction in which the
stockholder became an Interested Stockholder; or (ii) the Business Combination
is approved by the corporation's board of directors and authorized by a vote of
at least two-thirds of the outstanding voting stock of the corporation not owned
by the Interested Stockholder.

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<PAGE> 63

Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or a transaction in which the Interested Stockholder
receives certain other benefits.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
18,367,347 shares of Common Stock. The 9,000,000 shares sold in the Offering (or
a maximum of 10,350,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 9,367,347 shares outstanding are "restricted securities" as that term
is defined under Rule 144 and were issued by the Company in private transactions
in reliance upon one or more exemptions under the Securities Act. Such
restricted securities may be resold in a public distribution only if registered
under the Securities Act (which registration is contemplated with respect to all
of such restricted securities as described below) or pursuant to an exemption
therefrom, including Rule 144. Certain of the existing stockholders and
executive officers and directors of the Company have agreed, subject to certain
exceptions, that they will not sell any shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus without the prior
written consent of Lehman Brothers, subject to certain exceptions.

In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 1,565,000 shares of Common Stock pursuant to the Company's
stock option programs, none of which will be exercisable until the first
anniversary of the Offering.

In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three- month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period, to sell shares of Common Stock. A person
who is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned such
shares for at least two years, would be entitled to sell such shares without
regard to the volume limitations described above.

Subject to certain exceptions, the Company and all holders as of the date
of this Prospectus of outstanding shares of Common Stock, including the
executive officers of the Company, and optionees holding options to purchase a
total of 782,500 shares of Common Stock have agreed, subject to certain
exceptions, with the Underwriters not to sell or otherwise dispose of any shares
of Common Stock, any options to purchase Common Stock or any securities
convertible into or exchangeable for shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Lehman Brothers.

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<PAGE> 64

UNDERWRITING

The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., J.C. Bradford & Co. and Smith Barney Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement (the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part) to purchase from the Company and the Company has agreed to sell to
each Underwriter, the aggregate number of shares of Common Stock set forth below
opposite the name of each such Underwriter.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc.........................................
J.C. Bradford & Co..........................................
Smith Barney Inc............................................

---------
Total....................................................... 9,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to
be purchased by the Underwriters under the Underwriting Agreement must be so
purchased.

The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain selected
dealers who may include the Underwriters at such public offering price less a
selling concession not in excess of $ per share. The selected dealers may
reallow a discount not in excess of $ per share to certain brokers or
dealers. After the Offering, the public offering price, the discount to selected
dealers and the reallowance may be changed by the Representatives.

The Company has granted to the Underwriters an option to purchase up to an
additional 1,350,000 shares of Common Stock at the public offering price less
the aggregate underwriting discounts and commissions shown on the cover page of
this Prospectus, solely to cover overallotments, if any. Such option may be
exercised at any time within 30 days after the date of the Underwriting
Agreement. To the extent that such option is exercised, each Underwriter will be
committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table.

The Company has agreed that it will not, without the prior written consent
of Lehman Brothers Inc., offer for sale, contract to sell, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of), directly or indirectly, any shares of Common Stock (other than
shares offered hereby and shares issued pursuant to the 1997 Stock Incentive
Plan), or sell or grant options, rights or warrants with respect to any shares
of Common Stock (other than the grant of options pursuant to the 1997 Stock
Incentive Plan), for a period of 180 days after the date of this Prospectus.

In addition, certain directors and officers of the Company and their
affiliates have agreed that they will not, without the prior written consent of
the Company and Lehman Brothers Inc., subject to certain exceptions, offer for
sale, contract to sell, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to, result in
the disposition by any person at any time in the future of), directly or
indirectly, any shares of Common Stock received by them in connection with the
Formation Transactions or the Offering, for an initial period of 180 days after
the date of this Prospectus.

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<PAGE> 65

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to the payments they may be required to make in respect
thereto.

The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
between the Company and the Representatives. Among the factors to be considered
in such negotiations are the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies, and the general condition of the securities market at the
time of the Offering. The initial price per share to the public set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the Common Stock. Such price is subject to change as a
result of market conditions and other factors.

Application has been made to have the shares of Common Stock approved for
listing on the NYSE under the symbol "CSU."

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described herein.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security by purchasers in an offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

The Underwriters have reserved for sale at the public offering price up to
450,000 shares of Common stock to directors, officers, employees and consultants
of the Company, their business affiliates and related parties who have expressed
an interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase the reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as the others have been offered hereby.

In consideration of investment banking services provided by Lehman Brothers
Inc. in connection with the structuring of the Company and the Formation
Transactions, the Company will pay Lehman Brothers Inc. an

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<PAGE> 66

advisory and structuring fee equal to 0.75% of the gross proceeds of the
Offering. Under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), when more than 10% of the net proceeds of
a public offering of equity securities are to be paid to members of the NASD or
affiliates of members participating in the offering, the price at which the
equity securities are distributed to the public must be no lower than that
recommended by a "qualified independent underwriter" meeting certain standards.
Lehman Brothers Inc. is a member of the NASD. Lehman Brothers Inc. will receive
more than 10% of the net proceeds from the Offering as the result of the use of
such proceeds to repay the LBHI Loan. See "Use of Proceeds." J.C. Bradford & Co.
has agreed to act as the qualified independent underwriter in connection with
the Offering, has participated in the preparation of this Prospectus and of the
Registration Statement of which this Prospectus forms a part and has exercised
the usual standard of due diligence with respect thereto. The price of the
Common Stock when sold will be no lower than that recommended by J.C. Bradford &
Co. The Company has agreed to indemnify J.C. Bradford & Co. against certain
liabilities under the Securities Act, or to contribute to payments which J.C.
Bradford & Co. may be required to make in respect thereof.

LEGAL MATTERS

The validity of the Common Stock to be offered hereby will be passed upon
for the Company by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. Certain legal matters in connection with the Offering will be passed upon
for the Underwriters by Rogers & Wells, New York, New York.

EXPERTS

The combined financial statements of Capital Senior Living Corporation at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

The consolidated financial statements of HealthCare Properties, L.P. and
Subsidiaries as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The independent accountants of a predecessor to the Company for fiscal 1995
were Coopers & Lybrand LLP. Coopers & Lybrand LLP was replaced as the
independent auditors in May 1997. None of the reports of Coopers & Lybrand LLP
on the financial statements for either of fiscal 1994 or 1995 contained an
adverse opinion or a disclaimer of opinion, or was qualified as to uncertainty,
audit scope, or accounting principles. During the two most recent fiscal years
and the subsequent interim period preceding such dismissal, there were no
disagreements with Coopers & Lybrand LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.

In May 1997, Ernst & Young LLP was engaged as principal accountants for the
Company, among other things, to audit the financial statements of the Company
for fiscal 1996. The selection of Ernst & Young LLP, and the replacement of
Coopers & Lybrand LLP, was made by the Board of Directors. Prior to its
engagement, the Company did not consult with Ernst & Young LLP on either the
application of accounting principles to a completed or proposed specific
transaction, or the type of audit opinion that might be rendered on the
Company's or its predecessors' financial statements.

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<PAGE> 67

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document am
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.

As a result of the Offering, the Company will become subject to the
informational requirements of the Exchange Act, and in accordance therewith will
file reports and other information with the Commission. Reports, registration
statements, proxy statements, and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding registrants that file electronically with the
Commission.
---------------------

The Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited, condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.

66
<PAGE> 68

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Combined Financial Statements of Capital Senior
Living Corporation (unaudited):
Introduction to Pro Forma Combined Financial Statements... F-2
Pro Forma Combined Balance Sheet -- June 30, 1997......... F-3
Pro Forma Combined Statements of Income -- Six months
ended June 30, 1997 and year ended December 31, 1996... F-4
Notes to Pro Forma Combined Financial Statements.......... F-6
Combined Financial Statements of Capital Senior Living
Corporation:
Report of Ernst & Young LLP, Independent Auditors......... F-15
Combined Balance Sheets -- June 30, 1997 (unaudited) and
December 31, 1996 and 1995............................. F-16
Combined Statements of Income -- Six months ended June 30,
1997 and 1996 (unaudited) and years ended December 31,
1996, 1995 and 1994.................................... F-17
Combined Statements of Equity -- Six months ended June 30,
1997 (unaudited) and years ended December 31, 1996,
1995 and 1994.......................................... F-18
Combined Statements of Cash Flows -- Six months ended June
30, 1997 and 1996 (unaudited) and years ended December
31, 1996, 1995 and 1994................................ F-19
Notes to Combined Financial Statements.................... F-20
Consolidated Financial Statements of HealthCare Properties,
L.P. and Subsidiaries
Report of KPMG Peat Marwick LLP, Independent Auditors..... F-34
Consolidated Balance Sheets -- June 30, 1997 (unaudited)
and December 31, 1996 and 1995......................... F-35
Consolidated Statements of Operations -- Six months ended
June 30, 1997 and 1996 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-36
Consolidated Statements of Partnership Equity -- Six
months ended June 30, 1997 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-37
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1997 and 1996 (unaudited) and years ended
December 31, 1996, 1995 and 1994....................... F-38
Notes to Consolidated Financial Statements................ F-39
</TABLE>

F-1
<PAGE> 69

INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 and
unaudited Pro Forma Combined Statements of Income for the six months ended June
30, 1997 and the year ended December 31, 1996, represent the financial position
and results of operations of the Company for such periods after giving effect to
the adjustments described in the accompanying notes, relating to the
transactions contemplated in connection with the Offering and the Formation
Transactions, as if these transactions had occurred as of June 30, 1997 for the
unaudited Pro Forma Combined Balance Sheet, and as of January 1, 1996 for the
unaudited Pro Forma Combined Statements of Income.

The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma
Combined Statements of Income are presented for informational purposes only and
do not necessarily reflect the financial position or results of operations of
the Company which would have actually resulted had the Offering and Formation
Transactions occurred as of the dates indicated, or the future results of
operations of the Company. The unaudited Pro Forma Combined Balance Sheet and
unaudited Pro Forma Combined Statements of Income and the accompanying notes
should be read in conjunction with the historical combined financial statements
and the notes thereto of the Company, the consolidated financial statements and
the notes thereto of HCP, and "The Company-Formation Transactions" and "Use of
Proceeds" contained elsewhere in this Prospectus.

F-2
<PAGE> 70

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $13,198,573[1] $ 8,464,416 $21,662,989
Cash, restricted............................... 169,046[2] (169,046) --
Accounts receivable, net....................... 2,072,546[2] (836,917) 1,235,629
Accounts receivable from affiliates............ 6,738 -- 6,738
Prepaid expenses and other assets.............. 195,522[2] (77,688) 117,834
Deferred income taxes.......................... --[3] 27,780 27,780
----------- ------------ -----------
Total current assets................... 15,642,425 7,408,545 23,050,970
Property and equipment, net...................... 30,991,942[4] 8,995,442 39,987,384
Investments in limited partnerships.............. 9,621,412[5] 2,801,706 12,423,118
Goodwill......................................... --[6] 1,220,853 1,220,853
Management contract rights, net.................. 267,523 -- 267,523
Deferred financing charges, net.................. 72,828[7] (72,828) --
Deferred income taxes............................ --[8] 9,891,196 9,891,196
Other assets..................................... 38,248 -- 38,248
----------- ------------ -----------
Total assets........................... $56,634,378 $ 30,244,914 $86,879,292
=========== ============ ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................... $ 951,847[2] $ (580,600) $ 371,247
Accrued expenses............................... 2,204,371[9] (1,232,470) 971,901
Current portion of notes payable to
affiliates.................................. 965,091[10] (965,091) --
Current portion of notes payable............... 555,849 -- 555,849
Mortgage note payable.......................... 5,500,000[11] (5,500,000) --
Customer deposits.............................. 257,948[2] (257,948) --
Due to affiliates.............................. 69,355 -- 69,355
LBHI Loan...................................... --[12] -- --
Formation Note................................. --[13] -- --
----------- ------------ -----------
Total current liabilities.............. 10,504,461 (8,536,109) 1,968,352
Notes payable to affiliates, net of current
portion........................................ 201,390[10] (201,390) --
Notes payable, net of current portion............ 6,390,574 -- 6,390,574
Minority interest in combined partnerships....... 20,749,173[14] (9,658,803) 11,090,370
Equity:
Partners' capital.............................. 19,370,768[15] (19,370,768) --
Common stock................................... 16,800[16] 166,873 183,673
Additional paid in capital..................... 26,558[16] 67,890,159 67,916,717
Retained earnings (deficit).................... (625,346)[17] (45,048) (670,394)
----------- ------------ -----------
Total equity........................... 18,788,780 48,641,216 67,429,996
----------- ------------ -----------
Total liabilities and equity........... $56,634,378 $ 30,244,914 $86,879,292
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-3
<PAGE> 71

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Resident and health care revenue.............. $10,427,471 $ -- $10,427,471
Rental and lease income....................... 2,157,973 -- 2,157,973
Unaffiliated management services revenue...... 949,007 -- 949,007
Affiliated management services revenue........ 701,126 -- 701,126
Development fees.............................. 370,410 -- 370,410
Other income.................................. 461,410 -- 461,410
----------- ----------- -----------
Total revenues........................ 15,067,397 -- 15,067,397
----------- ----------- -----------
Expenses:
Operating expenses............................ 8,080,062 -- 8,080,062
General and administrative expenses........... 3,933,008[1] (1,932,816) 2,000,192
Depreciation and amortization................. 949,954[2] 43,605 993,559
----------- ----------- -----------
Total expenses........................ 12,963,024 (1,889,211) 11,073,813
----------- ----------- -----------
Income from operations.......................... 2,104,373 1,889,211 3,993,584
Other income (expense):
Interest income............................... 794,439[3] (72,707) 721,732
Interest expense.............................. (419,397)[4] 75,574 (343,823)
----------- ----------- -----------
Income before income taxes and minority
interest in combined partnerships........ 2,479,415 1,892,078 4,371,493
Provision for income taxes.................... --[5] (1,570,532) (1,570,532)
----------- ----------- -----------
Income before minority interest in combined
partnerships............................... 2,479,415 321,546 2,800,961
Minority interest in combined partnerships.... (1,266,026)[6] 870,564 (395,462)
----------- ----------- -----------
Net income.................................... $ 1,213,389 $ 1,192,110 $ 2,405,499
=========== =========== ===========
Pro forma net income per share................ $ 0.13
===========
Shares used in computing pro forma net income
per share.................................. 18,367,347
===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-4
<PAGE> 72

CAPITAL SENIOR LIVING CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------
THE COMPANY HCP, OTHER PRO FORMA THE COMPANY
HISTORICAL L.P.(7) ADJUSTMENTS PRO FORMA
----------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Resident and health care
revenue....................... $13,691,984 $2,969,991 $ -- $16,661,975
Rental and lease income.......... 1,101,317 4,590,113 -- 5,691,430
Unaffiliated management services
revenue....................... 800,961 -- -- 800,961
Affiliated management services
revenue....................... 2,708,077 --[8] (955,269) 1,752,808
Development fees................. 673,587 -- -- 673,587
Other income..................... 923,700 -- -- 923,700
----------- ---------- ----------- -----------
Total revenues........... 19,899,626 7,560,104 (955,269) 26,504,461
----------- ---------- ----------- -----------
Expenses:
Operating expenses............... 10,798,431 2,727,909 -- 13,526,340
General and administrative
expenses...................... 5,492,873 2,457,884[1] (2,983,869) 4,966,888
Depreciation and amortization.... 1,481,056 1,418,293[2] (759,853) 2,139,496
----------- ---------- ----------- -----------
Total expenses........... 17,772,360 6,604,086 (3,743,722) 20,632,724
----------- ---------- ----------- -----------
Income from operations............. 2,127,266 956,018 2,788,453 5,871,737
Other income (expense)
Interest income.................... 432,342 239,215[3] (309,277) 362,280
Interest expense................. (221,521) (784,092)[4] 39,093 (966,520)
Gain on sale of properties....... 437,819 387,617 -- 825,436
Equity in earnings on
investments................... 458,992 --[9] (458,992) --
Other............................ 42,042 (114,107) -- (72,065)
----------- ---------- ----------- -----------
Income before income taxes and
minority interest in
combined partnerships....... 3,276,940 684,651 2,059,277 6,020,868
Provision for income taxes....... -- --[5] (2,170,006) (2,170,006)
----------- ---------- ----------- -----------
Income before minority interest
in combined partnerships...... 3,276,940 684,651 (110,729) 3,850,862
Minority interest in combined
partnerships.................. (1,223,997) --[6] 696,816 (527,181)
----------- ---------- ----------- -----------
Net income....................... $ 2,052,943 $ 684,651[10] $ 586,087 $ 3,323,681
=========== ========== =========== ===========
Pro forma net income per share... $ 0.18
===========
Shares used in computing pro
forma net income per share.... 18,367,347
===========
</TABLE>

The accompanying notes are an integral part of these
pro forma combined financial statements.

F-5
<PAGE> 73

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The transactions contemplated in connection with the contribution of all of
the capital stock of the Contributed Entities have been accounted for as an
exchange between entities under common control and, accordingly, have been
accounted for in a manner similar to a pooling of interests.

2. FINANCING TRANSACTION OF CSLC

On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. (LBHI Loan) and pledged four retirement
communities and its investments in HCP and NHP as collateral. The purpose of the
LBHI Loan is to provide for repayment of the outstanding mortgage loan
commitment (prior credit facility), to fund the renovation and expansion of
owned properties, and, upon refinancing, to fund future property development and
acquisition activities. On July 1, 1997, $70,000,000 was borrowed under this
loan agreement; $5,500,000 was used to repay the prior credit facility and
$64,500,000 was used to fund the liquidity requirement under the loan agreement,
through the purchase of three-month U.S. Treasury bills. The purpose of the
liquidity requirement is to fund amounts that may be due from CSLC upon maturity
of the LBHI Loan. The U.S. Treasury bills were sold under a repurchase agreement
with a term equal to their maturity. It is expected that upon completion of the
Offering, the repurchase agreement will be canceled and the outstanding debt
under the loan agreement will be assumed by the Company and repaid from the
proceeds of the Offering. Upon such repayment, the U.S. Treasury bills will
revert to CSLC. Interest costs are based on 30-day LIBOR plus 50 basis points.
The loan agreement matures December 31, 1997.

3. CSLC TRANSACTION

As part of the Formation Transactions, the Company will purchase
substantially all the assets, other than working capital items, of CSLC, for
approximately $74.0 million, consisting of the assumption of the LBHI Loan for
$70.0 million and the payment of approximately $4.0 million in cash. This
transaction has been accounted for as an exchange between entities under common
control and, accordingly, has been accounted for in a manner similar to a
pooling of interests to the extent of the common ownership of CSLC. To the
extent of the ownership of CSLC by unrelated third parties, the assets acquired
have been adjusted to reflect the prorata portion of their fair market value.

The assets of CSLC to be acquired include, but are not limited to, its
interest in HCP (54.0% at June 30, 1997), and its interest in the NHP Notes
issued by NHP (27.9% at June 30, 1997). The purchase price paid for these assets
has been calculated as of June 30, 1997 utilizing the ownership percentages of
the investments in HCP and the NHP Notes existing as of that date. It is
anticipated that as a result of changes in assets and liabilities of HCP and NHP
and increases in the investments in HCP (increased approximately 0.7%) and the
NHP Notes (increased approximately 2.8%), the purchase price at closing of the
transaction is anticipated to be in the range of $75.5 million to $76.5 million,
excluding any construction in progress financed through the LPHI Loan. The
anticipated increase in the purchase price from $74.0 million will be paid in
cash.

F-6
<PAGE> 74

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of CSLC's increased ownership of HCP through June 30, 1997 of
54.0% (55.1% of the LP units), HCP has been consolidated in the historical
combined financial statements as though a controlling financial interest in HCP
had been acquired by CSLC at January 1, 1997. During 1996, HCP was accounted for
utilizing the equity method of accounting. The pro forma results of operations
for the year ended December 31, 1996 have been adjusted to consolidate HCP on a
basis consistent with operating results for June 30, 1997. CSLC's historical
weighted average ownership in HCP of 23% for the year ended December 31, 1996
was used in consolidating HCP's operating results for the year ended December
31, 1996.

4. BASIS OF VALUATION

The Company has obtained independent valuations of properties from third
party valuation firms, which were utilized in determining the purchase price of
the CSLC assets acquired in the Formation Transactions. The purchase price to be
paid by the Company for each of the assets being acquired was determined as
follows:

CSLC Properties............ Based on the appraised value of the properties
(including all real property, personal property
and goodwill) plus the historical basis of
construction in progress less any construction
related indebtedness

Investment in NHP LP
Units...................... Assumed to have no value based on the total
principal amount of the NHP Notes plus related
accrued and unpaid interest being more than the
estimated liquidation value of NHP

Investment in NHP Notes.... Based on the appraised value of the properties of
NHP (including all real and personal property),
plus net working capital items, plus other assets
that would result in the receipt of cash, less
other liabilities that would result in the use of
cash, to arrive at estimated liquidation value of
NHP, which was then multiplied by the percentage
of total NHP Notes owned by CSLC to arrive at the
estimated purchase price to be paid by the
Company

Investment in HCP LP
Units...................... Based on the appraised value of the properties of
HCP (including all real property, personal
property and goodwill), plus net working capital
items, plus other assets that would result in the
receipt of cash, less long term debt, to arrive
at the estimated fair value of HCP, which is then
multiplied by the percentage of HCP owned by CSLC
to arrive at the estimated purchase price to be
paid by the Company

F-7
<PAGE> 75

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. PRO FORMA ADJUSTMENTS

The pro forma adjustments to the combined balance sheet and combined
statements of income, and related assumptions, are detailed below:

PRO FORMA COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[1] Adjustments to reflect the net increase in cash and cash
equivalents:
Proceeds from the issuance of 9,000,000 shares of common
stock assuming an initial Offering price of $12.00 per
share..................................................... $108,000,000
Payment of estimated fees and expenses related to the
issuance of common stock.................................. (8,640,000)
Proceeds received by CSLC under the LBHI Loan............... 70,000,000
Repayment of prior credit facility by CSLC.................. (5,500,000)
Reduction for cash of $2,997,183 and cash equivalents of
$64,500,000 which were not acquired by the Company from
CSLC...................................................... (67,497,183)
Repayment by the Company of the LBHI Loan assumed in the
purchase of assets from CSLC.............................. (70,000,000)
Purchase of assets from CSLC................................ (4,027,896)
Repayment of the Formation Note............................. (12,666,052)
Repayment of notes payable to affiliates including accrued
interest.................................................. (1,204,453)
------------
$ 8,464,416
============
[2] Adjustment to reflect the reduction for certain working
capital items of CSLC which were not acquired or assumed
by the Company............................................
[3] Adjustment to reflect deferred income taxes upon the
transition from S corporation to C corporation status as a
result of the Formation Transactions......................
[4] Adjustments to reflect the net increase in property and
equipment:
Increase in value of CSLC's investment in HCP based upon
the fair market value of the investment to the extent
of the prorata portion of the ownership of CSLC by
unrelated third parties. (Purchase price of CSLC's
investment in HCP, net of goodwill, of $14,366,963 less
the historical cost basis of $13,582,655 multiplied by
the 34.2% owned by unrelated third parties.)........... $ 268,271
Increase in value of CSLC's property and equipment
acquired based upon the fair market value of the assets
to the extent of the prorata portion of the ownership
of CSLC by unrelated third parties. (Purchase price of
property and equipment acquired from CSLC of
$38,279,299 less the historical cost basis of
$12,764,826, multiplied by the 34.2% owned by unrelated
third parties.) The property and equipment acquired
from CSLC is being depreciated on a straight line basis
over the lives of the assets, which range from four to
thirty years........................................... 8,727,171
------------
$ 8,995,442
============
</TABLE>

F-8
<PAGE> 76

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[5] Adjustment to reflect the increase in value of the NHP Notes
acquired based upon the fair market value of these assets
to the extent of the prorata portion of the ownership of
CSLC by unrelated third parties. (Purchase price of
$17,812,389 less historical cost basis of $9,621,412
multiplied by the 34.2% owned by unrelated third
parties.).................................................
[6] Adjustment to reflect goodwill:
Recording of the excess of the purchase price over the
fair market value of HCP's tangible property (to the
extent of the prorata portion of the ownership of CSLC
by unrelated third parties) as a result of the
consolidation of CSLC's investment in HCP. (Excess of
the purchase price over the fair market value of
tangible property (goodwill) of HCP of $144,245
multiplied by the 34.2% owned by unrelated third
parties.) The goodwill is being amortized on a straight
line basis over its estimated life of 20 years......... $ 49,339
Recording of the excess of the purchase price over the
fair market value of tangible property acquired, to the
extent of the prorata portion of the ownership of CSLC
by unrelated third parties. (Excess of the purchase
price over the fair market value of tangible property
of $3,425,000 multiplied by the 34.2% owned by
unrelated third parties.) The goodwill acquired from
CSLC is being amortized on a straight line basis over
its estimated life of thirty years..................... 1,171,514
------------
$ 1,220,853
============
[7] Adjustment to reflect the elimination of deferred financing
charges of CSLC as a result of the repayment and
termination of the prior credit facility..................
[8] Adjustment to establish a deferred tax asset to the extent
of the tax effected difference between the recorded basis
and tax basis of CSLC assets acquired.....................
[9] Adjustment to reflect the net decrease in accrued
liabilities:
Reduction for accrued liabilities of CSLC which were not
acquired by the Company................................ $ (1,194,498)
Repayment of accrued interest on notes payable to
affiliates............................................. (37,972)
------------
$ (1,232,470)
============
[10] Adjustment to reflect repayment of notes payable to
affiliates................................................
[11] Adjustment to reflect repayment of prior credit facility by
CSLC......................................................
[12] Adjustment to reflect the LBHI Loan activity:
Recording of LBHI Loan by CSLC............................ $ 70,000,000
Repayment of the LBHI Loan with Offering proceeds......... (70,000,000)
------------
$ --
============
[13] Adjustment to reflect the Formation Note activity:
Recording of the Formation Note........................... $ 12,666,052
Repayment of the Formation Note with Offering proceeds.... (12,666,052)
------------
$ --
============
[14] Adjustment to reflect elimination of the 34.2% minority
interest of CSLC upon the acquisition of substantially all
the assets, except working capital, of CSLC...............
</TABLE>

F-9
<PAGE> 77

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
[15] Adjustment to reclassify partners' capital of CSLC to
additional paid in capital upon the acquisition of
substantially all the assets, except working capital, of
CSLC......................................................
[16] Adjustments to reflect the net increase in common stock and
additional paid in capital:
Issuance of 9,000,000 shares of common stock in the
Offering assuming an initial public offering price of
$12.00 per share....................................... $108,000,000
Payment of estimated fees and expenses related to the
issuance of common stock............................... (8,640,000)
Issuance of the Formation Note............................ (12,666,052)
Reduction of cash and other working capital items of CSLC
which were not acquired or assumed by the Company
(which includes $64,500,000 of cash equivalents)....... (66,547,788)
Purchase of assets from CSLC, net of the LBHI Loan
assumed................................................ (4,027,896)
Purchase accounting adjustments relating to the
acquisition of CSLC (increase in value of property and
equipment $8,995,442, excess of the purchase price over
the fair market value of tangible assets acquired of
$1,220,853, increase in the value of NHP Notes and NHP
LP interests $2,801,706, establishment of deferred tax
asset for tax effected difference between recorded
basis and tax basis of assets acquired and liabilities
assumed of $9,891,196 and elimination of minority
interest of $9,658,803)................................ 32,568,000
Reclassification of partners' capital upon the acquisition
of substantially all of the assets, except working
capital, and assumption of certain liabilities of
CSLC................................................... 19,370,768
------------
$ 68,057,032
============
Common stock (increase of 16,687,347 shares of common stock
at $.01 par value consisting of 9,000,000 shares issued in
the Offering and 7,687,347 shares issued in the Formation
Transactions, resulting in total outstanding shares of
18,367,347)............................................... $ 166,873
Additional paid in capital.................................. 67,890,159
------------
$ 68,057,032
============
[17] Adjustment to reflect the net increase in the deficit:
Recording of deferred income tax asset arising as a result
of the transition from S Corporation to C Corporation
status................................................. $ 27,780
Elimination of deferred financing charges as a result of
the repayment of the prior credit facility by CSLC..... (72,828)
------------
$ (45,048)
============
</TABLE>

F-10
<PAGE> 78

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

PRO FORMA COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[1] Adjustments to reflect the net decrease in general and
administrative expenses:
Additional expenses related to operating a public
entity consisting of additional annual directors'
and officers' liability insurance of $150,000 and
additional annual expenses and professional fees
of $500,000....................................... $ 325,000 $ 650,000
Reduction of officers' salaries and bonuses resulting
from new employment contracts..................... (2,257,816) (2,678,600)
Elimination of intercompany management fees.......... -- (955,269)
----------- -----------
$(1,932,816) $(2,983,869)
=========== ===========
[2] Adjustments to reflect the net increase (decrease) in
depreciation and amortization:
Addition (reduction) of depreciation expense as a
result of the purchase of CSLC's properties and
reevaluation of asset lives. (The adjustment in
the six month period ended June 30, 1997 was
affected by approximately $4.0 million of
equipment becoming fully depreciated during
1996.)............................................ $ 66,220 $ (363,925)
Additional depreciation expense as a result of the
purchase of CSLC's investment in HCP.............. 10,998 21,996
Reduction of depreciation and amortization expense as
a result of the consolidation of HCP.............. -- (426,378)
Elimination of amortization of financing charges as a
result of the repayment and termination of the
prior credit facility by CSLC..................... (33,613) (110,178)
Elimination of the amortization of deferred income
related to CSLC's change in method of accounting
for its investment in HCP from the cost to the
equity method, as a result of the consolidation of
HCP............................................... -- 118,632
----------- -----------
$ 43,605 $ (759,853)
=========== ===========
</TABLE>

F-11
<PAGE> 79

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[3] Adjustment to reflect the elimination of interest
income related to cash balances of CSLC not acquired
by the Company.......................................
The pro forma combined statements of income do not
include any estimated interest earned on
approximately $8.5 million of cash and cash
equivalents arising from proceeds of the Offering.
(Total net proceeds from the Offering of $99.4
million less; repayment of the LBHI Loan of $70.0
million, repayment of the Formation Note of $12.7
million, cash paid for assets of CSLC of $4.0
million, repayment of notes payable and accrued
interest to the Company founders and an affiliate of
$1.2 million, and cash and cash equivalents of CSLC
not acquired of $3.0 million.) At a simple interest
rate of 5%, interest earned would be approximately
$212,000 and $424,000 for the six month period ended
June 30, 1997 and for the year ended December 31,
1996, respectively. Additionally, the pro forma
combined statements of income do not reflect
estimated interest income on additional NHP Notes
acquired by CSLC through June 30, 1997. Had such NHP
Notes been owned at January 1, 1996 interest earned
would have been approximately $625,000 for the six
month period ended June 30, 1997 at a simple interest
rate of 10.5%, and approximately $833,000 for the
year ended December 31, 1996 at a simple interest
rate of 7% (par value of NHP Notes of $11,900,000).
This interest income is approximately $77,000 and
$730,000 higher than reflected herein relative to the
NHP Notes for the six month period ended June 30,
1997 and the year ended December 31, 1996,
respectively. The 10.5% and 7% rates utilized are
reflective of the rates at which CSLC was accruing
interest income on the NHP Notes at June 30, 1997 and
December 31, 1996, respectively......................
[4] Adjustment to reflect the net decrease in interest
expense resulting from:
Repayment of the prior credit facility............... $ 42,524 $ --
Repayment of notes payable to affiliates............. 33,050 39,093
----------- -----------
$ 75,574 $ 39,093
=========== ===========
[5] Adjustment to reflect the federal and state income tax
expense associated with operating as a C corporation
using an effective rate of 39.5%.....................
</TABLE>

F-12
<PAGE> 80

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
[6] Adjustment to reflect the decrease in the minority
interest in combined partnerships:
Elimination of the minority interest of CSLC upon the
acquisition of substantially all the assets,
except working capital, of CSLC................... $ 870,564 $ 1,223,997
Recording of minority interest of HCP (utilizing the
weighted average of 77%) for the year ended
December 31, 1996, upon consolidation with CSLC... -- (527,181)
----------- -----------
$ 870,564 $ 696,816
=========== ===========
[7] Adjustments to include the historical financial
statements of HCP as a result of CSLC's ownership
interest in HCP exceeding 50% (54.0% at June 30,
1997). For pro forma combined statement of income
purposes the 1996 extraordinary gain related to the
early extinguishment of debt in the amount of
$952,692 has not been included.......................
[8] Adjustment to reflect the elimination of intercompany
management fees......................................
[9] Adjustment to eliminate equity in earnings on
investments due to the consolidation of HCP upon
CSLC's ownership interest in HCP exceeding 50% (54.0%
at June 30, 1997)....................................
[10] In the fourth quarter of 1996, CSLC sold two
multi-family properties, Silver Lakes and Lake Ridge.
Pro forma information for the year ended December 31,
1996 includes the historical financial results of
these two properties and the gain on the sale.
Summary financial information regarding the 1996
financial results of Silver Lakes and Lake Ridge,
including the gain on sale are summarized below......
Revenues.......................... $1,101,317
Other income...................... 70,592
Operating expenses................ (705,785)
General and administrative
expenses........................ (58,960)
Depreciation and amortization..... (235,121)
Interest income................... 22,431
Interest expense.................. (183,908)
Gain on sale of properties........ 437,819
----------
Income before income taxes...... $ 448,385
==========
</TABLE>

F-13
<PAGE> 81

CAPITAL SENIOR LIVING CORPORATION

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. OTHER

The unaudited Pro Forma Combined Balance Sheet and unaudited Pro Forma
Combined Statements of Income are presented for informational purposes only and
do not necessarily reflect the financial position or results of operations of
the Company which would have actually resulted had the Offering and Formation
Transactions occurred as of the dates indicated, or the future results of
operations of the Company. The unaudited Pro Forma Combined Balance Sheet and
unaudited Pro Forma Combined Statements of Income and the accompanying notes
should be read in conjunction with the historical combined financial statements
and the notes thereto of the Company, the consolidated financial statements and
the notes thereto of HCP, and "The Company -- Formation Transactions" and "Use
of Proceeds" contained elsewhere in this Prospectus.

F-14
<PAGE> 82

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders
Capital Senior Living Corporation

We have audited the accompanying combined balance sheets of Capital Senior
Living Corporation as of December 31, 1996 and 1995, and the related combined
statements of income, equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Capital Senior
Living Corporation as of December 31, 1996, and the results of its combined
operations and its combined cash flows for each of the three years in the period
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Dallas, Texas
July 3, 1997

F-15
<PAGE> 83

CAPITAL SENIOR LIVING CORPORATION

COMBINED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $13,198,573 $10,818,512 $10,016,702
Cash, restricted.................................... 169,046 206,376 203,788
Accounts receivable, net (Note 13).................. 2,072,546 607,028 409,486
Accounts receivable from affiliates................. 6,738 90,075 148,886
Prepaid expenses and other.......................... 195,522 121,993 145,352
----------- ----------- -----------
Total current assets........................ 15,642,425 11,843,984 10,924,214
Property and equipment, net (Note 3).................. 30,991,942 12,668,539 17,367,074
Investments in limited partnerships (Note 12)......... 9,621,412 8,275,920 896,405
Management contract rights, net (Note 2).............. 267,523 291,487 382,411
Deferred financing charges, net (Note 6).............. 72,828 106,440 173,665
Other assets.......................................... 38,248 16,644 3,032
----------- ----------- -----------
Total assets................................ $56,634,378 $33,203,014 $29,746,801
=========== =========== ===========

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable.................................... $ 951,847 $ 396,867 $ 311,539
Accrued expenses (Note 4)........................... 2,204,371 1,084,686 1,177,916
Current portion of notes payable to affiliates (Note
5)............................................... 965,091 465,091 315,091
Current portion of notes payable (Note 6)........... 555,849 -- 2,035,148
Mortgage loan payable (Note 6)...................... 5,500,000 -- --
Customer deposits................................... 257,948 248,458 279,982
Due to affiliates................................... 69,355 81,456 20,146
----------- ----------- -----------
Total current liabilities................... 10,504,461 2,276,558 4,139,822
Deferred income (Note 12)............................. -- 3,400,684 --
Notes payable to affiliates, net of current portion
(Note 5)............................................ 201,390 201,390 336,982
Notes payable, net of current portion (Note 6)........ 6,390,574 -- --
Minority interest in combined partnerships (Note 7)... 20,749,173 10,123,858 10,822,619
Commitments and contingencies (Notes 10 and 14)
Equity (Note 7):
Partners' capital................................... 19,370,768 17,257,778 14,655,669
Common stock, $.01 par value:
Authorized shares -- 40,000,000
Issued and outstanding shares -- 1,680,000....... 16,800 16,800 16,800
Additional paid-in capital.......................... 26,558 26,558 (13,242)
Retained earnings (deficit)......................... (625,346) (100,612) (211,849)
----------- ----------- -----------
Total equity................................ 18,788,780 17,200,524 14,447,378
----------- ----------- -----------
Total liabilities and equity................ $56,634,378 $33,203,014 $29,746,801
=========== =========== ===========
</TABLE>

See accompanying notes.

F-16
<PAGE> 84

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF INCOME

See accompanying notes.

F-17
<PAGE> 85

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PARTNERS' ------------------- PAID-IN EARNINGS
CAPITAL SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- --------- ------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 (Notes 1 and
7)................................... $10,352,228 1,680,000 $16,800 $(15,800) $ 277,450 $10,630,678
Capital contribution................. -- -- -- 2,558 -- 2,558
Purchase of BUCs (Note 7)............ 1,316,220 -- -- -- -- 1,316,220
Net income (loss).................... 589,548 -- -- -- (43,712) 545,836
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1994........... 12,257,996 1,680,000 16,800 (13,242) 233,738 12,495,292
Dividend upon acquisition of
management contract rights (Note
1)................................. -- -- -- -- (517,719) (517,719)
Purchase of BUCs (Note 7)............ 1,466,411 -- -- -- -- 1,466,411
Net income........................... 931,262 -- -- -- 72,132 1,003,394
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1995........... 14,655,669 1,680,000 16,800 (13,242) (211,849) 14,447,378
Issuance of common stock (Note 7).... -- -- -- 16,800 -- 16,800
Capital contributions................ -- -- -- 23,000 -- 23,000
Purchase of BUCs (Note 7)............ 660,403 -- -- -- -- 660,403
Net income........................... 1,941,706 -- -- -- 111,237 2,052,943
----------- --------- ------- -------- --------- -----------
Balance at December 31, 1996........... 17,257,778 1,680,000 16,800 26,558 (100,612) 17,200,524
Purchase of BUCs (Note 7)............ 374,867 -- -- -- -- 374,867
Net income........................... 1,738,123 -- -- -- (524,734) 1,213,389
----------- --------- ------- -------- --------- -----------
Balance at June 30, 1997 (Unaudited)... $19,370,768 1,680,000 $16,800 $ 26,558 $(625,346) $18,788,780
=========== ========= ======= ======== ========= ===========
</TABLE>

See accompanying notes.

F-18
<PAGE> 86

CAPITAL SENIOR LIVING CORPORATION

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- --------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 1,213,389 $ 779,905 $ 2,052,943 $ 1,003,394 $ 545,836
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 891,410 741,181 1,397,258 1,632,371 1,581,794
Amortization.............................. 58,544 36,636 83,798 143,897 125,574
Deferred income tax benefit............... -- -- -- -- (49,235)
Non cash interest expense................. -- -- -- 1,616 15,737
Minority interest in combined
partnerships............................ 1,266,026 649,592 1,223,997 759,407 634,366
Equity in earnings on investments......... -- (398,508) (458,992) -- --
Gain on sale of properties................ -- -- (437,819) -- --
Provision for bad debts................... -- 16,500 22,312 71,098 --
Loss on sale of limited partnership
interests............................... -- -- -- -- 15,523
Changes in operating assets and
liabilities:
Cash, restricted........................ 37,330 -- (2,588) (152,803) (1,604)
Accounts receivable..................... (671,284) 77,063 (219,854) (215,233) 70,734
Accounts receivable from affiliates..... 83,337 (20,180) 58,811 (294,237) (25,482)
Prepaid expenses and other.............. 11,766 5,802 23,359 (36,141) 20,584
Other assets............................ (22,572) (7,801) (14,940) 6,766 (22,298)
Accounts payable........................ 343,676 450,311 85,328 256,183 (102,911)
Accrued expenses........................ 115,481 774,462 (5,402) (1,136,510) 472,391
Customer deposits....................... 9,490 15,175 32,295 26,204 (3,311)
Due to affiliates....................... (12,101) (20,146) 61,310 655,936 150,578
------------ ----------- ----------- ----------- ----------
Net cash provided by operating activities... 3,324,492 3,101,992 3,901,816 2,721,948 3,428,276
INVESTING ACTIVITIES
Capital expenditures........................ (562,255) (222,939) (851,732) (400,701) (182,729)
Proceeds from sale of properties............ -- -- 2,549,352 -- --
Sale of limited partnership interests....... -- -- -- -- 4,400,000
Cash acquired upon acquisition of HCP....... 8,995,455 -- -- -- --
Investments in limited partnerships......... (14,155,888) (2,599,228) (3,401,207) (896,405) (435,636)
------------ ----------- ----------- ----------- ----------
Net cash (used in) provided by investing
activities................................ (5,722,688) (2,822,167) (1,703,587) (1,297,106) 3,781,635
FINANCING ACTIVITIES
Proceeds from notes payable................. $ -- $ -- $ -- $ -- $ 93,815
Repayments of notes payable................. (260,991) (24,982) (145,319) (58,565) (272,740)
Repayments of notes payable to affiliates... -- (320,490) (455,592) (65,091) (448,646)
Proceeds from notes payable to affiliates... 500,000 -- 470,000 250,000 248,646
Proceeds from mortgage note payable......... 5,500,000 -- -- -- --
Issuance of common stock.................... -- -- 16,800 -- --
Capital contribution........................ -- 22,000 23,000 -- 2,558
Repurchase of BUCs.......................... (960,752) (447,504) (1,262,355) -- --
Deferred loan charges paid.................. -- (20,352) (42,953) (130,829) (99,596)
Cash portion of dividend (Note 1)........... -- -- -- (202,698) --
------------ ----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities................................ 4,778,257 (791,328) (1,396,419) (207,183) (475,963)
------------ ----------- ----------- ----------- ----------
(Decrease) increase in cash and cash
equivalents............................... 2,380,061 (511,503) 801,810 1,217,659 6,733,948
Cash and cash equivalents at beginning of
period.................................... 10,818,512 10,016,702 10,016,702 8,799,043 2,065,095
------------ ----------- ----------- ----------- ----------
Cash and cash equivalents at end of
period.................................... $ 13,198,573 $ 9,505,199 $10,818,512 $10,016,702 $8,799,043
============ =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest.................................. $ 347,847 $ 112,959 $ 188,510 $ 276,062 $ 245,705
============ =========== =========== =========== ==========
Income taxes.............................. $ -- $ -- $ -- $ 21,633 $ 155,876
============ =========== =========== =========== ==========
</TABLE>

See accompanying notes.

F-19
<PAGE> 87

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION, FORMATION AND PLANNED INITIAL PUBLIC OFFERING

Capital Senior Living Corporation, a Delaware corporation, was incorporated
on October 25, 1996. Capital Senior Living Corporation is owned by James A.
Stroud (through a trust), Jeffrey L. Beck, and Lawrence A. Cohen.

The accompanying financial statements include the combined financial
statements of Capital Senior Living Corporation (Corporation); Capital Senior
Living Communities, L.P. (CSLC); Capital Senior Living, Inc. (Living); Quality
Home Care, Inc. (Quality); Capital Senior Development, Inc. (Development);
Capital Senior Management 1, Inc. (Management 1); and Capital Senior Management
2, Inc. (Management 2) (collectively referred to with Capital Senior Living
Corporation as the Company). CSLC includes the accounts of CSLC and HealthCare
Properties, L.P. (HCP) (as of January 1, 1997). HCP includes the accounts of HCP
and its wholly owned subsidiaries, Danville Care, Inc., Foothills Care, Inc.,
Countryside Care, Inc., Countryside Care, L.P., and Cambridge Nursing Home
Limited Liability Company. All intercompany balances and transactions have been
eliminated in combination.

The Company is a provider of senior living services. The Company owns,
operates and manages senior living communities.

The Company is currently planning the registration of its common stock for
sale in an initial public offering (Offering). Simultaneously with the closing
of the Offering, Corporation will acquire Living, Quality, Development,
Management 1, and Management 2 (Formation) in exchange for common stock and a
note payable (Formation Note) to Jeffrey L. Beck and James A. Stroud or a
related trust (collectively, the Stockholders) and Lawrence A. Cohen.
Additionally, the Corporation will purchase certain assets and all of the
business and retire certain debt of CSLC; at June 30, 1997, these assets include
a controlling interest of 55% of the limited partner units in HCP. After the all
of above transactions, including the Offering, the Stockholders will own 49% of
the common stock of the Company (assuming the underwriters do not exercise their
over-allotment option). The Stockholders and other members of management will
own over 50% of the Company.

Due to all of these entities being under the common control of the
Stockholders for all periods presented, these combined financial statements
reflect the assets and liabilities at their historical values and the
accompanying combined statements of income, equity, and cash flows reflect the
combined results for the periods indicated even though they have historically
operated as separate entities. The Formation will be accounted for at historical
cost in a manner similar to a pooling of interests to the extent of the
percentage ownership by the Stockholders. Assets and liabilities in CSLC will be
recorded at fair value to the extent of any minority interest. CSLC's assets
include investments in HCP and NHP.

As of June 30, 1997, CSLC had increased its ownership in HCP to 55% of the
limited partner units. In the accompanying combined financial statements, HCP is
consolidated as though a controlling financial interest in HCP had been acquired
by CSLC at January 1, 1997. At December 31, 1996 and 1995, CSLC owned
approximately 31% and 6% of HCP's limited partner units, respectively.
Preacquisition earnings for 1997 applicable to HCP are included in minority
interest.

HCP is a Delaware limited partnership established for the purpose of
acquiring, leasing, and operating existing or newly constructed long-term health
care properties. One property is operated by HCP and seven properties are leased
to qualified operators who provide specialized health care services. Capital
Realty Group Senior Housing, Inc. (Housing), an entity controlled by the
Stockholders, is the general partner.

The general partner of CSLC is Retirement Living Communities, an Indiana
limited partnership (RLC). RLC is owned by James A. Stroud and Jeffrey L. Beck.
Additionally, CSLC has issued 1,264,000 Beneficial Unit Certificates (BUCs). At
June 30, 1997 and December 31, 1996 and 1995, BUCs outstanding were 1,117,692,
1,172,146, and 1,264,000, respectively. At June 30, 1997 and December 31, 1996,
1995, and 1994,

F-20
<PAGE> 88

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

James A. Stroud, Jeffrey L. Beck, and RLC collectively owned 66.5%, 63.4%,
57.4%, and 51.5% of the outstanding BUCs, respectively.

A description of the senior living communities now owned and operated by
CSLC is as follows:

Towne Centre Retirement Community (Towne Centre) -- This project is located
on a 15-acre site in Merrillville, Indiana, and includes a 148-unit senior
living community, a 34-bed assisted living unit which is licensed as
residential, and a 64-bed intermediate and skilled healthcare unit licensed
under a comprehensive license. The facility was approximately 92%, 95%, and 95%
occupied at December 31, 1996, 1995, and 1994, respectively.

Canton Regency Retirement Community (Canton Regency) -- This project is
located on a 10-acre site in Canton, Ohio, and includes a 147-unit senior living
community, a 34-bed assisted living unit, and a 50-bed intermediate and skilled
healthcare unit licensed by the Ohio Department of Health. The facility was
approximately 94% occupied at December 31, 1996, 1995, and 1994.

Cottonwood Village Retirement Community (Cottonwood Village) -- This
project is a 65-unit senior living community located on a 2-acre site in
Cottonwood, Arizona. The facility was approximately 95%, 100%, and 100% occupied
at December 31, 1996, 1995, and 1994, respectively.

On December 10, 1996, the Company began development on a 97-unit expansion
of the Cottonwood facility, comprised of 49 units for independent living and 48
units for assisted living. The budgeted cost for the expansion is approximately
$7,000,000 and includes funding for kitchen and dining room renovation. The
Company intends to finance 100% of the costs and estimates completion by March
1998. As of December 31, 1996, costs incurred for construction were $280,946.

Harrison Retirement Community (Harrison) -- This project is a 124-unit
senior living community located on a 4 1/2-acre site in Indianapolis, Indiana.
The facility was approximately 83%, 85%, and 90% occupied at December 31, 1996,
1995, and 1994, respectively.

On November 1, 1996, CSLC sold its two multi-family properties to a
non-related third party for a combined sales price of $4,793,000. This sale
resulted in the recognition of a $437,819 gain and net cash proceeds of
$2,549,352 after repayment of the related mortgage payable of $1,889,829.

Living, an S corporation, was incorporated on August 17, 1992, and
completed its initial issuance of shares in 1993. Living is owned 50% by James
A. Stroud (through a trust) and 50% by Jeffrey L. Beck.

Prior to February 1, 1995, Living's operations were limited to payroll
services provided to affiliated entities. On February 1, 1995, Living acquired
14 management contracts from Housing in exchange for a note payable to Housing
of $467,164. The acquisition was accounted for in a manner similar to that for a
pooling of interests. Accordingly, the management contracts were recorded at
Housing's historical basis and the financial statements were restated to include
the operations stemming from the management contracts for all periods prior to
the February 1, 1995 acquisition date. Effective February 1, 1995, a dividend of
$517,719 (including cash of $202,698) was recorded to eliminate the carrying
value of the net assets of the business stemming from the property management
contracts which were not acquired.

Development, Management 1, and Management 2, all S corporations, are owned
50% by James A. Stroud (directly or through a trust) and 50% by Jeffrey L. Beck.
Quality will be owned immediately prior to the Formation 42.5% by James A.
Stroud (directly or through a trust), 42.5% by Jeffrey L. Beck, and 15% by
Lawrence A. Cohen.

F-21
<PAGE> 89

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Investments with original maturities of three months or less are considered
to be cash equivalents.

Property and Equipment

Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to 31 years.

Management Contract Rights

Management contract rights are stated at cost and amortized on a
straight-line basis over their respective contract lives. Accumulated
amortization for management contract rights at June 30, 1997, and December 31,
1996 and 1995, was $248,640, $224,676, and $178,507, respectively.

At each balance sheet date, the Company reviews the carrying value of its
management contract rights and property and equipment to determine if facts and
circumstances suggest that they may be impaired or that the amortization and
depreciation period may need to be changed. The Company considers external
factors relating to each intangible asset, including contract changes, local
market developments, and other publicly available information. If these external
factors indicate the intangible assets and property and equipment will not be
recoverable, the carrying value of the intangible assets and property and
equipment will be analyzed and adjusted accordingly. During 1996, 1995, and
1994, management contract rights of $44,755, $52,771, and $72,932, respectively,
were written off due to the termination of certain contracts which has been
reflected as additional amortization expense. The Company does not believe there
are any indicators that would require an adjustment to the carrying value of the
management contract rights or property and equipment or their remaining useful
lives as of June 30, 1997 or December 31, 1996.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.

CSLC and HCP are partnerships and, consequently, are not subject to income
taxes. Taxable income or loss is directly allocated to the individual partners.
HCP's wholly-owned subsidiaries file federal corporate income tax returns. None
of these subsidiaries had significant net income for financial reporting or
income tax purposes in 1997. Accordingly, no provision has been made for income
taxes for these subsidiaries during 1997.

Living, Quality, Development, Management 1, and Management 2 are S
corporations and consequently, are not subject to income taxes. Thus, taxable
income or loss is directly allocated to the individual stockholders. Prior to
February 1, 1995, Living was subject to federal and state income taxes.

Housing was part of a consolidated group for tax reporting purposes during
the period in which it owned the management contracts acquired by Living in
February 1995. Taxes were allocated to Housing during this period as if it were
a separate taxpayer. Current tax expense (benefit) was offset against the due to
affiliates balance and deferred tax assets and liabilities were recorded. Cash
paid for income taxes during the year ended December 31, 1994, included a
federal tax payment of $137,000 paid on behalf of this consolidated group.

F-22
<PAGE> 90

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

Resident and healthcare revenue is recognized at estimated net realizable
amounts due from residents in the period to which the rental and other services
relate.

Revenues from the Medicare and Medicaid programs accounted for less than
10% each of the Company's net revenues for the year ended December 31, 1996. One
community is a provider of services under the Indiana Medicaid program.
Accordingly, the community is entitled to reimbursement under the foregoing
program at established rates which are lower than private pay rates. Patient
service revenue for Medicaid patients is recorded at the reimbursement rates as
the rates are set prospectively by the state upon the filing of an annual cost
report. Two communities are providers of services under the Medicare program and
are entitled to reimbursement under the foregoing programs in amounts determined
based on the filing of an annual cost report prepared in accordance with Federal
regulations, which reports are subject to audit and retroactive adjustments in
future periods. Revenue from the Medicare program is recorded at established
rates and adjusted for differences between such rates and estimated amounts
reimbursable from the program. Any differences between estimated and actual
reimbursements are included in operations in the year of settlement, which have
not been material. Under Federal regulations, Medicare reimbursements to these
facilities are limited to routine cost limits determined on a geographical
region. The Company has filed exception reports to request reimbursement in
excess of its routine cost limit for the years 1992, 1993, and 1994, as of
December 31, 1996, and has recorded $310,000 in the six months ended June 30,
1997, as a result of being granted exception requests for 1994. There can be no
assurance that an exception to a facility's routine cost limits will be granted.

Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.

Management services revenue, resident and healthcare revenue, and
development fees are recognized when earned. Management services revenue relates
to providing certain management and administrative support services under
management contracts, which have terms expiring through 2002 and provide for
termination fees upon early cancellation. Development fees are billed in
accordance with the terms under a development agreement. Management services
revenue are shown net of reimbursed expenses. The reimbursed expenses to
affiliates were $6,462,046, $6,165,622, $12,683,838, $14,501,425, and
$15,772,798, for the six months ended June 30, 1997 and 1996, and the years
ended December 31, 1996, 1995, and 1994, respectively. Reimbursed expenses to
unaffiliated parties were $4,095,905, $34,780, $2,600,529, $-0-, and $-0-, for
the six months ended June 30, 1997 and 1996, and the years ended December 31,
1996, 1995, and 1994, respectively.

Credit Risk

The Company's receivables are generally due within 30 days. The Company
does not require collateral. Credit losses have been within management's
expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses.

Advertising

Advertising expenses are expensed as incurred. Advertising expenses for the
six months ended June 30, 1997 and 1996 and the year ended December 31, 1996,
1995 and 1994 were $79,496, $109,792, $210,028, $223,862, and $230,270,
respectively.

F-23
<PAGE> 91

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

The Financial Accounting Standards Board issued Statement No. 128, Earnings
per Share, effective for fiscal 1997, and Statement No. 130, Reporting
Comprehensive Income and Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, both effective for fiscal 1998. Statement
No. 128 requires changes to the calculation of earnings per share. Statement No.
130 requires reporting and display of comprehensive income and its components in
the financial statements. Statement No. 131 requires reporting about operating
segments and other disclosures about the business in its annual and interim
financial statements. The Company does not believe adoption of these new
Statements will have a material impact on its financial statements.

Interim Financial Data (Unaudited)

The unaudited combined balance sheet as of June 30, 1997, the unaudited
combined statements of income and cash flows for the six months ended June 30,
1996 and 1997, and the unaudited combined statement of equity for the six months
ended June 30, 1997, include, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's combined financial position, results of operations and cash flows. The
data disclosed in these notes to the combined financial statements for these
periods is unaudited. Operating results for the six month period ended June 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $ 3,489,139 $ 879,723 $ 1,281,070
Land improvements........................... 131,909 127,481 418,665
Buildings and building improvements......... 29,063,612 13,562,383 17,586,575
Furniture and equipment..................... 6,343,055 4,606,048 4,803,054
Construction in process..................... 379,299 280,946 --
----------- ----------- -----------
39,407,014 19,456,581 24,089,364
Less accumulated depreciation............... 8,415,072 6,788,042 6,722,290
----------- ----------- -----------
Property and equipment, net................. $30,991,942 $12,668,539 $17,367,074
=========== =========== ===========
</TABLE>

F-24
<PAGE> 92

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued salaries, bonuses, and related
expenses..................................... $ 408,596 $ 460,646 $ 466,050
Accrued property taxes......................... 459,018 506,418 527,233
Third party settlements........................ 216,951 -- 123,000
Other.......................................... 1,119,806 117,622 61,633
----------- ---------- ----------
$ 2,204,371 $1,084,686 $1,177,916
=========== ========== ==========
</TABLE>

5. NOTES PAYABLE TO AFFILIATES

Notes payable to affiliates consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Demand notes payable to stockholders; principal
and interest at 10%; due December 31, 1997...... $ 900,000 $400,000 $ --
Demand notes payable to stockholders.............. -- -- 250,000
Note payable to Housing; interest at 10%; payable
in seven annual installments of $65,091 on or
before December 31 of each year and in one final
installment of $6,117........................... 266,481 266,481 402,073
---------- -------- --------
1,166,481 666,481 652,073
Less current portion.............................. 965,091 465,091 315,091
---------- -------- --------
$ 201,390 $201,390 $336,982
========== ======== ========
</TABLE>

At December 31, 1996, the aggregate maturities of notes payable to
affiliates are as follows:

F-25
<PAGE> 93

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. NOTES PAYABLE AND MORTGAGE LOAN PAYABLE

Notes payable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
HCP mortgage loans, bearing interest ranging from
6.8% to 10.75%; payable in monthly installments
of
$101,092 including interest, secured by certain
properties of HCP................................ $6,946,423 $ -- $ --
Mortgage loan, bearing interest at 11%, secured by
real estate...................................... -- -- 2,035,148
---------- ---------- ----------
Less current portion............................... 555,849 -- 2,035,148
---------- ---------- ----------
$6,390,574 $ -- $ --
========== ========== ==========
</TABLE>

On November 1, 1996, the mortgage loan was repaid upon sale of a
multi-family property.

On June 30, 1997, CSLC entered into a $77,000,000 mortgage loan agreement
with Lehman Brothers Holdings, Inc. and pledged the Cottonwood, Harrison, Towne
Centre, and Canton Regency senior living communities and its investments in HCP
and NHP Retirement Housing Partners I, L.P. (NHP) as collateral. The loan
agreement matures December 31, 1997. On July 1, 1997, $70,000,000 became
outstanding under this loan agreement; $5,500,000 was used to repay an
outstanding mortgage loan commitment (the prior credit facility) and $64,500,000
was used to fund the liquidity requirement under the loan agreement through the
purchase of three-month U.S. Treasury bills. The U.S. Treasury bills were sold
under a repurchase agreement with a term equal to their maturity. It is expected
that upon completion of the Offering, the repurchase agreement will be canceled
and the outstanding debt under the loan agreement will be assumed by the
Corporation and repaid from the proceeds of the Offering. Upon such repayment,
the U.S. Treasury bills will revert to CSLC. Interest costs are based on 30-day
LIBOR plus 50 basis points.

CSLC's prior credit facility from a non-affiliated mortgage company was for
$17,500,000. CSLC borrowed $5,500,000 under this prior credit facility in 1997,
and repaid the loan on July 1, 1997.

In connection with obtaining the prior credit facility, the Company
incurred $273,070 in deferred financing charges, which were amortized over the
life of the loan commitment using the straight-line method and written-off on
July 1, 1997. Accumulated amortization was $200,551, $166,630 and $56,452 in
1997, 1996, and 1995, respectively. In connection with obtaining the loan
agreement, the Company incurred $80,000 in deferred financing charges on July 1,
1997.

HCP leases four of its properties under a master lease. The rentals under
the master lease provide additional security for two notes payable used to
finance two of the master lease properties. One of these notes is due December
1, 2001. The other note for $686,542 was extended during 1997 to June 30, 1997.
HCP is currently negotiating the extension of this note until December 1, 2001.

7. EQUITY

On October 25, 1996, the Company issued 1,680,000 shares of $.01 par value
common stock for $16,800 in cash. For financial reporting purposes, as the
combined entities are under common control, the Company's common stock is
presented as outstanding as of January 1, 1994.

During 1996, Development, Management 1, Management 2, and Quality each
issued 1,000 shares of $.01 par value common stock for $1,000. All shares
authorized are outstanding at December 31, 1996. At December 31, 1996 and 1995,
Living has 1,000 shares of $.01 par value common stock authorized, issued, and

F-26
<PAGE> 94

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding. The par value and associated paid-in capital are included in
additional paid-in capital in the accompanying financial statements.

Net operating income of CSLC, if distributed as determined by its general
partner in its sole discretion, is to be distributed 99% to the BUC holders and
1% to RLC until the BUC holders receive distributions equal to a cumulative
noncompounded annual return of 11% on their adjusted capital contributions.
Thereafter, remaining net operating income is distributed 90% to the BUC holders
and 10% to RLC. The general partner of CSLC has sole discretion in determining
cash distributions. There were no distributions for 1996, 1995, and 1994.
Proceeds from the refinancing, sale, or other dispositions of CSLC assets, less
expenses directly attributable thereto (net residual proceeds), will be
distributed 100% to the BUC holders until the BUC holders have received an
amount equal to the sum of their adjusted capital contributions plus an amount
equal to a cumulative noncompounded annual return of 11% on their adjusted
capital contributions. All remaining net residual proceeds will be distributed
100% to RLC until such amount equals 1% of all net residual proceeds distributed
to the BUC holders. Thereafter, any remaining net residual proceeds will be
distributed 90% to the BUC holders and 10% to RLC.

Purchases of BUCs represent additional purchases by the Stockholders and
are accounted for at the book value of the BUCs and as an addition to partners'
capital and as a reduction in minority interest.

CSLC purchased 91,854 BUCs for $1,262,355 during 1996, at an average cost
of $13.74 per unit. These repurchase of BUCs have been reflected as a reduction
in minority interest at December 31, 1996.

Net income (loss) of HCP is generally allocated 98% to the limited partners
and 2% to the general partner. The net income of HCP from the disposition of a
property is allocated: (i) to partners with deficit capital accounts on a pro
rata basis; (ii) to limited partners until they have been paid an amount equal
to the amount of their adjusted investment (as defined); (iii) to the limited
partners until they have been allocated income equal to their 12% Liquidation
Preference; and (iv) thereafter, 80% to the limited partners and 20% to the
general partner. The net loss of HCP from the disposition of a property is
allocated: (i) to partners with positive capital accounts on a pro rata basis
and (ii) thereafter, 98% to the limited partners and 2% to the general partner.
Distributions of available cash flow are generally distributed 98% to the
limited partners and 2% to the general partner, until the limited partners have
received an annual preferential distribution, as defined. Thereafter, available
cash flow is distributed 90% to the limited partners and 10% to the general
partner. No distributions were made in 1997.

8. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $15,903 $156,077
State.............................................. -- 2,339 22,953
Deferred:
Federal............................................ -- -- (42,923)
State.............................................. -- -- (6,312)
------- ------- --------
$ -- $18,242 $129,795
======= ======= ========
</TABLE>

F-27
<PAGE> 95

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes differed from the amounts computed by
applying the U.S. federal income tax rate to income before provision for income
taxes as a result of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Computed tax expense................................... $ -- $15,903 $110,868
State income tax expense............................... -- 2,339 16,641
Other.................................................. -- -- 2,286
------- ------- --------
$ -- $18,242 $129,795
======= ======= ========
</TABLE>

No tax expense arose in 1997.

Upon completion of the initial public offering, the Company will accrue
deferred tax assets and liabilities arising from differences in book and tax
basis for the S corporations and partnerships.

CSLC

CSLC reports certain transactions differently for tax than for financial
statement purposes. A reconciliation between the financial statement net income
and the net income for tax purposes follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CSLC net income.................................. $3,105,703 $1,630,669 $1,198,914
(Decrease) increase in vacation expense
accrual..................................... (715) 10,766 6,350
Nondeductible bad debt expense................. 23,370 55,403 --
Other nondeductible expenses................... 1,250 1,253 1,250
Increase in workers compensation accrual....... 120 2,463 1,271
Excess of book over tax depreciation........... 101,069 347,376 170,485
Investment income accounted for under the
equity method for book and not tax.......... (603,147) -- --
Tax adjustment on sale of properties........... 268,068 -- --
Prepaid rent recognized for book purposes...... -- -- (41,416)
Decrease in bad debt reserve................... -- -- (72,415)
Income (loss) from joint ventures.............. 181,660 51,970 (62,523)
---------- ---------- ----------
Tax income....................................... $3,077,378 $2,099,900 $1,201,916
========== ========== ==========
</TABLE>

The tax basis of the partners' capital accounts are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
General Partner............................................ $ 19,024 $ (11,602)
BUC Holders................................................ 22,285,615 20,515,980
----------- -----------
$22,304,639 $20,504,378
=========== ===========
</TABLE>

The basis of property and equipment, net of accumulated depreciation, for
Federal income tax purposes was $13,504,827 and $18,192,768 at December 31, 1996
and 1995, respectively.

In the event CSLC is taxed as a corporation because it is "publicly traded"
under Section 7704 of the Internal Revenue Code of 1986, then CSLC would be
taxed at corporate rates on all of its taxable income and distributions to the
BUC holders would be treated as fully taxable dividends to the extent of current
and

F-28
<PAGE> 96

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

accumulated earnings and profits, while distributions in excess of current and
accumulated earnings and profits would be treated as the nontaxable return of
capital to the extent of each BUC holder's basis in the BUCs. The Company's
management does not believe CSLC will be taxed as "publicly traded" for fiscal
1996 based on its interpretation of Section 7704 and no provision for income
taxes has been reflected in the consolidated statements of income for CSLC. No
ruling has been requested from the Internal Revenue Service regarding this
matter and there can be no certainty as to the ultimate outcome of this matter
at this time.

HCP

The tax basis of the partners' capital accounts for HCP at December 31,
1996, was $28,516,874.

Because many types of transactions are susceptible to varying
interpretations under federal and state income tax laws and regulations, the
amounts reported above may be subject to change at a later date upon final
determination by the taxing authorities.

9. RELATED PARTY TRANSACTIONS

Certain administrative and occupancy costs were incurred by an affiliate on
behalf of the Company. Total costs allocated to the Company were $390,925,
$219,294, $552,586, $351,387, and $202,718 for the six months ended June 30,
1997 and 1996 and the years ended December 31, 1996, 1995, and 1994,
respectively.

The Company pays premiums to a related party for employee medical coverage.
The related party insures the Company for any claims exceeding the premiums
paid. Accordingly, no amounts have been accrued at December 31, 1996, for claims
incurred but unpaid.

Upon sale of the multi-family properties in November 1996, an affiliate
received a $79,883 brokerage fee.

The Company manages properties for a third party, in which an officer of
the Company is also an officer of the third party companies. Management fees
received for the six months ended June 30, 1997 and the year ended December 31,
1996 were $788,566 and $657,260, respectively.

In addition, one of the Stockholders is chairman of the board of a bank
where the Company holds the majority of its operating cash accounts.

10. COMMITMENTS AND CONTINGENCIES

The Company had $56,376 and $53,788 in certificates of deposit at December
31, 1996 and 1995, respectively, restricted for utility deposits. The
certificates of deposit mature one year from the original purchase date.

In conjunction with CSLC'S prior credit facility, a compensating balance of
$150,000 was established with the mortgage company.

The CSLC senior living communities have entered into various contracts for
services. The contracts are for a duration of 5 years or less and are on a fee
basis as services are rendered. Future commitments on fixed cost contracts and
leases total $49,000.

The Company has pending claims incurred in the normal course of business
which, in the opinion of management, based on the advice of legal counsel, will
not have a material effect on the financial statements.

F-29
<PAGE> 97

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial instruments at December
31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $10,818,512 $10,818,512 $10,016,702 $10,016,702
Cash, restricted.................... 206,376 206,376 203,788 203,788
Investments in limited partnerships,
net of related deferred income.... 4,875,236 6,348,776 896,405 887,228
Notes payable....................... -- -- 2,035,148 2,035,148
Notes payable to affiliates......... 666,481 666,481 652,073 652,073
</TABLE>

The following methods and assumptions were used in estimating its fair
value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate fair value.

Investment in limited partnerships: The fair values are based on the
most recent purchase price.

Notes payable and notes payable to affiliates: The fair value of notes
payable is estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements.

12. INVESTMENTS IN LIMITED PARTNERSHIPS

The investments in limited partnerships balance consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
HCP limited partnership interests (including
deferred income and equity in earnings)....... $ -- $7,487,818 $308,825
NHP pension notes............................... 9,620,048 786,738 587,580
NHP limited partnership interests............... 1,364 1,364 --
---------- ---------- --------
$9,621,412 $8,275,920 $896,405
========== ========== ========
</TABLE>

During 1996 and 1995, CSLC made various purchases of limited partnership
interests in HCP. During 1996 and 1995, CSLC paid $3,200,686 and $308,825,
respectively, for partnership interests in HCP and, as of December 31, 1996,
CSLC owned a 31% ownership in HCP. During 1997, CSLC made additional investments
in HCP limited partnership interests totaling $5,322,578 to bring CSLC'S
ownership of HCP limited partnership interests to 55% at June 30, 1997.

As a result, the Company changed its method of accounting for its
investment in HCP from the equity method to the consolidation of HCP in its
financial statements in 1997. Had HCP been consolidated in 1996, using its
weighted average ownership interest of 23%, the results of operations on a pro
forma basis for the year ended December 31, 1996 would have been:

<TABLE>
<S> <C>
Revenue........................................ $26,504,461
Income before extraordinary item and minority
interest..................................... 1,166,289
Net income..................................... 2,118,981
</TABLE>

Pro forma net income, assuming a tax rate of 39.5%, is $1,281,984.

F-30
<PAGE> 98

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In the second quarter of 1996, CSLC purchased a 9.36% in limited
partnership interest in HCP from Housing. CSLC paid $1,269,077 to Housing, who
recognized a $878,592 gain on the transaction. As a result of this purchase, the
Company exceeded a 20% ownership in HCP and changed its method of accounting
from the cost method to the equity method. The change resulted in recognizing
$3,519,315 of deferred income for the difference between cost and the underlying
equity in HCP, which is being amortized over 20 years. At June 30, 1997, the
unamortized deferred income was eliminated as a result of applying the purchase
method of accounting for CSLC's acquisition of HCP limited partnership units. At
June 30, 1997, the allocation of purchase price to the assets and liabilities of
HCP is based on independent valuation information from third party valuation
firms and management's estimates and will be revised upon completion of the
valuations. The fair value of CSLC's investment in HCP limited partnership
interests is $5,171,626 at December 31, 1996, based on the most recent purchase
price.

Summary financial information regarding the financial position and results
of operations of HCP is summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash...................................................... $ 8,995,455 $ 7,606,857
Property and equipment, net............................... 22,112,619 25,251,255
Other assets.............................................. 1,379,473 954,174
----------- -----------
Total assets.................................... $32,487,547 $33,812,286
=========== ===========
Liabilities............................................... $ 1,215,508 $ 1,609,403
Mortgage loans............................................ 7,207,414 9,775,601
Partnership capital....................................... 24,064,625 22,427,282
----------- -----------
Total liabilities and partnership capital....... $32,487,547 $33,812,286
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenue............................................... $ 7,560,104 $ 8,419,024
=========== ===========
Net income................................................ $ 1,637,343 $ 1,250,333
=========== ===========
</TABLE>

During 1996 and 1995, CSLC made various purchases of outstanding pension
notes of NHP (the NHP Notes). During 1996 and 1995, CSLC paid $199,158 and
$587,580, respectively, for purchases of NHP Notes. As of December 31, 1996,
CSLC has cumulatively paid $786,738 for an ownership of 4.2% of the outstanding
NHP Notes. NHP owns a portfolio of five independent senior living communities.
The pension notes bear simple interest at 13% per annum. Interest of 7% is paid
quarterly, with the remaining 6% interest deferred. Deferred interest and
principal matures on December 31, 2001. CSLC accrued the interest income on the
pension notes at 7% through December 31, 1996 and at 10.5% from April 1, 1997
through June 30, 1997, due to uncertainties regarding the ultimate realization
of the accrued interest. The ultimate realization of the NHP Notes is expected
to be based primarily upon the value of the underlying properties, which have an
appraised value in excess of the NHP Notes as of June 30, 1997. During 1996,
CSLC paid $1,364 for a 3.1% ownership of limited partnership interests in NHP.
Subsequent to year end and through June 30, 1997, CSLC disbursed $8,833,310 for
an additional investment in NHP Notes. These purchases bring CSLC's ownership of
NHP notes to 27.9% at June 30, 1997.

CSLC accounts for investments in NHP at cost and classifies them as held to
maturity. The fair value of the investments in NHP is $1,177,150 at December 31,
1996, based on the most recent purchase price.

F-31
<PAGE> 99

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Summary financial information regarding financial position and results of
operations of NHP as of June 30, 1997 and for the six months then ended and as
of December 31 and for the years then ended is summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash........................................ $ 3,964,224 $ 4,017,181 $ 3,478,604
Property and equipment, net................. 49,547,718 50,171,241 51,260,763
Other assets................................ 2,387,060 1,883,462 3,010,129
----------- ----------- -----------
Total assets...................... $55,899,002 $56,071,884 $57,749,496
=========== =========== ===========
Pension notes............................... $42,672,000 $42,672,000 $42,672,000
Interest payable............................ 22,210,056 20,681,172 17,901,461
Other liabilities........................... 1,273,719 1,154,823 1,976,344
Partnership deficit......................... (10,256,773) (8,436,111) (4,800,309)
----------- ----------- -----------
Total liabilities and partnership
deficit......................... $55,899,002 $56,071,884 $57,749,496
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue................................. $ 7,617,713 $14,488,099 $14,020,626
=========== =========== ===========
Net loss.................................... $(1,790,269) $(3,574,668) $(3,690,549)
=========== =========== ===========
</TABLE>

13. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The components of the allowance for doubtful accounts for the years ended
December 31, 1996, 1995, and 1994 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $141,452 $ 86,049 $158,464
Provision for bad debts.......................... 22,312 71,098 --
Recoveries and other............................. 1,058 (15,695) (72,415)
-------- -------- --------
Balance at end of year............................. $164,822 $141,452 $ 86,049
======== ======== ========
</TABLE>

14. LEASES

HCP leases its property and equipment to tenants under noncancelable
operating leases. The lease terms range from 9 to 12 years with options to renew
for additional five-year terms and options to purchase the leased property at
the current fair market value at the end of the initial lease term. The leases
generally provide for contingent rentals based on the performance of the
property. Contingent rentals aggregated $172,309 in 1997.

Minimum rentals for the next three years for leases are $3,971,328 per
year, subject to change based on changes in interest rates. Minimum rentals are
$3,761,262 and $2,858,619 for the years 2000 and 2001. There are no minimum
rentals thereafter. Property and equipment less accumulated depreciation
attributable to such rentals, amounted to $20,502,517 at January 1, 1997.

F-32
<PAGE> 100

CAPITAL SENIOR LIVING CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Four of HCP's properties are subject to a master lease with a single
operator, HealthSouth Rehabilitation Corp. (HealthSouth). This master lease, as
amended, contains a nine-year renewal option and provides for contingent rentals
equal to 4% of the revenue differential, as defined, effective January 30, 1997.

During 1994, HealthSouth closed HCP's Sandybrook facility. In February
1997, HealthSouth closed the Cedarbrook facility. Despite these closures,
HealthSouth has continued making its full lease payments under the terms of the
master lease.

15. OFFICER'S SALARIES AND BONUSES

General and administrative expense includes officers' salaries and bonuses
of $2,600,490, $1,658,300, $3,371,887, $2,976,302, and $3,443,034 for the six
months ended June 30, 1997 and 1996 and the years ended December 31, 1996,1995,
and 1994.

16. PRO FORMA INCOME TAXES (UNAUDITED)

The income taxes on earnings of the S corporations and partnerships are the
responsibility of the Stockholders and partners. The pro forma adjustments
reflected on the statements of income assume these S corporations and
partnerships were subject to income taxes. Pro forma income tax expense has been
calculated using statutory federal and state tax rates, estimated at 39.5%.

F-33
<PAGE> 101

INDEPENDENT AUDITORS' REPORT

The Partners
HealthCare Properties, L.P.:

We have audited the accompanying consolidated balance sheets of HealthCare
Properties, L.P. and subsidiaries (a Delaware limited partnership) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partnership equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCare
Properties, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Dallas, Texas
February 7, 1997, except as to the fifth paragraph
of note 4, which is as of March 21, 1997

F-34
<PAGE> 102

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 9,548,043 $ 8,995,455 $ 7,606,857
Accounts receivable, less allowance for doubtful
accounts of $4,255,655 at June 30, 1997 (Unaudited),
$4,225,811 at December 31, 1996 and $3,489,937 at
December 31, 1995 (notes 6 and 9)..................... 947,337 794,234 210,409
Prepaid expenses........................................ 72,723 85,295 129,714
Property and improvements, net (notes 3, 4 and 5)....... 21,469,109 22,112,619 25,251,255
Deferred charges, less accumulated amortization of
$819,111 at June 30, 1997 (Unaudited), $765,409 at
December 31, 1996 and $734,146 at December 31, 1995... 446,242 499,944 614,051
----------- ----------- -----------
$32,483,454 $32,487,547 $33,812,286
=========== =========== ===========

LIABILITIES AND PARTNERSHIP EQUITY
Accounts payable and accrued expenses (note 4).......... $ 820,991 $ 1,004,204 $ 1,526,209
Operating facility accounts payable..................... 43,359 211,304 83,194
Mortgage loans payable -- in default (note 4)........... -- -- 2,068,539
Mortgage loans payable (note 4)......................... 6,946,423 7,207,414 7,707,062
----------- ----------- -----------
7,810,773 8,422,922 11,385,004
----------- ----------- -----------
Partnership equity (deficit):
Limited partners (4,172,457 units).................... 24,654,579 24,058,684 22,449,617
General partner....................................... 18,102 5,941 (22,335)
----------- ----------- -----------
24,672,681 24,064,625 22,427,282
Commitments and contingencies (note 4)
----------- ----------- -----------
$32,483,454 $32,487,547 $33,812,286
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-35
<PAGE> 103

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (notes 5, 6 and 9):
Net patient service.......... $2,495,295 $ 786,239 $2,969,991 $ 3,268,800 $ 6,698,751
Rental....................... 2,157,973 2,448,668 4,590,113 5,100,085 5,296,655
Other income................. -- -- -- 50,139 579,075
---------- ---------- ---------- ----------- -----------
4,653,268 3,234,907 7,560,104 8,419,024 12,574,481
---------- ---------- ---------- ----------- -----------
Expenses:
Facility operating
expenses.................. 2,256,544 736,957 2,727,909 3,238,004 6,597,068
Depreciation................. 681,920 733,908 1,418,293 1,721,605 1,911,876
Fees to affiliates (note
7)........................ 523,343 643,369 1,275,833 1,279,428 1,581,765
Bad debts.................... 28,061 415,509 875,143 1,585,555 919,737
Lease default expenses....... 14,687 58,215 114,523 286,108 453,140
Administrative and other..... 306,768 75,903 192,385 114,625 222,055
---------- ---------- ---------- ----------- -----------
3,811,323 2,663,861 6,604,086 8,225,325 11,685,641
---------- ---------- ---------- ----------- -----------
Income from operations.... 841,945 571,046 956,018 193,699 888,840
---------- ---------- ---------- ----------- -----------
Other income (expense):
Interest income.............. 163,635 114,541 239,215 185,650 102,511
Interest expense............. (343,823) (430,313) (784,092) (1,324,845) (1,645,647)
Amortization................. (53,701) (57,054) (114,107) (171,265) (195,782)
Gain (loss) on disposition of
operating properties, net
(note 3).................. -- 387,528 387,617 (1,237,420) --
Loss due to reduction of
carrying value of
operating properties (note
3)........................ -- -- -- -- (2,185,381)
---------- ---------- ---------- ----------- -----------
(233,889) 14,702 (271,367) (2,547,880) (3,924,299)
---------- ---------- ---------- ----------- -----------
Income (loss) before
extraordinary item........... 608,056 585,748 684,651 (2,354,181) (3,035,459)
---------- ---------- ---------- ----------- -----------
Extraordinary gain on
disposition of operating
properties (note 3).......... -- 952,692 952,692 3,604,514 --
---------- ---------- ---------- ----------- -----------
Net income (loss)......... $ 608,056 $1,538,440 $1,637,343 $ 1,250,333 $(3,035,459)
========== ========== ========== =========== ===========
Allocation of net income
(loss):
Limited partners............. $ 595,895 $1,512,141 $1,609,067 $ 960,336 $(2,974,750)
General partners............. 12,161 26,299 28,276 289,997 (60,709)
---------- ---------- ---------- ----------- -----------
$ 608,056 $1,538,440 $1,637,343 $ 1,250,333 $(3,035,459)
========== ========== ========== =========== ===========
Per unit:
Income (loss) before
extraordinary item........ .14 .13 .16 (.56) (.71)
Extraordinary gain........... -- .23 .23 .79 --
---------- ---------- ---------- ----------- -----------
Net income (loss)............ .14 .36 .39 .23 (.71)
========== ========== ========== =========== ===========
Distributions................ -- -- --
========== ========== ========== =========== ===========
Weighted average number of
units........................ 4,172,457 4,172,457 4,172,457 4,172,457 4,172,457
========== ========== ========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-36
<PAGE> 104

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF PARTNERSHIP EQUITY

<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
------------ -------- ----------
<S> <C> <C> <C>
Equity at December 31, 1993............................... $ 24,464,031 (251,623) 24,212,408
Net loss................................................ (2,974,750) (60,709) (3,035,459)
------------ -------- ----------
Equity at December 31, 1994............................... 21,489,281 (312,332) 21,176,949
Net income.............................................. 960,336 289,997 1,250,333
------------ -------- ----------
Equity at December 31, 1995............................... 22,449,617 (22,335) 22,427,282
Net income.............................................. 1,609,067 28,276 1,637,343
------------ -------- ----------
Equity at December 31, 1996............................... 24,058,684 5,941 24,064,625
Net income (Unaudited).................................. 595,895 12,161 608,056
------------ -------- ----------
Equity at June 30, 1997 (Unaudited)....................... $ 24,654,579 18,102 24,672,681
============ ======== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-37
<PAGE> 105

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 608,056 1,538,440 1,637,343 1,250,333 (3,035,459)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 735,621 790,962 1,532,400 1,892,870 2,107,658
Bad debts.......................... 28,061 415,509 875,143 1,585,555 919,737
(Gain) loss on disposition of
operating properties, net........ -- (387,528) (387,617) 1,237,420 --
Extraordinary gain on disposition
of operating properties.......... -- (952,692) (952,692) (3,604,514) --
Loss due to reduction of carrying
value of operating properties.... -- -- -- -- 2,185,381
Changes in assets and liabilities,
net of effects of property
dispositions:
Accounts receivable.............. (181,164) (279,067) (1,458,968) (1,228,720) (850,301)
Prepaid expenses................. 12,572 34,118 43,647 39,406 (11,473)
Accounts payable and accrued
expenses...................... (351,158) 176,802 443,384 (89,940) 1,018,878
---------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.................. 851,988 1,336,544 1,732,640 1,082,410 2,334,421
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and
improvements....................... (38,409) (10,655) (21,969) (760) (514,406)
Proceeds from sale of property....... -- 2,246,114 2,246,114 2,958,287 --
Cash forfeiture on disposition of
property held in receivership...... -- -- -- (67,969) --
Net cash provided by (used in)
investing activities........ (38,409) 2,235,459 2,224,145 2,889,558 (514,406)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities --
payments on mortgage loans payable... (260,991) (2,314,784) (2,568,187) (1,971,385) (444,352)
---------- ----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents.......................... 552,588 1,257,219 1,388,598 2,000,583 1,375,663
Cash and cash equivalents at beginning
of year.............................. 8,995,455 7,606,857 7,606,857 5,606,274 4,230,611
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
year................................. $9,548,043 8,864,076 8,995,455 7,606,857 5,606,274
========== =========== =========== =========== ===========
Cash paid for interest................. $ 343,823 363,132 716,910 850,747 981,346
========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-38
<PAGE> 106

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996, 1995 AND 1994

(1) GENERAL

HealthCare Properties, L.P., is a Delaware limited partnership established
for the purpose of acquiring, leasing and operating existing or newly
constructed long-term health care properties. These properties are operated by
the Partnership or are leased to qualified operators who provide specialized
health care services. Effective July 1, 1993, Capital Realty Group Senior
Housing, Inc. (CRG) became the sole general partner of the Partnership.
Effective February 1, 1995, Capital Senior Living, Inc., (CSL), an affiliate of
CRG became the managing agent for the Partnership replacing CRG, which had been
managing agent since July 1, 1992.

At December 31, 1995, CRG owned approximately 9% of the Partnership's
limited partner units. During 1996, Capital Senior Living Communities, L.P.
(CSLC), an affiliate of CRG, acquired CRG's 9% interest in the Partnership. In
addition, CSLC purchased approximately 24% and 16% of the limited partner units
from unaffiliated limited partners for the six months ended June 30, 1997
(Unaudited) and the year ended December 31, 1996, respectively. At June 30, 1997
(Unaudited) and December 31, 1996 and 1995, CSLC owned approximately 55%, 31%
and 6% of the Partnership's limited partner units, respectively.

The consolidated financial statements as of and for the years ended
December 31, 1995 and 1994 include the accounts of the Partnership and its
wholly owned subsidiaries, Danville Care, Inc., Foothills Care, Inc.,
Countryside Care, Inc. and Countryside Care, LP. In addition, the consolidated
financial statements as of and for the six months ended June 30, 1997
(Unaudited) and the year ended December 31, 1996 include the accounts of the
Partnership's wholly owned subsidiary, Cambridge Nursing Home Limited Liability
Company (Cambridge LLC), which began operating Cambridge Nursing Home effective
August 1, 1996 (see note 6). All significant intercompany accounts and
transactions have been eliminated in consolidation.

At June 30, 1997 (Unaudited) and December 31, 1996, 1995 and 1994, the
status of the Partnership's properties was as follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Leased to unaffiliated operators on a triple net
basis............................................ 7 7 7 8
Operated by subsidiaries of the Partnership and
managed by CSL................................... 1 1 1 2
Operated under bankruptcy and managed by CSL....... -- -- 1 1
Operated and managed under receivership by an
unaffiliated operator............................ -- -- -- 1
-- -- -- --
8 8 9 12
== == == ==
</TABLE>

During 1996, one of the properties (Countryside) operated by a subsidiary
of the Partnership was sold to an unrelated third party. Additionally, during
1996, the operations of the property (Cambridge) previously operated under
bankruptcy and managed by CSL were transferred to Cambridge LLC. CSL continues
to manage this property (see note 6). During 1995, one of the Partnership's
leased properties was sold to an unrelated third party and the deeds for two of
the Partnership's operated properties were transferred to the noteholders in
lieu of foreclosure (see note 3).

In the opinion of management, the accompanying unaudited consolidated
financial statements as of June 30, 1997 and for the six months ended June 30,
1997 and 1996, reflect all adjustments (all of which were normal and recurring)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial position and results of operations for the interim
periods presented. The consolidated

F-39
<PAGE> 107

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

results of operations for the six month period ended June 30, 1997 are not
indicative of the results to be expected for the full year.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Property and improvements are stated at cost. The Partnership adopted the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets be reviewed 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 future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. The fair value is
based on either the expected future cash flows discounted at a rate which varies
based on associated risk or an independent third-party appraisal. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Partnership's 1996 financial position or results of operations.

Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, using
declining-balance and straight-line methods, as follows: buildings and
improvements, 25 to 31 years; furniture, fixtures and equipment, 5 to 10 years.

The financial statements and federal income tax returns are prepared on the
accrual method of accounting and include only those assets and liabilities and
results of operations which relate to the business of the Partnership and its
wholly owned subsidiaries. No provision has been made for federal and state
income taxes since such taxes are the responsibility of the individual partners.
Although the Partnership's subsidiaries file federal corporate income tax
returns, none of the subsidiaries had significant net income for financial
reporting or income tax purposes for the six months ended June 30, 1997
(Unaudited) or the years ended December 31, 1996, 1995 or 1994. Accordingly, no
provision has been made for federal and state income taxes for these
subsidiaries for the six months ended June 30, 1997 (Unaudited) or the years
ended December 31, 1996, 1995 or 1994.

Net income (loss) of the Partnership and taxable income (loss) are
generally allocated 98% to the limited partners and 2% to the general partner.
The net income of the Partnership from the disposition of a property is
allocated (i) to partners with deficit capital accounts on a pro rata basis (ii)
to limited partners until they have been paid an amount equal to the amount of
their Adjusted Investment (iii) to the limited partners until they have been
allocated income equal to their 12% Liquidation Preference, and (iv) thereafter,
80% to the limited partners and 20% to the general partner. The net loss of the
Partnership from the disposition of a property is allocated (i) to partners with
positive capital accounts on a pro rata basis and (ii) thereafter, 98% to the
limited partners and 2% to the general partner. Distributions of available cash
flow are generally distributed 98% to the limited partners and 2% to the general
partner, until the limited partners have received an annual preferential
distribution, as defined. Thereafter, available cash flow is distributed 90% to
the limited partners and 10% to the general partner. No distributions were made
during the six months ended June 30, 1997 (Unaudited) or the years ended
December 31, 1996, 1995 or 1994.

Deferred charges primarily represent initial fees and other costs incurred
in negotiating leases and mortgage loans payable. These costs are being
amortized using the straight-line method over the lives of the related leases or
mortgage loans.

Net patient service revenue is reported at the estimated net realizable
amounts due from residents, third-party payors, and others for service rendered.
Revenue under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party payor settlements are provided
in the period

F-40
<PAGE> 108

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the related services are rendered. Differences between the estimated amounts
accrued and interim and final settlements are reported in operations in the year
of settlement.

The Partnership records accounts receivable for contingent rentals and past
due rents only when circumstances indicate a substantial probability of
collection. Existing receivables are reserved to the extent collection is deemed
doubtful by the Partnership's management. Deductions to the allowance for
doubtful accounts were $156, $45,682, $29,953 and $32,426 for the six months
ended June 30, 1997 (Unaudited) and the years ended December 31, 1996, 1995 and
1994, respectively.

The Partnership classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.

Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare these
consolidated financial statements. Actual results could differ from those
estimates.

(3) PROPERTY AND IMPROVEMENTS

Property and improvements consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
JUNE 30, 1997 1996 1995
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 3,145,803 $ 3,145,803 $ 3,570,802
Buildings and improvements.................... 31,397,383 31,397,383 34,467,946
Furniture, fixtures and equipment............. 1,642,375 1,603,965 1,851,124
----------- ----------- -----------
36,185,561 36,147,151 39,889,872
Allowance for reduction in carrying value of
operating properties........................ (2,185,381) (2,185,381) (3,026,898)
----------- ----------- -----------
34,000,180 33,961,770 36,862,974
Less accumulated depreciation................. 12,531,071 11,849,151 11,611,719
----------- ----------- -----------
$21,469,109 $22,112,619 $25,251,255
=========== =========== ===========
</TABLE>

F-41
<PAGE> 109

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of information for the individual Partnership
properties from inception of the Partnership through December 31, 1996. The
information presented includes furniture, fixtures and equipment which are
immaterial to the Partnership.
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
PARTNERSHIP ACQUISITION GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
------------------------- ------------- -----------------------------------------------------
BUILDINGS BUILDINGS
AND AND VALUATION
DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS ALLOWANCE TOTAL
----------- ---------- ------------ ------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cedarbrook.............. $ 807,861 $ 3,147,139 $ 783,608 $ 807,861 $ 3,930,747 $ -- $ 4,738,608
rehab facility
Nashville, TN
Cane Creek.............. 97,560 3,902,440 225,118 97,560 4,127,558 -- 4,225,118
rehab facility
Martin, TN
Crenshaw Creek.......... 123,801 3,776,199 102,732 123,801 3,878,931 -- 4,002,732
rehab facility
Lancaster, SC
Sandy Brook............. 563,072 3,636,928 128,434 563,072 3,765,362 -- 4,328,434
rehab facility
Mt. Dora, FL
Cambridge............... 497,470 4,602,530 101,771 497,470 4,704,301 (2,185,381) 3,016,390
nursing home
Cambridge, MA
Trinity Hills........... 300,000 2,400,000 26,152 300,000 2,426,152 -- 2,726,152
nursing home
Ft. Worth, TX
Hearthstone............. 756,039 2,868,961 116,365 756,039 2,985,326 -- 3,741,365
nursing home
Round Rock, TX
McCurdy................. -- 7,100,000 74,064 -- 7,174,064 -- 7,174,064
nursing home
Evansville, IN
Partnership assets...... -- -- 8,907 -- 8,907 -- 8,907
Dallas, TX
---------- ----------- ---------- ---------- ----------- ----------- -----------
Total................... $3,145,803 $31,434,197 $1,567,151 $3,145,803 $33,001,348 $(2,185,381) $33,961,770
========== =========== ========== ========== =========== =========== ===========

ACCUMULATED DATE OF DATE USEFUL
DESCRIPTION ENCUMBRANCES DEPRECIATION CONSTRUCTION ACQUIRED LIFE
----------- ------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Cedarbrook.............. $ 899,029 $ 1,555,502 1985 1987 25-31 years
rehab facility
Nashville, TN
Cane Creek.............. 789,198 1,760,842 1985 1987 25-31 years
rehab facility
Martin, TN
Crenshaw Creek.......... -- 1,401,146 1988 1988 25-31 years
rehab facility
Lancaster, SC
Sandy Brook............. -- 1,323,065 1985 1988 25-31 years
rehab facility
Mt. Dora, FL
Cambridge............... -- 1,410,785 1967 1990 25-31 years
nursing home
Cambridge, MA
Trinity Hills........... -- 1,077,225 1971 1988 25-31 years
nursing home
Ft. Worth, TX
Hearthstone............. 1,341,859 1,094,160 1988 1988 25-31 years
nursing home
Round Rock, TX
McCurdy................. 4,177,328 2,222,015 1916 1989 25-31 years
nursing home
Evansville, IN
Partnership assets...... -- 4,411 n/a 1991-1993 10 years
Dallas, TX
---------- -----------
Total................... $7,207,414 $11,849,151
========== ===========
</TABLE>

F-42
<PAGE> 110

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following information is a summary of Partnership additions to and
deductions from property and improvements and accumulated depreciation for the
years ended December 31, 1996, 1995 and 1994. The information presented includes
furniture, fixtures and equipment which are immaterial to the Partnership.

<TABLE>
<CAPTION>
PROPERTY AND IMPROVEMENTS 1996 1995 1994
------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $36,862,974 $46,272,927 $47,943,902
Additions during period:
Acquisitions........................... -- -- 486,807
Improvements........................... 21,969 760 27,599
----------- ----------- -----------
21,969 760 514,406
Deductions during period:
Cost of property sold.................. 2,923,173 3,520,068 --
Cost of property transferred in lieu of
foreclosure.......................... -- 5,890,645 --
Write-down in value of property........ -- -- 2,185,381
----------- ----------- -----------
Total deductions.................. 2,923,173 9,410,713 2,185,381
----------- ----------- -----------
Balance at close of period.................. $33,961,770 $36,862,974 $46,272,927
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated Depreciation
Balance at beginning of period............ $11,611,719 $12,576,670 $10,664,794
Additions.............................. 1,418,293 1,721,605 1,911,876
Deductions during period:
Property sold........................ 1,180,861 989,422 --
Property transferred in lieu of
foreclosure....................... -- 1,697,134 --
----------- ----------- -----------
Total deductions.................. 1,180,861 2,686,556 --
----------- ----------- -----------
Balance at close of period................ $11,849,151 $11,611,719 $12,576,670
=========== =========== ===========
</TABLE>

The Federal income tax basis of the Partnership's property and improvements
at December 31, 1996 is $26,772,518.

The following property dispositions occurred during 1996 and 1995:

<TABLE>
<CAPTION>
NET PROPERTY MORTGAGE
AND LOANS NET NET GAIN ON
IMPROVEMENTS PAYABLE OTHER PROCEEDS DISPOSITION
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996:
Sale of Countryside on May 1,
1996....................... $1,742,401 $(2,068,539) $ (987,804) $ (26,367) $1,340,309
========== =========== =========== =========== ==========
1995:
Sale of Heritage Manor on
July 5, 1995............... $2,530,645 $(1,500,000) $ 63,857 $(1,458,287) $ 363,785
Deed transferred to
noteholder in lieu of
foreclosure:
Foothills.................. 2,122,178 (2,360,895) (872,587) -- 1,111,304
Diablo/Tamarack............ 2,071,334 (2,160,787) (802,552) -- 892,005
---------- ----------- ----------- ----------- ----------
$6,724,157 $(6,021,682) $(1,611,282) $(1,458,287) $2,367,094
========== =========== =========== =========== ==========
</TABLE>

F-43
<PAGE> 111

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Other" consists primarily of disposition costs, accrued interest payable
and deferred charges (prepaid loan fees).

The Countryside property was sold to an unrelated third-party investor on
May 1, 1996 for $2,246,114. The resulting net gain is comprised of (1) an
ordinary gain of $387,617 representing the difference between the carrying value
of the property and the sales proceeds and (2) an extraordinary gain of $952,692
representing the difference between the agreed-upon cash settlement with the
lender and the mortgage loan payable including accrued interest payable.

The Heritage Manor property was sold on July 5, 1995 to an unrelated
third-party investor for $3,075,000. With the proceeds, the Partnership paid the
$1,500,000 mortgage loan balance. The resulting net gain of $363,785 represents
the difference between the carrying value of the property and the sales
proceeds.

The deed to the Diablo/Tamarack property was transferred to the noteholder
in lieu of foreclosure on July 31, 1995. The resulting net gain is comprised of
(1) an ordinary loss of $686,770 representing the difference between the
carrying value and the fair value of the property and, (2) an extraordinary gain
of $1,578,775 representing the difference between the fair value of the
property, and the mortgage loan payable including accrued interest payable.

Effective December 1, 1994, the Foothills property was placed in
receivership. The deed to the property was subsequently transferred to the
noteholder in lieu of foreclosure on July 19, 1995. The resulting net gain is
comprised of (1) an ordinary loss of $914,435, representing the difference
between the carrying value and the fair value of the property and, (2) an
extraordinary gain of $2,025,739 representing the difference between the fair
value of the property, and the mortgage loan payable including accrued interest
payable.

In 1994, management concluded that the carrying value of its Cambridge
property exceeded its estimated fair value. As a result, in the fourth quarter
of 1994, this property, which had been carried at $4,185,381, was written down
to $2,000,000.

Combined operating results for Cambridge, Foothills, Countryside and
Diablo/Tamarack follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service revenue..... $2,422,262 $2,969,991 $ 3,268,800 $ 6,698,751
---------- ---------- ----------- -----------
Facility operating expenses..... 2,219,577 2,727,909 3,238,004 6,597,068
Depreciation.................... 100,231 248,134 275,815 369,401
Fees to affiliates.............. 195,889 261,517 319,454 650,740
Bad debts....................... 29,844 79,682 325,921 52,263
Lease default expenses.......... 7,022 35,923 120,258 81,014
---------- ---------- ----------- -----------
2,552,563 3,353,165 4,279,452 7,750,486
---------- ---------- ----------- -----------
Loss from operations............ $ (130,301) $ (383,174) $(1,010,652) $(1,051,735)
========== ========== =========== ===========
Interest expense................ $ -- 67,181 457,691 664,306
========== ========== =========== ===========
</TABLE>

Operating results for the six months ended June 30, 1997 (Unaudited)
consist primarily of amounts at the Cambridge facility. 1996 operating results
consist of amounts at the Cambridge facility from August 1, 1996 through
December 31, 1996 and at the Countryside facility from January 1, 1996 through
April 30, 1996. Operating results consist of amounts at the Countryside facility
for the year ended December 31, 1995 and at the Diablo/Tamarack facility from
January 1, 1995 through July 31, 1995. 1994 operating results consist of

F-44
<PAGE> 112

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts at the Countryside and Diablo/Tamarack facilities for the year ended
December 31, 1994 and at the Foothills facility from January 1, 1994 through
November 30, 1994.

(4) MORTGAGE LOANS PAYABLE

Mortgage loans payable consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans payable -- in default (note
3)........................................... $ -- $ -- $2,068,539
Mortgage loans payable......................... 6,946,423 7,207,414 7,707,062
---------- ---------- ----------
Total mortgage loans payable......... $6,946,423 $7,207,414 $9,775,601
========== ========== ==========
</TABLE>

Mortgage loans payable (including $5,621,906, $5,865,555 and $6,333,183 due
to banks at June 30, 1997 (Unaudited), December 31, 1996 and 1995), bear
interest ranging from 6.8% to 10.75% at June 30, 1997 (Unaudited), 6.6% to
10.75% at December 31, 1996 and 6.8% to 10.75% at December 31, 1995. These notes
are payable in monthly installments of $100,732 at June 30, 1997 (Unaudited),
$101,092 at December 31, 1996 and $94,618 at December 31, 1995, including
interest. The notes are secured by properties with net book values aggregating
$12,870,731, $13,246,635 and $14,004,632 at June 30, 1997 (Unaudited), December
31, 1996 and 1995, respectively. The notes range in maturity from 1997 to 2012.

Mortgage loans payable -- in default, consisted of one loan at December 31,
1995, secured by the Countryside property. In 1996, the note secured by the
Countryside property was extinguished in connection with the disposition of the
property securing the note (see note 3). The note was secured by property with
net book value aggregating $1,779,852 at December 31, 1995. The note was in
default at December 31, 1995 because of the Partnership's failure to make
required debt service payments when due and because of the failure of the former
lessee to pay required property taxes to the taxing authorities.

The Partnership had one mortgage loan aggregating $1,062,237 at December
31, 1995 that was in default as a result of not meeting a debt coverage ratio,
as defined. Despite this default, the lender waived this ratio requirement
through January 1, 1997. At December 31, 1996, the Partnership met the debt
coverage ratio. Accordingly, this loan balance is classified as "mortgage loans
payable" in the accompanying consolidated balance sheets.

Accrued interest payable related to mortgage loans payable -- in default
aggregated $766,972 at December 31, 1995.

The Partnership leases four of its properties under a master lease (see
note 6). The rentals under the master lease provide additional security for two
notes payable used to finance two of the master lease properties. Both of these
notes were callable by the lenders at any time between January 1, 1993 and
November 30, 1995; however, the lenders agreed not to exercise their call rights
prior to maturity on January 31, 1996 as long as the Partnership remained in
compliance with the loan agreements. One of the lenders agreed to extend the
maturity date of its note to December 1, 2001, pending completion of final loan
documents. On March 21, 1997, the other lender agreed not to exercise its call
rights until June 30, 1997. The Partnership is currently negotiating the
extension of the note until December 1, 2001.

F-45
<PAGE> 113

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Presented below is a summary of required principal payments on mortgage
loans payable as of December 31, 1996. The note callable on June 30, 1997 is
included in amounts due currently.

<TABLE>
<S> <C>
1997..................................................... $2,568,389
1998..................................................... 355,176
1999..................................................... 385,309
2000..................................................... 273,807
2001..................................................... 178,193
2002 and thereafter...................................... 3,446,540
----------
$7,207,414
==========
</TABLE>

(5) LEASES

The Partnership leases its property and equipment to tenants under
noncancelable operating leases. The lease terms range from 9 to 12 years with
options to renew for additional five-year terms and options to purchase the
leased property at the current fair market value at the end of the initial lease
term. The leases generally provide for contingent rentals based on the
performance of the property. Contingent rentals aggregated $172,309 for the six
months ended June 30, 1997 (Unaudited), $192,325, $165,042 and $173,541 for the
years ended December 31, 1996, 1995 and 1994, respectively.

Minimum rentals for 1997, 1998 and 1999 for leases not in default are
$3,971,328 per year, subject to change based on changes in interest rates.
Minimum rentals are $3,761,262 and $2,858,619 for the years 2000 and 2001. There
are no minimum rentals thereafter. Property and improvements less accumulated
depreciation attributable to such rentals, amounted to $19,925,325, $20,502,517
and $21,671,891 at June 30, 1997 (Unaudited), December 31, 1996 and 1995,
respectively.

(6) LEASE DEFAULTS

NCA Cambridge, Inc., the lessee of the Partnership's Cambridge Nursing Home
(Cambridge) property, petitioned for Chapter 11 bankruptcy protection in 1992.
In May 1993, CRG began operating Cambridge under the control of the bankruptcy
court pursuant to a settlement agreement with the lessee; however, the results
of operations of this property have not been included in the Partnership's
consolidated statements of operations for the two years ended December 31, 1995
and from the period January 1, 1996 through July 31, 1996. On August 1, 1996, in
accordance with the approval of the bankruptcy court, the operations of
Cambridge were transferred to Cambridge LLC, a subsidiary of the Partnership,
effectively removing the operations of the property from the jurisdiction of the
bankruptcy court. Accordingly, the results of operations of Cambridge are
included in the 1996 consolidated statements of operations for the period August
1, 1996 through December 31, 1996, and for the six months ended June 30, 1997
(Unaudited).

In connection with this property, the lessee was overpaid for services to
Medicaid patients during the period the lessee operated the property. Based on
certain interpretations of state regulations, the Partnership could have been
liable for approximately $1,400,000 in connection with the recovery of these
Medicaid overpayments. During 1995, the Partnership entered into a settlement
agreement with the state of Massachusetts, approved by the bankruptcy court,
whereby the $1,400,000 became a general, unsecured claim of the bankruptcy
estate of NCA Cambridge, Inc., which will be settled through bankruptcy court
proceedings. Additionally, as part of the settlement agreement with the state,
the Partnership agreed to loan NCA Cambridge, Inc. $590,000 to pay outstanding
real property taxes due on the Cambridge property. The Partnership fully
reserved for this receivable in 1995.

F-46
<PAGE> 114

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Four of the Partnership's properties are subject to a master lease with a
single operator, HealthSouth Rehabilitation Corp. (HealthSouth). This master
lease, as amended, contains a nine-year renewal option and provides for
contingent rentals equal to 4% of the revenue differential, as defined,
effective January 30, 1997. As of June 30, 1997 (Unaudited), no contingent
rentals have been accrued on the master lease.

During 1994, HealthSouth closed the Partnership's Sandybrook facility. In
February 1997, HealthSouth closed the Cedarbrook facility. Despite these
closures, HealthSouth has continued making its full lease payments under the
terms of the master lease.

The following summary consolidated financial data was obtained from the
December 31, 1996 Form 10-K and the June 30, 1997 Form 10-Q of HealthSouth:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Cash $ 175,831 $ 148,028 $ 152,244
Accounts receivable, net....................... 622,142 510,567 409,150
Property and equipment, net.................... 1,627,443 1,390,873 1,283,560
Intangible assets, net......................... 1,150,734 1,049,658 873,911
Other assets................................... 102,419 272,826 212,630
---------- ---------- ----------
Total assets......................... $3,894,795 $3,371,952 $2,931,495
========== ========== ==========
Long-term debt................................. $1,635,697 $1,450,620 $1,356,489
Other liabilities.............................. 410,302 405,408 389,108
Stockholders' equity........................... 1,848,796 1,515,924 1,185,898
---------- ---------- ----------
Total liabilities & stockholders'
equity............................. $3,894,795 $3,371,952 $2,931,495
========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SIX MONTHS
ENDED
JUNE 30,
1997 1996 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue....................... $1,414,648 $2,436,537 $2,003,146 $1,649,199
========== ========== ========== ==========
Net income........................ $ 145,899 $ 220,818 $ 92,521 $ 88,083
========== ========== ========== ==========
</TABLE>

Delinquent rentals fully reserved by the Partnership as a result of lease
defaults approximated $393,000 in 1996 and $674,000 in 1995 and 1994.

Other income in 1994 primarily consists of $560,000 in recovered
administrative expenses owed the Partnership from the former operator of two of
the Partnership's properties.

F-47
<PAGE> 115

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) RELATED PARTY TRANSACTIONS

Approximate fees paid to the general partner and affiliates of the general
partner are as follows:

<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Asset management fees................... $222,000 $ 740,000 $ 712,000 $ 731,000
Property management fees................ 170,000 208,000 252,000 472,000
Administrative and other expenses....... 86,000 256,000 235,000 266,000
General partner management fees......... 45,000 72,000 80,000 113,000
-------- ---------- ---------- ----------
$523,000 $1,276,000 $1,279,000 $1,582,000
======== ========== ========== ==========
</TABLE>

A 50% partner in CRG is chairman of the board of a bank where the
Partnership holds the majority of its operating cash accounts.

In connection with the sale of Countryside in 1996, the general partner was
paid fees aggregating $66,000. In connection with the sale of Heritage Manor in
1995, the general partner was paid fees aggregating $92,250.

(8) INCOME TAXES

Reconciliation of financial statement basis partners' equity to federal
income tax basis partners' equity is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Total partners' equity -- financial statement
basis......................................... $24,064,625 $22,427,282 $21,176,949
Current year tax basis net earnings over (under)
financial statement basis..................... (684,329) (2,942,675) 2,552,427
Cumulative tax basis net earnings over financial
statement basis............................... 5,136,578 8,079,253 5,526,826
----------- ----------- -----------
Total partners' equity -- federal income tax
basis......................................... $28,516,874 $27,563,860 $29,256,202
=========== =========== ===========
</TABLE>

(9) BUSINESS AND CREDIT CONCENTRATIONS

The Partnership's eight facilities are located in the southeastern United
States, Texas, Indiana and Massachusetts. The four facilities operated by
HealthSouth (note 6) are located in the southeastern United States and accounted
for approximately $1,183,500 (25%), $2,367,000 (31%), $2,367,000 (28%) and
$2,292,000 (18%) of Partnership revenues for six months ended June 30, 1997
(Unaudited) and the years ended December 31, 1996, 1995 and 1994, respectively.
One property leased to an unaffiliated operator accounted for approximately
$500,319 (11%), $1,023,716 (14%) and $977,000 (12%) of Partnership revenues for
six months ended June 30, 1997 (Unaudited) and the years ended December 31, 1996
and 1995, respectively.

The Partnership also derives revenue from Medicaid programs funded by the
states of Colorado, California, Michigan and Massachusetts. The Partnership
derived 14% of its revenues from the Colorado state program during 1994 and 15%
and 11% of its revenues from the Michigan state program in 1995 and 1994,

F-48
<PAGE> 116

HEALTHCARE PROPERTIES, L.P. AND SUBSIDIARIES
(A DELAWARE LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively. The Partnership derived 29% of its revenues from the state program
in Massachusetts for the six months ended June 30, 1997 (Unaudited), and 15% for
the year ended December 31, 1996.

Receivables due from state Medicaid programs aggregated $473,522 at June
30, 1997 (Unaudited) and $438,350 and $116,933 at December 31, 1996 and 1995,
respectively.

The Partnership does not require collateral or other security to support
financial instruments subject to credit risk.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments presented below.

(a) Cash and Cash Equivalents, Receivables and Payables

The carrying amount approximates fair value because of the short maturity
of these instruments.

(b) Mortgage Loans Payable

The fair value of the Partnership's mortgage loans payable is calculated by
discounting scheduled cash flows through maturity using discount rates that are
currently available to the Partnership on other borrowings with similar risk and
maturities. Issuance costs and other expenses that would be incurred in an
actual borrowing are not reflected in this amount.

<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
Mortgage loans payable at June 30, 1997 (Unaudited)........ $6,946,423 $7,222,306
========== ==========
Mortgage loans payable at December 31, 1996................ $7,207,414 $7,436,177
========== ==========
</TABLE>

F-49
<PAGE> 117

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
The Offering............................ 6
Summary Financial Data.................. 7
Risk Factors............................ 9
The Company............................. 6
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Dilution................................ 22
Selected Financial Data................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 32
Management.............................. 48
Certain Transactions.................... 55
Principal Stockholders.................. 59
Description of Capital Stock............ 59
Shares Eligible for Future Sale......... 62
Underwriting............................ 63
Legal Matters........................... 65
Experts................................. 65
Additional Information.................. 66
Index to Financial Statements........... F-1
</TABLE>

------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligations of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
------------------------------------------------------

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

9,000,000 Shares

[LOGO]

Capital Senior
Living Corporation

Common Stock

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

PROSPECTUS
, 1997
---------------------------
LEHMAN BROTHERS

J.C. BRADFORD & CO.

SMITH BARNEY INC.

- ------------------------------------------------------
------------------------------------------------------
<PAGE> 118

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<S> <S>
+1 -- Form of Underwriting Agreement
+3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant
+3.2 -- Amended and Restated Bylaws of the Registrant
5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation, with respect to the legality of the
securities being registered
+10.1 -- Asset Purchase Agreement, dated as of July 8, 1997, by
and between Capital Senior Living Communities, L.P. and
Capital Senior Living Corporation
+10.2 -- Contribution Agreement, dated as of August 1, 1997, by
and among Capital Senior Living Corporation, Jeffrey L.
Beck, James A. Stroud, Senior Living Trust, and Lawrence
A. Cohen
+10.3 -- Stock Purchase and Stockholders' Agreement, dated as of
November 1, 1996, by and among Capital Senior Living
Corporation, Jeffrey L. Beck, Senior Living Trust, and
Lawrence Cohen
10.4 -- Amended and Restated Exchange Agreement, dated as of June
30, 1997, by and between Lawrence A. Cohen and Jeffrey L.
Beck (in replacement of previously filed exhibit with the
same corresponding number)
10.5 -- Amended and Restated Exchange Agreement, dated as of June
30, 1997, by and among Lawrence A. Cohen and James A.
Stroud (in replacement of previously filed exhibit with
the same corresponding number)
10.6 -- 1997 Omnibus Stock and Incentive Plan (in replacement of
previously filed exhibit with the same corresponding
number)
+10.7 -- Senior Living Agreement, by and between Capital Senior
Living, Inc. and New World Development (China) Limited
+10.8 -- Amended and Restated Loan Agreement, dated as of June 30,
1997, by and between Lehman Brothers Holdings Inc., d/b/a
Lehman capital, A Division of Lehman Brothers Holdings
Inc., and Capital Senior Living Communities, L.P.
10.9 -- Amended and Restated Employment Agreement, dated as of
May 7, 1997, by and between Capital Senior Living, Inc.
and Jeffrey L. Beck (in replacement of previously filed
exhibit with the same corresponding number)
10.10 -- Amended and Restated Employment Agreement, dated as of
May 7, 1997, by and between Capital Senior Living, Inc.
and James A. Stroud (in replacement of previously filed
exhibit with the same corresponding number)
+10.11 -- Employment Agreement, dated as of November 1, 1996, by
and between Capital Senior Living Corporation and
Lawrence A. Cohen
+10.12 -- Employment Agreement, dated as of November 26, 1996, by
and between Capital Senior Living, Inc. and David R.
Brickman
+10.13 -- Employment Agreement, dated as of November 26, 1996, by
and between Capital Senior Living, Inc. and Keith N.
Johannessen
+10.14 -- Engagement Letter, dated as of June 30, 1997, by and
between Lehman Brothers Holdings Inc. D/B/A Lehman
Capital, A Division of Lehman Brothers Holdings Inc. and
Capital Senior Living Corporation
+10.15 -- Lease Agreement, dated as of June 1, 1997, by and between
G&L Gardens, LLC, as lessor, and Capital Senior
Management 1, Inc., as lessee
+10.16 -- Pre-Opening Consulting Agreement, dated as of June 16,
1997, by and between The Emmaus Calling, Inc., as owner,
and Capital Senior Management 1, Inc., as consultant
+10.17 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding Canton Regency Retirement Community, in Canton,
Ohio
+10.18 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding Cottonwood Village, in Cottonwood, Arizona
</TABLE>

II-1
<PAGE> 119

<TABLE>
<C> <S>
+10.19 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding The Harrison At Eagle Valley, in Indianapolis,
Indiana
+10.20 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner and Capital Senior Living, Inc., as manager,
regarding Towne Centre, in Merrillville, Indiana
+10.21 -- Management Agreement, dated as of August 1, 1996, by and
between Capital Senior Living, Inc., as manager, and
Cambridge Nursing Home Limited Liability Company, as
lessee
+10.22 -- Management Agreement, dated as of April 1, 1996, by and
between Buckner Retirement Services, Inc. and Capital
Senior Management 1, Inc.
+10.23 -- Management Agreement, dated as of May 23, 1997, by and
between The Emmaus Calling, Inc., as owner, and Capital
Senior Management 1, Inc., as manager
+10.24 -- Property Management Agreement, dated as of February 1,
1995, by and between NHP Retirement Housing Partners I
Limited Partnership, as owner, and Capital Senior Living,
Inc., as agent
+10.25 -- Management Agreement, dated as of April 1, 1997, by and
between Buckner Retirement Services, Inc. and Capital
Senior Management 1, Inc.
+10.26 -- Management Agreement, dated as of November 30, 1992, by
and between Capital Realty Group Senior Housing, Inc.
d/b/a Capital Senior Living, Inc., as manager, and
Jacques-Miller Healthcare Properties, L.P., as owner
+10.27 -- Management Agreement, dated as of July 29, 1996, by and
between ILM I Lease Corporation, as owner, and Capital
Senior Management 2, Inc., as manager, and Capital Senior
Living, Inc., as guarantor
+10.28 -- Management Agreement, dated as of July 29, 1996, by and
between ILM II Lease Corporation, as owner, and Capital
Senior Management 2, Inc., as manager, and Capital Senior
Living, Inc., as guarantor
+10.29 -- Option Agreement, by and between Capital Realty Group
Corporation, as optionor, and Capital Senior Living
Corporation, as optionee
+10.30 -- Development Agreement, by and between Capital Senior
Development, Inc., as developer, and Tri Point
Communities, L.P., as owner
+10.31 -- Development and Turnkey Services Agreement, dated as of
September 1, 1997, by and between Capital Senior
Development Corporation and Tri Point Communities, L.P.
10.32 -- Management Agreement, by and between Tri Point
Communities, L.P., as owner, and Capital Senior Living,
Inc. (in replacement of previously filed exhibit with the
same corresponding number)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Dr. Gordon I. Goldstein
23.4 -- Consent of Dr. Victor W. Nee to Nomination as Director
23.5 -- Consent of J. Frank Miller, III to Nomination as Director
23.6 -- Consent of James A. Moore to Nomination as Director.
23.7 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1)
+24 -- Power of Attorney
</TABLE>

(B) FINANCIAL STATEMENT SCHEDULES

Not applicable.
- ---------------

+ Previously filed
* To be filed by amendment

II-2
<PAGE> 120

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the 1st day of October, 1997.

CAPITAL SENIOR LIVING CORPORATION

By: /s/ JEFFREY L. BECK

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

Jeffrey L. Beck

Co-Chairman of the Board and

Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ JEFFREY L. BECK Co-Chairman of the Board, Chief October 1, 1997
- ----------------------------------------------------- Executive Officer
Jeffrey L. Beck (Principal Executive Officer)

/s/ *JAMES A. STROUD Co-Chairman of the Board, Chief October 1, 1997
- ----------------------------------------------------- Operating Officer
James A. Stroud

/s/ *LAWRENCE A. COHEN Vice Chairman, Chief Financial October 1, 1997
- ----------------------------------------------------- Officer (Principal Financial
Lawrence A. Cohen and Accounting Officer)

/s/ *JEFFREY L. BECK October 1, 1997
- -----------------------------------------------------
Jeffrey L. Beck,
Attorney-in-Fact
</TABLE>

II-3
<PAGE> 121

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
+1 -- Form of Underwriting Agreement
+3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant
+3.2 -- Amended and Restated Bylaws of the Registrant
5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation, with respect to the legality of the
securities being registered
+10.1 -- Asset Purchase Agreement, dated as of July 8, 1997, by
and between Capital Senior Living Communities, L.P. and
Capital Senior Living Corporation
+10.2 -- Contribution Agreement, dated as of August 1, 1997, by
and among Capital Senior Living Corporation, Jeffrey L.
Beck, James A. Stroud, Senior Living Trust, and Lawrence
A. Cohen
+10.3 -- Stock Purchase and Stockholders' Agreement, dated as of
November 1, 1996, by and among Capital Senior Living
Corporation, Jeffrey L. Beck, Senior Living Trust, and
Lawrence Cohen
10.4 -- Amended and Restated Exchange Agreement, dated as of June
30, 1997, by and between Lawrence A. Cohen and Jeffrey L.
Beck (in replacement of previously filed exhibit with the
same corresponding number)
10.5 -- Amended and Restated Exchange Agreement, dated as of June
30, 1997, by and among Lawrence A. Cohen and James A.
Stroud (in replacement of previously filed exhibit with
the same corresponding number)
10.6 -- 1997 Omnibus Stock and Incentive Plan (in replacement of
previously filed exhibit with the same corresponding
number)
+10.7 -- Senior Living Agreement, by and between Capital Senior
Living, Inc. and New World Development (China) Limited
+10.8 -- Amended and Restated Loan Agreement, dated as of June 30,
1997, by and between Lehman Brothers Holdings Inc., d/b/a
Lehman capital, A Division of Lehman Brothers Holdings
Inc., and Capital Senior Living Communities, L.P.
10.9 -- Amended and Restated Employment Agreement, dated as of
May 7, 1997, by and between Capital Senior Living, Inc.
and Jeffrey L. Beck (in replacement of previously filed
exhibit with the same corresponding number)
10.10 -- Amended and Restated Employment Agreement, dated as of
May 7, 1997, by and between Capital Senior Living, Inc.
and James A. Stroud (in replacement of previously filed
exhibit with the same corresponding number)
+10.11 -- Employment Agreement, dated as of November 1, 1996, by
and between Capital Senior Living Corporation and
Lawrence A. Cohen
+10.12 -- Employment Agreement, dated as of November 26, 1996, by
and between Capital Senior Living, Inc. and David R.
Brickman
+10.13 -- Employment Agreement, dated as of November 26, 1996, by
and between Capital Senior Living, Inc. and Keith N.
Johannessen
+10.14 -- Engagement Letter, dated as of June 30, 1997, by and
between Lehman Brothers Holdings Inc. D/B/A Lehman
Capital, A Division of Lehman Brothers Holdings Inc. and
Capital Senior Living Corporation
+10.15 -- Lease Agreement, dated as of June 1, 1997, by and between
G&L Gardens, LLC, as lessor, and Capital Senior
Management 1, Inc., as lessee
+10.16 -- Pre-Opening Consulting Agreement, dated as of June 16,
1997, by and between The Emmaus Calling, Inc., as owner,
and Capital Senior Management 1, Inc., as consultant
+10.17 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding Canton Regency Retirement Community, in Canton,
Ohio
</TABLE>

<PAGE> 122

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
+10.18 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding Cottonwood Village, in Cottonwood, Arizona
+10.19 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner, and Capital Senior Living, Inc., as manager,
regarding The Harrison At Eagle Valley, in Indianapolis,
Indiana
+10.20 -- Management Agreement, dated as of February 1, 1995, by
and between Capital Senior Living Communities, L.P., as
owner and Capital Senior Living, Inc., as manager,
regarding Towne Centre, in Merrillville, Indiana
+10.21 -- Management Agreement, dated as of August 1, 1996, by and
between Capital Senior Living, Inc., as manager, and
Cambridge Nursing Home Limited Liability Company, as
lessee
+10.22 -- Management Agreement, dated as of April 1, 1996, by and
between Buckner Retirement Services, Inc. and Capital
Senior Management 1, Inc.
+10.23 -- Management Agreement, dated as of May 23, 1997, by and
between The Emmaus Calling, Inc., as owner, and Capital
Senior Management 1, Inc., as manager
+10.24 -- Property Management Agreement, dated as of February 1,
1995, by and between NHP Retirement Housing Partners I
Limited Partnership, as owner, and Capital Senior Living,
Inc., as agent
+10.25 -- Management Agreement, dated as of April 1, 1997, by and
between Buckner Retirement Services, Inc. and Capital
Senior Management 1, Inc.
+10.26 -- Management Agreement, dated as of November 30, 1992, by
and between Capital Realty Group Senior Housing, Inc.
d/b/a Capital Senior Living, Inc., as manager, and
Jacques-Miller Healthcare Properties, L.P., as owner
+10.27 -- Management Agreement, dated as of July 29, 1996, by and
between ILM I Lease Corporation, as owner, and Capital
Senior Management 2, Inc., as manager, and Capital Senior
Living, Inc., as guarantor
+10.28 -- Management Agreement, dated as of July 29, 1996, by and
between ILM II Lease Corporation, as owner, and Capital
Senior Management 2, Inc., as manager, and Capital Senior
Living, Inc., as guarantor
+10.29 -- Option Agreement, by and between Capital Realty Group
Corporation, as optionor, and Capital Senior Living
Corporation, as optionee
+10.30 -- Development Agreement, by and between Capital Senior
Development, Inc., as developer, and Tri Point
Communities, L.P., as owner
+10.31 -- Development and Turnkey Services Agreement, dated as of
September 1, 1997, by and between Capital Senior
Development Corporation and Tri Point Communities, L.P.
10.32 -- Management Agreement, by and between Tri Point
Communities, L.P., as owner, and Capital Senior Living,
Inc. (in replacement of previously filed exhibit with the
same corresponding number)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Dr. Gordon I. Goldstein
23.4 -- Consent of Dr. Victor W. Nee to Nomination as Director
23.5 -- Consent of J. Frank Miller, III to Nomination as Director
23.6 -- Consent of James A. Moore to Nomination as Director.
23.7 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1)
+24 -- Power of Attorney
</TABLE>

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

+ Previously filed
* To be filed by amendment

<PAGE> 1

Exhibit 5.1

[JENKENS & GILCHRIST LETTERHEAD]

October 1, 1997

Capital Senior Living Corporation
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240

Re: Offering of Common Stock of Capital Senior Living Corporation
on Form S-1

Gentlemen:

On August 12, 1997, Capital Senior Living Corporation, a Delaware
corporation (the "Company"), filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1 (as amended, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). Such Registration Statement relates to the sale by the Company of an
aggregate of 10,350,000 shares of the Company's common stock (the "Common
Stock"), par value $.01 per share (the "Shares"). We have acted as counsel to
the Company in connection with the preparation and filing of the Registration
Statement.

In connection therewith, we have examined and relied upon the original
or copies, certified to our satisfaction, of (i) the Amended and Restated
Certificate of Incorporation and Bylaws of the Company, in each case as amended
to date, (ii) copies of resolutions of the Board of Directors of the Company
authorizing the offering of the Shares and the preparation and filing of the
Registration Statement and related matters, (iii) the Registration Statement,
and all exhibits thereto, and (iv) such other documents and instruments as we
have deemed necessary for the expression of the opinions herein contained. In
making the foregoing examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies. As to various questions of fact material to
this opinion, we have relied, to the extent we deem reasonably appropriate,
upon representations or certificates of officers or directors of the Company
and upon documents, records and instruments furnished to us by the Company,
without independent check or verification of their accuracy.
<PAGE> 2

Capital Senior Living Corporation
October 1, 1997
Page 2

Based upon the foregoing examination, we are of the opinion that the
Shares to be issued by the Company in the offering, as described in the
Registration Statement, have been duly and validly authorized for issuance and
the Shares, when issued and delivered by the Company in the manner stated in
the Prospectus constituting a part of the Registration Statement and in
accordance with the Underwriting Agreement described in the Registration
Statement, will be legally issued, fully paid, and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of
persons whose consent is required by Section 7 of the Act or the rules and
regulations of the Commission thereunder.

Respectfully submitted,

JENKENS & GILCHRIST, A
PROFESSIONAL CORPORATION

By: /s/ L. Steven Leshin
-------------------------------------------
L. Steven Leshin, Esq.

<PAGE> 1

Exhibit 10.4

AMENDED AND RESTATED EXCHANGE AGREEMENT

Amended and Restated Exchange Agreement ("Agreement") made effective
this 30th day of June, 1997 by and among Lawrence Cohen, an individual residing
at 41 Willow Road, Woodsburgh, New York 11598 ("Cohen"), and Jeffrey L. Beck,
with an address at Capital Senior Living Corporation, 14160 Dallas Parkway,
Suite 300, Dallas, Texas 75240 ("Beck").

W I T N E S S E T H:

WHEREAS, Cohen desires to transfer and Beck desires to acquire
55,000 shares (the "Shares") of the capital stock of Capital Senior Living
Corporation, a Delaware corporation (the "Corporation"), owned by Cohen in
exchange for the Exchange Shares (as hereinafter defined) owned by Beck, on the
terms and subject to the conditions hereinafter set forth; and

NOW, THEREFORE, in consideration of the premises hereof and other good
and valuable consideration, and intending to be legally bound hereby, Cohen and
Beck hereby agrees as follows:

1. Exchange of Shares of the Corporation. Subject to the terms
and conditions hereof, Cohen hereby agrees to transfer, assign and convey to
Beck and Beck hereby agrees to accept from Cohen the Shares, and in exchange
therefor Beck agrees to transfer, assign and convey to Cohen the Exchange
Shares on the terms and conditions hereinafter set forth. At the Closing (as
hereinafter defined), Cohen will deliver the stock certificate representing the
Shares duly endorsed by Cohen to Beck.

2. Exchange of Exchange Shares. At the Closing, Beck shall
transfer, assign and convey to Cohen 75 shares (the "Exchange Shares") of the
capital stock of Quality Home Care, Inc., an Indiana corporation ("Quality
Home") owned by Beck in exchange for the Shares of the Corporation

1
<PAGE> 2
set forth in Section 1 hereof. At the Closing, Beck will deliver the stock
certificate representing the Exchange Shares duly endorsed by Beck to Cohen.

3. [Intentionally Deleted]

4. Representations and Warranties Concerning the Transaction.

(a) REPRESENTATIONS AND WARRANTIES OF COHEN. Cohen
represents and warrants to Beck that the statements contained in this Section
4(a) are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were submitted for the date of this Agreement throughout this
Section 4(a)).

(i) AUTHORIZATION OF TRANSACTION. Cohen has full
power and authority to execute and deliver this Agreement and to perform his
obligations hereunder and this Agreement has been duly executed and delivered
by Cohen. This Agreement constitutes the valid and legally binding obligation
of Cohen, enforceable in accordance with its terms and conditions. To the best
of Cohen's knowledge, Cohen need not give any notice to, make any filing with,
or obtain any

2
<PAGE> 3
authorization, consent, or approval of, any government or governmental agency
or third party in order to consummate the transactions contemplated by this
Agreement, except for the Stock Purchase and Stockholders' Agreement entered
into as of the 1st day of November, 1996, by and among the Corporation, Senior
Living Trust ("Trust"), Beck and Cohen (the "Stockholder Agreement").

(ii) NONCONTRAVENTION. To the best of Cohen's
knowledge, neither the execution and the delivery of this Agreement by Cohen,
nor the consummation of the transactions contemplated hereby by Cohen, will (A)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental
agency, or court to which Cohen is subject, or (B) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any part the right to accelerate, terminate, modify, or cancel, or require any
notice under any contract, agreement or mortgage for borrowed money, instrument
of indebtedness, or other arrangement to which Cohen is a party or by which he
is bound or to which the Shares are subject, except for the Stockholder
Agreement.

(iii) SHARES. Cohen holds of record and owns
beneficially the Shares, free and clear of any restrictions on transfer,
claims, liens, security interests, encumbrances, options, warrants, rights,
contracts, calls, commitments, equities, and demands, except as set forth in
the Stockholder Agreement. Cohen is not a party to any option, warrant, right,
contract, call, put, or other agreement or commitment providing for the
disposition or acquisition of any capital stock of the Corporation, except as
set forth in the Stockholder Agreement. Upon payment for the Shares in
accordance with the terms hereof Beck will acquire good and clear title to all
of the Shares, all of which will be fully paid and non-assessable.

(b) REPRESENTATIONS AND WARRANTIES OF BECK. Beck
represents and warrants to Cohen that the statements contained in this Section
4(b) are correct and complete as of the date

3
<PAGE> 4
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date
of this Agreement throughout this Section 4(b)).

(i) AUTHORIZATION OF TRANSACTION. Beck has full
power and authority to execute and deliver this Agreement and to perform his
obligations hereunder and this Agreement has been duly executed and delivered
by Beck. This Agreement constitutes the valid and legally binding obligation
of Beck, enforceable in accordance with its terms and conditions. To the best
of Beck's knowledge, Beck need not give any notice to, make any filing with, or
obtain any authorization, consent, or approval of, any government or
governmental agency or third party in order to consummate the transactions
contemplated by this Agreement.

(ii) NONCONTRAVENTION. To the best of Beck's
knowledge, neither the execution and the delivery of this Agreement by Beck,
nor the consummation of the transactions contemplated hereby by Beck, will (A)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental
agency, or court to which Beck is subject, or (B) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any contract, agreement or mortgage for borrowed money, instrument
of indebtedness, or other arrangement to which Beck is a party or by which it
is bound or to which any of its assets is subject.

(iii) EXCHANGE SHARES. Beck holds of record and
owns beneficially the Exchange Shares, free and clear of any restrictions on
transfer, claims, liens, security interest, encumbrances, option warrants,
rights, contracts, calls, commitments, equities and demands. Beck is not a
party to any option, warrant, right, contract, call, put, or other agreement or
commitment

4
<PAGE> 5
providing for the disposition or acquisition of any capital stock of Quality
Home. Upon payment for the Exchange Shares in accordance with the terms
hereof, Cohen will acquire good and clear title to all of the Exchange Shares,
all of which will be fully paid and non-assessable.

(c) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties, covenants and agreements of Cohen and Beck
contained in this Agreement (or in any document delivered pursuant hereto)
shall survive the execution and delivery hereof and the Closing.

5. The Closing.

The closing ("Closing") shall take place effective as of June 30, 1997
("Closing Date").

6. Consent of Corporation and Other Shareholders.

Cohen and Beck acknowledge that the transfer of the Shares is subject
to restrictions set forth in the Stockholder Agreement. The Corporation,
Cohen, Beck and Trust hereby consent to the transfer of the Shares hereunder
and waive any rights whatsoever that the Corporation, Beck or Trust may have to
the Shares.

7. Initial Public Offering of the Corporation. If an initial
public offering of common stock of the Corporation is not completed by December
31, 1997, effective as of December 31, 1997, Cohen and Beck shall take all
actions necessary to have Cohen transfer, assign and convey back to Beck the
Exchange Shares and to have Beck transfer, assign and convey back to Cohen the
Shares.

8. Amendments to Stockholder Agreement. Section 5.3 of the
Stockholders Agreement concerning registration rights shall be deleted, except
that if the Shares and the Exchange Shares are reconveyed as provided in
Section 7 hereof, Section 5.3 of the Stockholder Agreement shall be
reinstituted and restored. Also, Section 5.4 of the Stockholder Agreement
provides anti-dilution rights to the stockholders. In recognition of the
exchange of shares set forth herein, the 2.8% minimum applicable to Cohen in
Section 5.4 shall be adjusted downward to take into account the

5
<PAGE> 6
Exchange Shares which Cohen is receiving hereunder, except that if the Shares
and the Exchange Shares are reconveyed as provided in Section 7 hereof, the
2.8% minimum applicable to Cohen in Section 5.4 shall be reinstituted and
restored.

9. General Provisions.

(a) This Agreement may be amended, modified or terminated
only by written instrument executed by all parties hereto.

(b) Any party hereto may at any time waive compliance by
the other with any covenants or conditions contained in this Agreement but only
by written instrument executed by the party waiving such compliance. No such
waiver, however, shall be deemed to constitute the waiver of any such covenant
or condition in any other circumstance or the waiver of any other covenant or
condition.

(c) If any provision of this Agreement shall finally be
determined to be unlawful, then such provision shall be deemed to be severed
from this Agreement and every other provision of this Agreement shall remain in
full force and effect.

(d) This Agreement is not intended to, and shall not,
create any rights in or confer any benefits upon any person other than the
parties hereto.

(e) The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party. The parties
intend that each representation, warranty, and covenant contained herein shall
have independent significance. If any party has breached any representation,
warranty, or covenant relating to the same subject matter as any other
representation, warranty or covenant (regardless of the relative levels of
specificity) which the party has not breached, it shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.

6
<PAGE> 7
(f) All notices or other communications hereunder shall
be in writing and shall be deemed given on the date of delivery if delivered
personally or five days after deposit in a facility of the United States Post
Office if mailed by certified mail (return receipt requested) to the parties at
the addresses set forth above or at such other address as shall be specified by
like notice.

(g) The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

(h) This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between Cohen and Beck, with respect to the subject matter hereof, except the
Stockholder Agreement and as specifically provided or otherwise referred to
herein. This Agreement shall be governed in all respects including validity,
interpretation and effect by the laws of the State of Delaware and shall be
binding upon and shall inure to the benefit of the parties hereto, their heirs,
administrators or executives, successors and assigns.

(i) The parties hereto agree that they will, from time to
time, execute and deliver any and all additional and supplemental instruments,
and do such other acts and things which may be reasonably necessary or
desirable to effect the purposes and intent of this Agreement, and the
consummation of the transactions contemplated hereby.

7
<PAGE> 8
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals the day and year first above stated.

/s/ LAWRENCE COHEN
--------------------------------------
Lawrence Cohen

/s/ JEFFREY L. BECK
--------------------------------------
Jeffrey L. Beck

Consented To:

Capital Senior Living Corporation

By: /s/ JEFFREY L. BECK
-----------------------------------
Jeffrey L. Beck

Senior Living Trust

By: /s/ TROY D. PHILLIPS
-----------------------------------
Troy D. Phillips, Trustee

<PAGE> 1

Exhibit 10.5

AMENDED AND RESTATED EXCHANGE AGREEMENT

Amended and Restated Exchange Agreement ("Agreement") made effective
this 30th day of June, 1997 by and among Lawrence Cohen, an individual residing
at 41 Willow Road, Woodsburgh, New York 11598 ("Cohen"), and James A. Stroud,
with an address at Capital Senior Living Corporation, 14160 Dallas Parkway,
Suite 300, Dallas, Texas 75240 ("Stroud").

W I T N E S S E T H:

WHEREAS, Cohen desires to transfer and Stroud desires to acquire
55,000 shares (the "Shares") of the capital stock of Capital Senior Living
Corporation, a Delaware corporation (the "Corporation"), owned by Cohen in
exchange for the Exchange Shares (as hereinafter defined) owned by Stroud, on
the terms and subject to the conditions hereinafter set forth; and

NOW, THEREFORE, in consideration of the premises hereof and other good
and valuable consideration, and intending to be legally bound hereby, Cohen and
Stroud hereby agrees as follows:

1. Exchange of Shares of the Corporation. Subject to the terms
and conditions hereof, Cohen hereby agrees to transfer, assign and convey to
Stroud and Stroud hereby agrees to accept from Cohen the Shares, and in
exchange therefor Stroud agrees to transfer, assign and convey to Cohen the
Exchange Shares on the terms and conditions hereinafter set forth. At the
Closing (as hereinafter defined), Cohen will deliver the stock certificate
representing the Shares duly endorsed by Cohen to Stroud.

2. Exchange of Exchange Shares. At the Closing, Stroud shall
transfer, assign and convey to Cohen 75 shares (the "Exchange Shares") of the
capital stock of Quality Home Care, Inc., an Indiana corporation ("Quality
Home") owned by Stroud in exchange for the Shares of the

1
<PAGE> 2
Corporation set forth in Section 1 hereof. At the Closing, Stroud will
deliver the stock certificate representing the Exchange Shares duly endorsed by
Stroud to Cohen.

3. [Intentionally Deleted]

4. Representations and Warranties Concerning the Transaction.

(a) REPRESENTATIONS AND WARRANTIES OF COHEN. Cohen
represents and warrants to Stroud that the statements contained in this Section
4(a) are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were submitted for the date of this Agreement throughout this
Section 4(a)).

(iii) SHARES. Cohen holds of record and owns
beneficially the Shares, free and clear of any restrictions on transfer,
claims, liens, security interests, encumbrances, options, warrants, rights,
contracts, calls, commitments, equities, and demands, except as set forth in
the Stockholder Agreement. Cohen is not a party to any option, warrant, right,
contract, call, put, or other agreement or commitment providing for the
disposition or acquisition of any capital stock of the Corporation, except as
set forth in the Stockholder Agreement. Upon payment for the Shares in
accordance with the terms hereof Stroud will acquire good and clear title to
all of the Shares, all of which will be fully paid and non-assessable.

3
<PAGE> 4
(b) REPRESENTATIONS AND WARRANTIES OF STROUD. Stroud
represents and warrants to Cohen that the statements contained in this Section
4(b) are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout
this Section 4(b)).

(i) AUTHORIZATION OF TRANSACTION. Stroud has
full power and authority to execute and deliver this Agreement and to perform
his obligations hereunder and this Agreement has been duly executed and
delivered by Stroud. This Agreement constitutes the valid and legally binding
obligation of Stroud, enforceable in accordance with its terms and conditions.
To the best of Stroud's knowledge, Stroud need not give any notice to, make any
filing with, or obtain any authorization, consent, or approval of, any
government or governmental agency or third party in order to consummate the
transactions contemplated by this Agreement.

(ii) NONCONTRAVENTION. To the best of Stroud's
knowledge, neither the execution and the delivery of this Agreement by Stroud,
nor the consummation of the transactions contemplated hereby by Stroud, will
(A) violate any statute, regulation, rule, judgment, order, decree,
stipulation, injunction, charge, or other restriction of any government,
governmental agency, or court to which Stroud is subject, or (B) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any contract, agreement or mortgage for borrowed
money, instrument of indebtedness, or other arrangement to which Stroud is a
party or by which it is bound or to which any of its assets is subject.

(iii) EXCHANGE SHARES. Stroud holds of record and
owns beneficially the Exchange Shares, free and clear of any restrictions on
transfer, claims, liens, security interest,

4
<PAGE> 5
encumbrances, option warrants, rights, contracts, calls, commitments, equities
and demands. Stroud is not a party to any option, warrant, right, contract,
call, put, or other agreement or commitment providing for the disposition or
acquisition of any capital stock of Quality Home. Upon payment for the
Exchange Shares in accordance with the terms hereof, Cohen will acquire good
and clear title to all of the Exchange Shares, all of which will be fully paid
and non-assessable.

(c) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties, covenants and agreements of Cohen and Stroud
contained in this Agreement (or in any document delivered pursuant hereto)
shall survive the execution and delivery hereof and the Closing.

5. The Closing.

The closing ("Closing") shall take place effective as of June 30, 1997
("Closing Date").

6. Consent of Corporation and Other Shareholders.

Cohen and Stroud acknowledge that the transfer of the Shares is
subject to restrictions set forth in the Stockholder Agreement. The
Corporation, Cohen, Beck and Trust hereby consent to the transfer of the Shares
hereunder and waive any rights whatsoever that the Corporation, Beck or Trust
may have to the Shares.

7. Initial Public Offering of the Corporation. If an initial
public offering of common stock of the Corporation is not completed by December
31, 1997, effective as of December 31, 1997, Cohen and Stroud shall take all
actions necessary to have Cohen transfer, assign and convey back to Stroud the
Exchange Shares and to have Stroud transfer, assign and convey back to Cohen
the Shares.

5
<PAGE> 6
reinstituted and restored. Also, Section 5.4 of the Stockholder Agreement
provides anti-dilution rights to the stockholders. In recognition of the
exchange of shares set forth herein, the 2.8% minimum applicable to Cohen in
Section 5.4 shall be adjusted downward to take into account the Exchange Shares
which Cohen is receiving hereunder, except that if the Shares and the Exchange
Shares are reconveyed as provided in Section 7 hereof, the 2.8% minimum
applicable to Cohen in Section 5.4 shall be reinstituted and restored.

9. General Provisions.

(a) This Agreement may be amended, modified or terminated
only by written instrument executed by all parties hereto.

(d) This Agreement is not intended to, and shall not,
create any rights in or confer any benefits upon any person other than the
parties hereto.

6
<PAGE> 7
relating to the same subject matter as any other representation, warranty or
covenant (regardless of the relative levels of specificity) which the party has
not breached, it shall not detract from or mitigate the fact that the party is
in breach of the first representation, warranty or covenant.

(f) All notices or other communications hereunder shall
be in writing and shall be deemed given on the date of delivery if delivered
personally or five days after deposit in a facility of the United States Post
Office if mailed by certified mail (return receipt requested) to the parties at
the addresses set forth above or at such other address as shall be specified by
like notice.

(g) The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

(h) This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between Cohen and Stroud, with respect to the subject matter hereof, except the
Stockholder Agreement and as specifically provided or otherwise referred to
herein. This Agreement shall be governed in all respects including validity,
interpretation and effect by the laws of the State of Delaware and shall be
binding upon and shall inure to the benefit of the parties hereto, their heirs,
administrators or executives, successors and assigns.

7
<PAGE> 8
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals the day and year first above stated.

/s/ LAWRENCE COHEN
--------------------------------------
Lawrence Cohen

/s/ JAMES A. STROUD
--------------------------------------
James A. Stroud

Consented To:

- -----------------------------------
Jeffrey L. Beck

Capital Senior Living Corporation

By:
--------------------------------
Jeffrey L. Beck

Senior Living Trust

By: /s/ TROY D. PHILLIPS
--------------------------------
Troy D. Phillips, Trustee

<PAGE> 1

EXHIBIT 10.6

1997 OMNIBUS STOCK AND INCENTIVE PLAN

FOR

CAPITAL SENIOR LIVING CORPORATION
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
-------

2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
-----------
(a) "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(b) "Agreed Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(c) "Award" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(d) "Available Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(e) "Board" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(f) "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(g) "Change in Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(h) "Change in Control Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(i) "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(j) "Committee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(k) "Common Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(l) "Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(m) "Consultant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(n) "Date of Grant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(o) "Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(p) "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(q) "Effective Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(r) "Eligible Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(s) "Fair Market Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(t) "Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(u) "Immediate Family" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(v) "Incentive Stock Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(w) "Limited SAR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(x) "Non-Employee Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(y) "Non-qualified Stock Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(z) "Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(aa) "Optionee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(bb) "Option Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(cc) "Option Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(dd) "Outside Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(ee) "Outside Director Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(ff) "Parent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(gg) "Performance Award" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(hh) "Performance Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(ii) "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(jj) "Plan Year" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(kk) "Potential Change In Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(ll) "Reacquired Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(mm) "Restriction(s)" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(nn) "Restricted Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

</TABLE>

i
<PAGE> 3
<TABLE>
<S> <C> <C>
(oo) "Restricted Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(pp) "Restricted Share Award" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(qq) "Restricted Share Distributions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(rr) "SAR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(ss) "Section 162(m) Maximum" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(tt) "Share(s)" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(uu) "Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(vv) "Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(ww) "1933 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(xx) "1934 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

3. Award of Available Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------------------------

4. Conditions for Grant of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
------------------------------

5. Grant of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
----------------

6. Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
------------

7. Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
-------------------

8. Exercisability of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
-------------------------

9. Termination of Option Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
----------------------------

10. Incentive Stock Options for 10% Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-------------------------------------------

11. Non-qualified Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
---------------------------

12. Restricted Share Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-----------------------

13. Performance Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
------------------

14. Acceleration on Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
---------------------------------

15. Adjustment of Available Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
------------------------------

16. Transferability of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-------------------------

17. Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
------------------

18. Stock Appreciation Rights and Limited Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . 13
---------------------------------------------------------------

19. Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
--------------------------

20. Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
---------------
</TABLE>

ii
<PAGE> 4
<TABLE>
<S> <C> <C>
21. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
--------------

22. Amendment and Discontinuation of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-----------------------------------------

23. Section 83(b) Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
----------------------

24. Awards to Outside Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
---------------------------

25. Effective Date and Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-----------------------------------

</TABLE>

iii
<PAGE> 5
1997 OMNIBUS STOCK AND INCENTIVE PLAN
FOR
CAPITAL SENIOR LIVING CORPORATION

1. PURPOSE. The purpose of this Plan is to advance the interests
of Capital Senior Living Corporation and increase shareholder value by
providing additional incentives to attract, retain and motivate those qualified
and competent employees, Directors and Consultants upon whose efforts and
judgment its success is largely dependent.

2. DEFINITIONS. As used herein, the following terms shall have
the meaning indicated:

(a) "AFFILIATE" means any entity other than the Parent that is
designated by the Board as a participating employer under the Plan, provided
that the Parent directly or indirectly owns at least 20% of the combined voting
power of all classes of stock of such entity or at least 20% of the ownership
interests in such entity.

(b) "AGREED PRICE" shall relate to the grant of a SAR or Limited
SAR under an Award, and shall mean the value assigned to the Available Shares
in the Award which will form the basis for calculating the Spread on the date
of exercise of the SAR or Limited SAR, which assigned value may be any value
determined by the Committee, including the Fair Market Value of the Shares on
the Date of Grant.

(c) "AWARD" shall mean either an Option, an SAR, a Restricted
Share Award, or a Performance Award, except that where it shall be appropriate
to identify the specific type of Award, reference shall be made to the specific
type of Award.

(d) "AVAILABLE SHARES" shall mean, at each time of reference, the
total number of Shares described in SECTION 3 with respect to which the
Committee may grant an Award, all of which Available Shares shall be held in
the Parent's treasury or shall be made available from authorized and unissued
Shares.

(e) "BOARD" shall mean the Board of Directors of the Parent.

(f) "CAUSE" shall mean (i) a final, nonappealable conviction of a
holder for commission of a felony involving moral turpitude, (ii) Holder's
willful gross misconduct that causes material economic harm to the Company or
that brings substantial discredit to the Company's reputation, or (iii)
Holder's material failure or refusal to perform his duties if Holder has failed
to cure such failure or refusal to perform within thirty (30) days after the
Company notifies Holder in writing of such failure or refusal to perform.

(g) "CHANGE IN CONTROL" shall mean the first to occur of (i) a
merger, consolidation, statutory share exchange or sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all of the assets of the Company that requires the consent or
vote of the holders of the Parent's Common Stock, other than a consolidation,
merger or share

1
<PAGE> 6
exchange of the Parent in which the holders of the Parent's Common Stock
immediately prior to such transaction have the same proportionate ownership of
common stock of the surviving corporation immediately after such transaction;
(ii) the shareholders of the Parent approve any plan or proposal for the
liquidation or dissolution of the Company; (iii) the cessation of control (by
virtue of their not constituting a majority of Directors) of the Board of
Directors of the Parent by the individuals (the "Continuing Directors") who (x)
on the Effective Date were Directors or (y) become Directors after the date of
this Agreement and whose election or nomination for election by the Parent's
shareholders was approved by a vote of at least two-thirds of the Directors
then in office who were Directors at the Effective Date or whose election or
nomination for election was previously so approved; (iv) the acquisition of
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of an aggregate of 20% or more of the voting power of the Parent's outstanding
voting securities by any person or group (as such term is used in Rule 13d-5
under the Exchange Act) who beneficially owned less than 15% of the voting
power of the Parent's outstanding voting securities on the Effective Date, or
the acquisition of beneficial ownership of an additional 5% of the voting power
of the Parent's outstanding voting securities by any person or group who
beneficially owned at least 15% of the voting power of the Parent's outstanding
voting securities on the Effective Date; provided, however, that
notwithstanding the foregoing, an acquisition shall not be described hereunder
if the acquiror is (x) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company and acting in such capacity, (y) a
wholly-owned subsidiary of the Parent or a corporation owned, directly or
indirectly, by the shareholders of the Parent in the same proportions as their
ownership of voting securities of the Parent or (z) any other person whose
acquisition of shares of voting securities is approved in advance by a majority
of the Continuing Directors; or (v) in a Title 11 bankruptcy proceeding, the
appointment of a trustee or the conversion of a case involving the Company to a
case under Chapter 7.

(h) "CHANGE IN CONTROL PRICE" shall mean the highest price per
share paid in any transaction reported on the NYSE or such other exchange or
market as is the principal trading market for the Common Stock, or paid or
offered in any bona fide transaction related to a Potential or actual Change in
Control at any time during the 60 day period immediately preceding such
occurrence, in each case as determined by the Committee except that, in the
case of Stock Appreciation Rights relating to Incentive Stock Options, such
price shall be based only on transactions reported for the date on which the
Holder exercises such Stock Appreciation Rights or, where applicable, the date
on which a cash out occurs.

(i) "CODE" shall mean the Internal Revenue Code of 1986, as now or
hereafter amended.

(j) "COMMITTEE" shall mean the a Committee composed entirely of
Non-Employee Directors, not less than 2 in number, unless the Board expressly
elects to act as the Committee.

(k) "COMMON STOCK" shall mean the common stock, par value $.01 per
share, of the Parent.

(l) "COMPANY" shall mean the Parent, its Subsidiaries and
Affiliates, except when it shall be appropriate to refer only to Capital Senior
Living Corporation, then it shall be referred to as "Parent".

2
<PAGE> 7
(m) "CONSULTANT" shall mean any person or entity who or which is
engaged by the Company to render consulting services and is compensated for
such consulting services and any director of the Employer whether compensated
for such services or not; provided that, in the event the Company registers any
security under Section 12 of the Securities Exchange Act of 1934, as amended,
the term Consultant shall thereafter not include Directors who are not
compensated for their services and are paid only a director's fee by the
Employer.

(n) "DATE OF GRANT" shall mean the date on which the Committee
takes formal action to grant an Award, provided that it is followed, as soon as
reasonably possible, by written notice to the Eligible Person receiving the
Award.

(o) "DIRECTOR" shall mean a member of the Board.

(p) "DISABILITY" shall mean a Holder's present incapacity
resulting from an injury or illness (either mental or physical) which, in the
reasonable opinion of the Committee based on such medical evidence as it deems
necessary, will result in death or can be expected to continue for a period of
at least twelve (12) months and will prevent the Holder from performing the
normal services required of the Holder by the Company, provided, however, that
such disability did not result, in whole or in part: (i) from chronic
alcoholism; (ii) from addiction to narcotics; (ii) from a felonious
undertaking; or (iv) from an intentional self-inflicted wound.

(q) "EFFECTIVE DATE" shall mean September 1, 1997.

(r) "ELIGIBLE PERSON" shall mean employees of the Company who the
Committee determines have the capacity to substantially contribute to the
success of the Company.

(s) "FAIR MARKET VALUE" shall mean, as of a particular date, the
closing sale price of Shares, which shall be (i) if the Shares are listed or
admitted for trading on any United States national securities exchange, the
last reported sale price of the Shares on such exchange as reported in any
newspaper of general circulation or (ii) if the Shares are quoted on NASDAQ, or
any similar system of automated dissemination of quotations of securities
prices in common use, the mean between the closing high bid and low asked
quotations for such day on such system. If neither clause (i) nor clause (ii)
is applicable, the fair market value shall be determined by any fair and
reasonable means prescribed by the Committee.

(t) "HOLDER" shall mean, at each time of reference, each person
(including, but not limited to an Optionee) with respect to whom an Award is in
effect, except that where it should be appropriate to distinguish between a
Holder with respect to an Option and a Holder with respect to a different type
of Award, reference shall be made to Optionee; and provided further that to the
extent provided under, and subject to the conditions of, the Award, it shall
refer to the person who succeeds to the rights of the Holder upon the death of
the Holder.

(u) "IMMEDIATE FAMILY" means any child, stepchild, grandchild,
parent stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall
include adoptive relationships.

3
<PAGE> 8
(v) "INCENTIVE STOCK OPTION" shall mean an Option that is an
incentive stock option as defined in Section 422 of the Code.

(w) "LIMITED SAR" shall mean a limited stock appreciation right as
defined in SECTION 18 hereof.

(x) "NON-EMPLOYEE DIRECTOR" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under
the 1934 Act and an outside director within the meaning of Treasury Regulation
Sec. 162-27(e)(3) promulgated under the Code.

(y) "NON-QUALIFIED STOCK OPTION" shall mean an Option that is not
an Incentive Stock Option.

(z) "OPTION" (when capitalized) shall mean any Incentive Stock
Option and Non-qualified Stock Option granted under this Plan, except that,
where it shall be appropriate to identify a specific type of Option, reference
shall be made to the specific type of Option; provided, further, without
limitation, that a single Option may include both Incentive Stock Option and
Non-qualified Stock Option provisions.

(aa) "OPTIONEE" shall mean a person to whom an Option is granted
(often referred to as a Holder).

(bb) "OPTION PRICE" shall mean the price per Share which is
required to be paid by the Optionee in order to exercise his right to acquire
the Share under the terms of the Option.

(cc) "OPTION PROCEEDS" shall mean the cash proceeds received by the
Company from the exercise of Options reduced by any such amounts previously
used to purchase Reacquired Shares.

(dd) "OUTSIDE DIRECTOR" means a member of the Board who is not an
officer or employee of the Company.

(ee) "OUTSIDE DIRECTOR OPTION" means an award to an Outside
Director under SECTION 24 below.

(ff) "PARENT" shall mean Capital Senior Living Corporation, a
Delaware corporation.

(gg) "PERFORMANCE AWARD" shall mean the award which is granted
contingent upon the attainment of the performance objectives during the
Performance Period, all as described more fully in SECTION 13.

(hh) "PERFORMANCE PERIOD" shall mean the period described in
SECTION 13 with respect to which the performance objectives relate.

(ii) "PLAN" shall mean this 1997 Omnibus Stock and Incentive Plan
For Capital Senior Living Corporation

4
<PAGE> 9
(jj) "PLAN YEAR" shall mean the Parent's fiscal year.

(kk) "POTENTIAL CHANGE IN CONTROL" shall mean the first to occur of
(i) approval by shareholders of an agreement by the Parent, the consummation of
which would result in a Change in Control; or (ii) the acquisition of
beneficial ownership, directly or indirectly, by any entity, person or group
(other than the Company or any Company employee benefit plan of securities of
the Company representing 5% or more of the combined voting power of the
Parent's outstanding securities and the adoption by the Committee of a
resolution to the effect that a Potential Change in Control has occurred for
purposes of this Plan.

(ll) "REACQUIRED SHARES" shall mean Shares, if any, reacquired by
the Company on the open market with the Option Proceeds, provided that the
aggregate of such Reacquired Shares may not exceed fifty percent (50%) of the
aggregate Shares (excluding Reacquired Shares) authorized in SECTION 3.

(mm) "RESTRICTION(S)" shall mean the restrictions applicable to
Available Shares subject to an Award which prohibit the "transfer" of such
Available Shares, and which constitute "a substantial risk of forfeiture" of
such Available Shares, as those terms are defined under Section 83(a)(1) of the
Code.

(nn) "RESTRICTED PERIOD" shall mean the period during which
Restricted Shares shall be subject to Restrictions.

(oo) "RESTRICTED SHARES" shall mean the Available Shares granted to
an Eligible Person which are subject to Restrictions.

(pp) "RESTRICTED SHARE AWARD" shall mean the award of Restricted
Shares.

(qq) "RESTRICTED SHARE DISTRIBUTIONS" shall mean any amounts,
whether Shares, cash or other property (other than regular cash dividends) paid
or distributed by the Parent with respect to Restricted Shares during a
Restricted Period.

(rr) "SAR" shall mean a stock appreciation right as defined in
SECTION 18 hereof.

(ss) "SECTION 162(M) MAXIMUM" shall mean 100,000 Shares.

(tt) "SHARE(S)" shall mean a share or shares of Common Stock.

(uu) "SPREAD" shall mean the difference between the Option Price,
or the Agreed Price, as the case may be, of the Share(s) and the Fair Market
Value of such Share(s), on the date of reference.

(vv) "SUBSIDIARY" shall mean any corporation (other than the
Parent) in any unbroken chain of corporations beginning with the Parent if, at
the time of the granting of the Award, each of the corporations, other than the
last corporation in the unbroken chain, owns stock possessing 50%

5
<PAGE> 10
or more of the total combined voting power of all classes of stock in one of
the other corporations in such unbroken chain.

(ww) "1933 ACT" shall mean the Securities Act of 1933, as amended.

(xx) "1934 ACT" shall mean the Securities Exchange Act of 1934, as
amended.

3. AWARD OF AVAILABLE SHARES. As of the Effective Date, 1,565,000
Shares shall automatically, and without further action, become Available
Shares. To the extent any Award shall terminate, expire or be canceled, or the
Award shall be paid in cash, the Available Shares subject to such Award (or
with respect to which the Award is measured), shall remain Available Shares.
Such number shall be increased automatically by the number of Reacquired
Shares; provided, however, that Incentive Stock Options may not be issued after
1,565,000 Shares have been issued under the Plan. No person whose compensation
may be subject to the limitations on deductibility under Section 162(m) of the
Code shall be eligible to receive Awards pursuant to this Plan in any Plan Year
which relate to Shares which exceed the Section 162(m) Maximum.

4. CONDITIONS FOR GRANT OF AWARDS.

(a) Without limiting the generality of the provisions hereof which
deal specifically with each form of Award, Awards shall only be granted to such
one or more Eligible Persons as shall be selected by the Committee.

(b) In granting Awards, the Committee shall take into
consideration the contribution the Eligible Person has made or may be
reasonably expected to make to the success of the Company and such other
factors as the Committee shall determine. The Committee shall also have the
authority to consult with and receive recommendations from officers and other
personnel of the Company with regard to these matters. The Committee may from
time to time in granting Awards under the Plan prescribe such other terms and
conditions concerning such Awards as it deems appropriate, including, without
limitation, relating an Award to achievement of specific goals established by
the Committee or to the continued employment of the Eligible Person for a
specified period of time, provided that such terms and conditions are not
inconsistent with the provisions of this Plan.

(c) Incentive Stock Options may be granted only to Employees, and
all other Awards may be granted to either Employees, Consultants or
Non-Employee Directors. Outside Directors are eligible to receive Awards only
pursuant to SECTION 24.

(d) The Plan shall not confer upon any Holder any right with
respect to continuation of employment by, or consulting relationship with, the
Company, nor shall it interfere in any way with his right or the Company's
right to terminate his employment, consulting relationship or Directorship at
any time, nor shall the reference to "Company" confer an employment
relationship on a Consultant.

(e) The Awards granted to Eligible Persons shall be in addition to
regular salaries, pension, life insurance or other benefits related to their
service to the Company. Neither the Plan nor any Award granted under the Plan
shall confer upon any person any right to continuance of employment by the
Company; and provided, further, that nothing herein shall be deemed to limit
the ability of the Company to enter into any other compensation arrangements
with any Eligible Person.

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<PAGE> 11
(f) The Committee shall determine in each case whether periods of
military or government service shall constitute a continuation of employment
for the purposes of this Plan or any Award.

(g) Notwithstanding any provision hereof to the contrary, each
Award which in whole or in part involves the issuance of Available Shares may
provide for the issuance of such Available Shares for consideration consisting
of such consideration as the Committee may determine, including (without
limitation) as compensation for past services rendered.

5. GRANT OF OPTIONS.

(a) The Committee may grant to Optionees from time to time Options
alone, in addition to, or in tandem with , other Awards granted under the Plan
and/or cash Awards made outside of the Plan, to purchase some or all of the
Available Shares. An Option granted hereunder shall be either an Incentive
Stock Option or a Non-qualified Stock Option, shall be evidenced by a written
agreement that shall contain such provisions as shall be selected by the
Committee, which may incorporate the terms of this Plan by reference, and which
clearly shall state whether it is (in whole or in part) an Incentive Stock
Option or a Non-qualified Stock Option.

(b) The aggregate Fair Market Value (determined as of the Date of
Grant) of the Available Shares with respect to which any Incentive Stock Option
is exercisable for the first time by an Optionee during any calendar year under
the Plan and all such plans of the Company (as defined in Section 425 of the
Code) shall not exceed $100,000.

(c) A Non-qualified Stock Option shall not be transferable by the
Holder without the prior written consent of the Committee other than (i)
transfers by the Holder to a member of his or her Immediate Family or a trust
for the benefit of the optionee or a member of his or her Immediate Family, or
(ii) transfers by will or by the laws of descent and distribution. An
Incentive Stock Option shall not be transferable by the Holder otherwise than
by will or by the laws of descent and distribution. All Options shall be
exercisable, during the Holder's lifetime, only by the Holder.

(d) In the case of a Non-qualified Stock Option or a Holder who
elects to make a disqualifying disposition (as defined in Section 422(a)(1) of
the Code) of Shares acquired pursuant to the exercise of an Incentive Stock
Option, the Committee in its discretion may award at the time of grant or
thereafter the right to receive upon exercise of such Option a cash bonus
calculated to pay part or all of the federal and state, if any, income tax
incurred by the Holder upon such exercise.

(e) The Committee may at any time offer to buy out for a payment
in cash, Common Stock, or Restricted Stock an Option previously granted, based
on such terms and conditions as the Committee shall establish and communicate
to the Holder at the time that such offer is made.

(f) If the Option agreement so provides at Date of Grant or
(except in the case of an Incentive Stock Option) is amended after Date of
Grant and prior to exercise to so provide (with the Holder's consent), the
Committee may require that all or part of the Shares to be issued with respect

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<PAGE> 12
to the Spread take the form of Restricted Stock, which shall be valued on the
date of exercise on the basis of the Fair Market Value of such Restricted Stock
determined without regard to the transferability and forfeiture restrictions
involved.

(g) Without limitation, the Committee may condition the exercise
of any Option upon the attainment of specified performance goals or other
factors as the Committee may determine, in its sole discretion. Unless
specifically provided in the Option agreement, any such conditional Option
shall vest twelve (12) months prior to its expiration if the conditions to
exercise have not theretofore been satisfied.

6. OPTION PRICE.

(a) The Option Price shall be any price determined by the
Committee; provided, however, that the Option Price may not be less than the
par value of the Common Stock, and in the case of an Incentive Stock Option,
shall not be less than one hundred percent (100%) of the Fair Market Value per
Share on the Date of Grant.

(b) Unless further limited by the Committee in any Option, the
Option Price shall be paid solely in cash, by certified or cashier's check, by
wire transfer, by money order, with Common Stock (but with Shares only if
expressly permitted by the terms of the Option), or by a combination of the
above; provided, however, that the Committee may accept a personal check in
full or partial payment. If the Option Price is permitted to be, and is, paid
in whole or in part with Common Stock, the value of the Common Stock
surrendered shall its Fair Market Value on the date surrendered.

7. EXERCISE OF OPTIONS. An Option shall be deemed exercised when
(i) the Committee has received written notice of such exercise in accordance
with the terms of the Option, and (ii) full payment of the aggregate Option
Price of the Available Shares as to which the Option is exercised has been
made. Separate stock certificates shall be issued by the Parent for any
Available Shares acquired as a result of exercising an Incentive Stock Option
and a Non-qualified Stock Option.

8. EXERCISABILITY OF OPTIONS.

(a) Each Option shall become exercisable in whole or in part and
cumulatively, and shall expire, according to the terms of the Option to the
extent not inconsistent with the express provisions of this Plan; and provided
further, without limitation, that in the case of the grant of an Option to an
officer (as that term is used in Rule 16a-1 promulgated under the 1934 Act) or
any similar rule which may subsequently be in effect, the Committee may provide
that no Available Shares acquired on the exercise of such Option shall be
transferable during such 6 month period following the Date of Grant.

(b) The Committee, in its sole discretion, may accelerate the date
on which all or any portion of an otherwise unexercisable Option may be
exercised or a restriction will lapse.

9. TERMINATION OF OPTION PERIOD.

(a) As provided in SECTION 5, and without limitation, each Option
shall be evidenced by an agreement that may contain any provisions selected by
the Committee; provided, however, that

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<PAGE> 13
in each case, unless terminated earlier under the express terms of the Option,
the unexercised portion of an Option shall automatically and without notice
terminate and become null and void on the earlier of (i) the date that Optionee
ceases to be employed by the Company, if such cessation is for Cause, (ii) the
tenth (10th) anniversary of the Date of Grant; and (iii) solely in the case of
an Incentive Stock Option, three months after the date that Optionee ceases to
be employed by the Company regardless of the reason therefor, other than a
cessation by reason of death, or Disability, in which case the date of
termination may be extended under the terms of the Incentive Stock Option
agreement.

(b) Notwithstanding any provision of SECTION 14(a) to the
contrary, if provided in an Option, the Committee may, by giving written notice
("CANCELLATION NOTICE"), cancel, effective upon the date of the consummation of
any of the transactions described in SUBSECTION 14(a), all or any portion of
such Option which remains unexercised on such date. Such Cancellation Notice
shall be given a reasonable period of time (but not less than 15 days) prior to
the proposed date of such cancellation, and may be given either before or after
shareholder approval of such corporate transaction.

10. INCENTIVE STOCK OPTIONS FOR 10% SHAREHOLDER. Notwithstanding
any other provisions of the Plan to the contrary, an Incentive Stock Option
shall not be granted to any person owning directly (or indirectly through
attribution under Section 425(d) of the Code) at the Date of Grant, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (as defined in Section 425 of the Code) at the Date of
Grant, unless the Option Price of such Incentive Stock Option is at least 110%
of the Fair Market Value on the Date of Grant of the Available Shares subject
to such Incentive Stock Option, and the period during which the Incentive Stock
Option may be exercised does not exceed five (5) years from the Date of Grant.

11. NON-QUALIFIED STOCK OPTIONS. Non-qualified Stock Options may
be granted hereunder and shall contain such terms and provisions as shall be
determined by the Committee, except that each such Non-qualified Stock Option
(i) must be clearly designated as a Non-qualified Stock Option; (ii) may be
granted for Available Shares which become exercisable in excess of the limits
contained in SUBSECTION 5(B); and (iii) shall not be subject to SECTION 10
hereof. If both Incentive Stock Options and Non-qualified Stock Options are
granted to an Optionee, the right to exercise, to the full extent thereof,
Options of either type shall not be contingent in whole or in part upon the
exercise of, or failure to exercise, Options of the other type.

12. RESTRICTED SHARE AWARDS.

(a) Each Restricted Share Award shall be evidenced by an agreement
that may contain any provisions selected by the Committee, including, without
limitation, a provision allowing the Holder, prior to the date on which the
Restrictions lapse with respect to the Restricted Shares of reference, or
within a period of 10 days after such lapse where such lapse is accelerated, to
elect to receive cash in an amount equal to the Fair Market Value of some or
all of the Restricted Shares on the date the Restrictions with respect to such
Restricted Shares lapse, in lieu of retaining the corresponding formerly
Restricted Shares; and provided, further, that in the event such a provision is
included in the Restricted Share Award of an officer (as defined in SECTION
18(l) the election to receive cash in lieu of Restricted Shares shall be
subject to the same limitations on exercise as are set forth in SECTION 18(l).
As a condition to the grant of a Restricted Share Award, the Committee shall

9
<PAGE> 14
require the Eligible Person receiving the Restricted Share Award to pay at
least an amount equal to the par value of the Restricted Shares granted under
such Restricted Share Award, and such Restricted Share Award shall
automatically terminate if such payment is not received within 30 days
following the Date of Grant. Except as otherwise provided in the express
terms and conditions of each Restricted Share Award, the Eligible Person
receiving the Restricted Share Award shall have all of the rights of a
shareholder with respect to such Restricted Shares including, but not limited
to, voting rights and the right to receive any dividends paid, subject only to
the retention provisions of the Restricted Share Distributions.

(b) The Restrictions on Restricted Shares shall lapse in whole, or
in installments, over whatever Restricted Period shall be selected by the
Committee; provided, however, that a complete lapse of Restrictions always
shall occur on or before the 9th anniversary of the Date of Grant.

(d) During the Restricted Period, the certificates representing
the Restricted Shares, and any Restricted Share Distributions, shall be
registered in the Holder's name and bear a restrictive legend disclosing the
Restrictions, the existence of the Plan, and the existence of the applicable
agreement granting such Restricted Share Award. Such certificates shall be
deposited by the Holder with the Company, together with stock powers or other
instruments of assignment, each endorsed in blank, which will permit the
transfer to the Company of all or any portion of the Restricted Shares, and any
assets constituting Restricted Share Distributions, which shall be forfeited in
accordance with the applicable agreement granting such Restricted Share Award.
Restricted Shares shall constitute issued and outstanding Common Stock for all
corporate purposes and the Holder shall have all rights, powers and privileges
of a Holder of unrestricted Shares except that the Holder will not be entitled
to delivery of the stock certificates until all Restrictions shall have
terminated, and the Company will retain custody of all related Restricted Share
Distributions (which will be subject to the same Restrictions, terms, and
conditions as the related Restricted Shares) until the conclusion of the
Restricted Period with respect to the related Restricted Shares; and provided,
further, that any Restricted Share Distributions shall not bear interest or be
segregated into a separate account but shall remain a general asset of the
Company, subject to the claims of the Company's creditors, until the conclusion
of the applicable Restricted Period; and provided, finally, that any material
breach of any terms of the agreement granting the Restricted Share Award, as
reasonably determined by the Committee will cause a forfeiture of both
Restricted Shares and Restricted Share Distributions.

13. PERFORMANCE AWARDS.

(a) The Committee may grant Performance Awards, which may in the
sole discretion of the Committee represent a Share or be related to the
increase in value of a Share, or be contingent on the Company's achievement of
the specified performance measures during the Performance Period, including,
without limitation, performance shares, convertible preferred stock,
convertible debentures, exchangeable securities and Restricted Share Awards or
Options valued by reference to earnings per Share or Subsidiary performance,
may be granted either alone, in addition to, or in tandem with, other Awards
and cash awards made outside of the Plan. The Committee shall establish the
performance measures for each Performance Period, and such performance
measures, and the duration of any

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<PAGE> 15
Performance Period, may differ with respect to each Eligible Person who
receives a Performance Award, or with respect to separate Performance Awards
issued to the same Eligible Person. The performance measures, the medium of
payment, the Performance Period(s) and any other conditions to the Company's
obligation to pay such Performance Award in full or in part, shall be set forth
in the written agreement evidencing each Performance Award.

(b) The Committee shall determine the manner and medium of payment
of each Performance Award.

(c) Unless otherwise expressly provided in the agreement
evidencing the Performance Award, the Holder of the Performance Award must
remain employed by the Company until the end of the Performance Period in order
to be entitled to any payment under such Performance Award; provided, however,
that the Committee expressly may provide in the agreement granting such
Performance Award that such Holder may become entitled to a specified portion
of the amount earned under such Performance Award based on one or more
specified period(s) of time between the Date of Grant of such Performance Award
and such Holder's termination of employment by the Company prior to the end of
the Performance Period.

14. ACCELERATION ON CHANGE IN CONTROL.

(a) In the event of either a Change in Control, or a Potential
Change in Control, unless otherwise expressly provided by the Committee prior
to such event, (i) all Awards, other than Performance Awards, shall become
fully exercisable, nonforfeitable, or the Restricted Period shall terminate, as
the case may be (hereafter, in this SECTION 14, such Award shall be
"accelerated") and (ii) the value of all outstanding Non-qualified Stock
Options, Stock Appreciation Rights, Restricted Stock, and Outside Director
Options shall be cashed out on the basis of the Change in Control Price,
effective as the date of the Change in Control, or on such other date as the
Committee may determine prior to the Change in Control.

(b) Notwithstanding any provisions hereof to the contrary, if an
Award is accelerated under SUBSECTION 14(b), the portion of the Award which is
accelerated is limited to that portion which can be accelerated without causing
the Holder to have an "excess parachute payment" as determined under Section
280G of the Code, determined by taking into account all of the Holder's
"parachute payments" determined under Section 280G of the Code, all as
reasonably determined by the Committee.

15. ADJUSTMENT OF AVAILABLE SHARES.

(a) If at any time while the Plan is in effect or Awards with
respect to Available Shares are outstanding, there shall be any increase or
decrease in the number of issued and outstanding Shares through the declaration
of a stock dividend or through any recapitalization resulting in a stock
split-up, combination or exchange of Shares, then and in such event:

(i) appropriate adjustment shall be made in the maximum
number of Available Shares which may be granted under SECTION 3, and
in the Available Shares which are then subject to each Award, so that
the same proportion of the Parent's issued and outstanding Common
Stock shall continue to be subject to grant under SECTION 3, and to
such Award, and

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<PAGE> 16
(ii) in addition, and without limitation, in the case of
each Award (including, without limitation, Options) which requires the
payment of consideration by the Holder in order to acquire Shares, an
appropriate adjustment shall be made in the consideration (including,
without limitation the Option Price) required to be paid to acquire
the each Share, so that (i) the aggregate consideration to acquire all
of the Shares subject to the Award remains the same and, (ii) so far
as possible (and without disqualifying an Incentive Stock Option) as
reasonably determined by the Committee in its sole discretion, the
relative cost of acquiring each Share subject to such Award remains
the same.

(b) The Committee may change the terms of Options outstanding
under this Plan, with respect to the Option Price or the number of Available
Shares subject to the Options, or both, when, in the Committee's judgment, such
adjustments become appropriate by reason of a corporate transaction (as defined
in Treasury Regulation Section 1.425-1(a)(1)(ii)); provided, however, that if
by reason of such corporate transaction an Incentive Stock Option is assumed or
a new option is substituted therefore, the Committee may only change the terms
of such Incentive Stock Option such that (i) the excess of the aggregate Fair
Market Value of the Shares subject to option immediately after the substitution
or assumption, over the aggregate option price of such Shares, is not more than
the excess of the aggregate Fair Market Value of all Available Shares subject
to the Option immediately before such substitution or assumption over the
aggregate Option Price of such Available Shares, and (ii) the new option, or
the assumption of the old Incentive Stock Option does not give the Optionee
additional benefits which he did not have under the old Incentive Stock Option.

(c) Except as otherwise expressly provided herein, the issuance by
the Parent of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Parent convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof shall be made with respect to Available Shares subject to Awards
granted under the Plan.

(d) Without limiting the generality of the foregoing, the
existence of outstanding Awards with respect to Available Shares granted under
the Plan shall not affect in any manner the right or power of the Parent to
make, authorize or consummate (1) any or all adjustments, recapitalizations,
reorganizations or other changes in the Parent's capital structure or its
business; (2) any merger or consolidation of the Parent; (3) any issue by the
Parent of debt securities, or preferred or preference stock which would rank
above the Available Shares subject to outstanding Awards; (4) the dissolution
or liquidation of the Parent; (5) any sale, transfer or assignment of all or
any part of the assets or business of the Company; or (6) any other corporate
act or proceeding, whether of a similar character or otherwise.

16. TRANSFERABILITY OF AWARDS. Each Award shall provide that such
Award shall not be transferable by the Holder otherwise than by will or the
laws of descent and distribution, or, if so provided in the Award, (a) that
such Award is transferable, in whole or in part, without payment of
consideration, to members of the Holder's Immediate Family, to trusts for such
Immediate Family

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<PAGE> 17
members, or to partnerships whose only partners are such
Immediate Family members, or (b) except as prohibited by Rule 16b-3, to a
person or other entity for which the Holder is entitled to a deduction for a
"charitable contribution" under Section 170(a)(i) of the Code (provided, in
each such case that no further transfer by any such permitted transferee(s)
shall be permitted); provided, further, that in each case the exercise of the
Award will remain the power and responsibility of the Holder and that so long
as the Holder lives, only such Holder (even if pursuant to the legal direction
of the person to whom a charitable contribution has been made) or his guardian
or legal representative shall have the rights set forth in such Award.

17. ISSUANCE OF SHARES. No Holder or other person shall be, or
have any of the rights or privileges of, the owner of Shares subject to an
Award unless and until certificates representing such Common Stock shall have
been issued and delivered to such Holder or other person. As a condition of
any issuance of Common Stock, the Committee may obtain such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to
assure compliance with any such law or regulation including, but not limited
to, the following:

(i) a representation, warranty or agreement by the Holder
to the Parent, at the time any Shares are transferred, that he is
acquiring the Shares to be issued to him for investment and not with a
view to, or for sale in connection with, the distribution of any such
Shares; and

(ii) a representation, warranty or agreement to be bound
by any legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities law deemed
by the Committee to be applicable to the issuance of the Shares and
are endorsed upon the Share certificates.

Share certificates issued to the Holder receiving such Shares who are
parties to any shareholders agreement or any similar agreement shall bear the
legends contained in such agreements. Notwithstanding any provision hereof to
the contrary, no Shares shall be required to be issued with respect to an Award
unless counsel for the Parent shall be reasonably satisfied that such issuance
will be in compliance with applicable Federal or state securities laws.

18. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION
RIGHTS.

(a) The Committee shall have authority to grant a SAR, or to grant
a Limited SAR with respect to all or some of the Available Shares covered by
any Option ("RELATED OPTION"), or with respect to, or as some or all of, a
Performance Award ("RELATED PERFORMANCE AWARD"). A SAR or Limited SAR granted
with respect to an Incentive Stock Option must be granted on the Date of Grant
of such related Option. A SAR or Limited SAR granted with respect to a Related
Non-qualified Stock Option or a Performance Award, may be granted on or after
the Date of Grant of such Related Option or Related Performance Award.

(b) For the purposes of this SECTION 18, the following definitions
shall apply:

(i) The term "OFFER" shall mean any tender offer or
exchange offer for thirty percent (30%) or more of the outstanding
Common Stock of the Parent, other than one made by the PARENT;
provided that the corporation, person or other entity making the Offer
acquires Common Stock pursuant to such Offer.

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<PAGE> 18
(ii) The term "OFFER PRICE PER SHARE" shall mean the
highest price per Share paid in any Offer which is in effect at any
time during the period beginning on the sixtieth (60th) day prior to
the date on which a Limited SAR is exercised and ending on the date on
which the Limited SAR is exercised. Any securities or properties
which are a part or all of the consideration paid or to be paid for
Common Stock in the Offer shall be valued in determining the Offer
Price Per Share at the higher of (1) the valuation placed on such
securities or properties by the person making such Offer, or (2) the
valuation placed on such securities or properties by the Committee.

(iii) The term "LIMITED SAR" shall mean a right granted
under this Plan with respect to a Related Option or Related
Performance Award, that shall entitle the Holder to an amount in cash
equal to the Offer Spread in the event an Offer is made.

(iv) The term "OFFER SPREAD" shall mean, with respect to
each Limited SAR, an amount equal to the product of (1) the excess of
(A) the Offer Price Per Share immediately preceding the date of
exercise over (B) (x) if the Limited SAR is granted in tandem with an
Option, then the Option Price per Share of the Related Option, or (y)
if the Limited SAR is issued with respect to a Performance Award, the
Agreed Price under the Related Performance Award, multiplied by (2)
the number of Available Shares with respect to which such Limited SAR
is being exercised; provided, however that with respect to any Limited
SAR granted in tandem with an Incentive Stock Option, in no event
shall the Offer Spread exceed the amount permitted to be treated as
the Offer Spread under applicable Treasury Regulations or other legal
authority without disqualifying the Option as an Incentive Stock
Option.

(v) The term "SAR" shall mean a right granted under this
Plan, including, without limitation, a right granted in tandem with an
Award, that shall entitle the Holder thereof to an amount in cash
equal to the Spread.

(vi) The term "SAR SPREAD" shall mean with respect to each
SAR an amount equal to the product of (1) the excess of (A) the Fair
Market Value per Share on the date of exercise over (B) (x) if the SAR
is granted in tandem with an Option, then the Option Price per Share
of the Related Option, (y) if the SAR is granted in tandem with a
Performance Award, the Agreed Price under the Related Performance
Award, or (z) if the SAR is granted by itself with respect to a
designated number of Available Shares, then whichever of the FMV of
the Available Shares on the Date of Grant, or the Agreed Price, shall
be designated in the SAR agreement, in each case multiplied by (2) the
number of Available Shares with respect to which such SAR is being
exercised; provided, however, that with respect to any SAR granted in
tandem with an Incentive Stock Option, in no event shall the SAR
Spread exceed the amount permitted to be treated as the SAR Spread
under applicable Treasury Regulations or other legal authority without
disqualifying the Option as an Incentive Stock Option.

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<PAGE> 19
(c) To exercise the SAR or Limited SAR, the Holder shall:

(i) Give written notice thereof to the Company,
specifying the SAR or Limited SAR being exercised and the number or
Available Shares with respect to which such SAR or Limited SAR is
being exercised, and

(ii) If requested by the Company, deliver within a
reasonable time the agreement evidencing the SAR or Limited SAR being
exercised, and the Related Option agreement, or Related Performance
Award agreement, to the Secretary of the Company who shall endorse or
cause to be endorsed thereon a notation of such exercise and return
all agreements to the Holder.

(d) As soon as practicable after the exercise of a SAR or Limited
SAR, the Company shall pay to the Holder (i) cash, (ii) at the request of the
Holder and the approval of the Committee, or in accordance with the terms of
the Award, Shares, or (iii) a combination of cash and Shares, having a Fair
Market Value equal to either the SAR Spread, or to the Offer Spread, as the
case may be; provided, however, that the Company may, in its sole discretion,
withhold from such payment any amount necessary to satisfy the Company's
obligation for federal and state withholding taxes with respect to such
exercise.

(e) A SAR or Limited SAR may be exercised only if and to the
extent that it is permitted under the terms of the Award which, in the case of
a Related Option, shall be only when such Related Option is eligible to be
exercised; provided, however, a Limited SAR may be exercised only during the
period beginning on the first day following the date of expiration of the Offer
and ending on the thirtieth (30th) day following such date.

(f) Upon the exercise or termination of a Related Option, or the
payment or termination of a Related Performance Award, the SAR or Limited SAR
with respect to such Related Option or Related Performance Award likewise shall
terminate.

(g) A SAR or Limited SAR shall be transferable only to the extent,
if any, that the Related Award is transferable, and under the same conditions.

(h) A SAR or Limited SAR granted with respect to an Incentive
Stock Option may be exercised only when the Fair Market Value of the Available
Shares exceeds the Option Price.

(i) Each SAR or Limited SAR shall be on such terms and conditions
not inconsistent with this Plan as the Committee may determine and shall be
evidenced by a written agreement.

(j) The Holder shall have no rights as a stockholder with respect
to the related Available Shares as a result of the grant of a SAR or Limited
SAR.

(k) With respect to a Holder who, on the date of a proposed
exercise of a SAR or Limited SAR, is an officer (as that term is used in Rule
16a-1 promulgated under the 1934 Act or any similar rule which may subsequently
be in effect), and who would receive cash in whole or in part upon the proposed
exercise of his SAR, or Limited SAR such proposed exercise may only occur as
permitted

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<PAGE> 20
by Rule 16b-3, including without limitation paragraph (e)(3)(iii) (or any
similar rule which may subsequently be in effect promulgated pursuant to
Section 16(b) of the 1934 Act) which, at the date of adopting this Plan, among
other things, permits exercise during a period beginning on the third (3rd)
business day following the Parent's public release of quarterly or annual
summary statements of sales and earnings and ending on the twelfth (12th)
business day following such public release.

19. ADMINISTRATION OF THE PLAN.

(a) The Plan shall be administered by the Committee and, except
for the powers reserved to the Board in SECTION 22 hereof, the Committee shall
have all of the administrative powers under Plan. The initial Committee shall
be the Compensation Committee of the Board. In the event there are not at
least two Non- Employee Directors on the Board, the Plan shall be administered
by the Board and all references herein to the Committee shall refer to the
Board.

(b) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan and, without limitation,
may delegate all of what, in its sole discretion, it determines to be
ministerial duties to an officer of the Parent. The determinations under, and
the interpretations of, any provision of the Plan or an Award by the Committee
shall, in all cases, be in its sole discretion, and shall be final and
conclusive.

(c) Any and all determinations and interpretations of the
Committee shall be made either (i) by a majority vote of the members of the
Committee at a meeting duly called, with at least 3 days prior notice and a
general explanation of the subject matter given to each member, or (ii) without
a meeting, by the written approval of all members of the Committee.

(d) No member of the Committee shall be liable for any action
taken or omitted to be taken by him or by any other member of the Committee
with respect to the Plan, and to the extent of liabilities not otherwise
insured under a policy purchased by the Company, the Company does hereby
indemnify and agree to defend and save harmless any member of the Committee
with respect to any liabilities asserted or incurred in connection with the
exercise and performance of their powers and duties hereunder, unless such
liabilities are judicially determined to have arisen out of such member's gross
negligence, fraud or bad faith. Such indemnification shall include attorney's
fees and all other costs and expenses reasonably incurred in defense of any
action arising from such act of commission or omission. Nothing herein shall
be deemed to limit the Company's ability to insure itself with respect to its
obligations hereunder.

(e) In particular, and without limitation, the Committee shall
have the authority, consistent with the terms of the Plan:

(i) to select the officers, key employees of and
consultants to the Company to whom Awards may from time to time be
granted hereunder;

(ii) to determine whether and to what extent Awards are to
be granted hereunder to one or more eligible persons;

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<PAGE> 21
(iii) to determine the number of Shares to be covered by
each such Award granted hereunder;

(iv) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Award granted
hereunder (including, but not limited to, the Agreed Value and any
restriction or limitation, or any vesting acceleration or waiver of
forfeiture restrictions, based in each case on such factors as the
Committee shall determine, in its sole discretion); and to amend or
waive any such terms and conditions to the extent permitted by the
Plan;

(v) to determine whether and under what circumstances an
Option may be settled in cash or Restricted Shares instead of Shares;

(vi) to determine whether, to what extent, and under what
circumstances Awards under the Plan are to be made, and operate, on a
tandem basis vis-a-vis other Awards under the Plan and/or cash awards
made outside of the Plan;

(vii) to determine whether and to what extent, and under
what circumstances Shares and other amounts payable with respect to an
Award shall be deferred either automatically or at the election of the
Holder (including providing for and determining the amount (if any) of
any deemed earnings on any deferred amount during any deferral
period); and

(viii) to determine whether to require payment of tax
withholding requirements in Shares and to impose any holding period
required to satisfy Section 16 under the Exchange Act.

(f) The Committee shall have the authority to adopt, alter, and
repeal such rules, guidelines, and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan; provided, however,
that to the extent that this Plan otherwise requires the approval of the Board
or the shareholders of the Parent, all decisions of the Committee shall be
subject to such Board or shareholder approval. Subject to the foregoing, and
without limitation, all decisions made by the Committee pursuant to the
provisions of the Plan shall be made in the Committee's sole discretion and
shall be final and binding on all persons, including the Company and Holders.

20. TAX WITHHOLDING. On or immediately prior to the date on which
a payment is made to a Holder hereunder or, if earlier, the date on which an
amount is required to be included in the income of the Holder as a result of an
Award, the Holder shall be required to pay to the Company, in cash or in Shares
(including, but not limited to, the reservation to the Company of the requisite
number of Available Shares otherwise payable to such Holder with respect to
such Award) the amount which the Company reasonably determines to be necessary
in order for the Company to comply with applicable federal or state tax
withholding requirements, and the collection of employment taxes, if
applicable; provided, further, that the Committee may require that such payment
be made in cash.

17
<PAGE> 22
21. INTERPRETATION.

(a) If any provision of the Plan is held invalid for any reason,
such holding shall not affect the remaining provisions hereof, but instead the
Plan shall be construed and enforced as if such provision had never been
included in the Plan.

(b) THIS PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

(c) Headings contained in this Agreement are for convenience only
and shall in no manner be construed as part of this Plan.

(d) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.

(e) The Plan is intended to constitute an "unfunded" plan for
incentive and deferred compensation. With respect to any payments not yet made
to a Holder, nothing contained herein shall give any such Holder any rights
that are greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Common
Stock or payments in lieu of or with respect to Awards hereunder; provided,
however, that, unless the Committee otherwise determines with the consent of
the affected Holder, the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.

(f) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.

22. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Board, or the
Committee (subject to the prior written authorization of the Board), may from
time to time amend the Plan or any Award; provided, however, that [except to
the extent provided in SECTION 9(B) AND 15 hereof] no such amendment may,
without approval by the shareholders of the Parent, (a) increase the number of
Available Shares or change the class of Eligible Persons, (b) permit the
granting of Awards which expire beyond the maximum 10-year period described in
SUBSECTION 9(A)(II), (c) extend the termination date of the Plan as set forth
in SECTION 25, (d) increase the Section 162(m) Maximum; (e) amend SECTION 24 so
as to materially increase the benefits to Outside Directors; or (f) make any
change for which applicable law or regulatory authority (including the
regulatory authority of the NYSE or any other market or exchange on which the
Common Stock is traded) would require shareholder approval or for which
shareholder approval would be required to secure all deductibility of
compensation received under the Plan under Section 162(m) of the Code; and
provided, further, that no amendment or suspension of the Plan or any Award
issued hereunder shall, except as specifically permitted in this Plan or under
the terms of such Award, substantially impair any Award previously granted to
any Holder without the consent of such Holder. Solely for purposes of
computing the Section 162(m) Maximum, if any Award(s) previously granted is
canceled and new Award(s) having a lower Option Price or other more favorable
terms for the Holder are substituted in their place, both the initial Award(s)
and the replacement Award(s) will be deemed to be outstanding (although the
canceled Award(s) will not be exercisable or deemed outstanding for any other
purposes).

<PAGE> 23
23. SECTION 83(b) ELECTION. If as a result of receiving an Award,
a Holder receives Restricted Shares subject to a "substantial risk of
forfeiture", then such Holder may elect under Section 83(b) of the Code to
include in his gross income, for his taxable year in which the Restricted
Shares are transferred to him, the excess of the Fair Market Value (determined
without regard to any Restriction other than one which by its terms will never
lapse), of such Restricted Shares at the Date of Grant, over the amount paid
for the Restricted Shares. If the Holder makes the Section 83(b) election
described above, the Holder shall (i) make such election in a manner that is
satisfactory to the Committee, (ii) provide the Committee with a copy of such
election, (iii) agree to promptly notify the Company if any Internal Revenue
Service or state tax agent, on audit or otherwise, questions the validity or
correctness of such election or of the amount of income reportable on account
of such election, and (iv) agree to such federal and state income withholding
as the Committee may reasonably require in its sole and absolute discretion.

24. AWARDS TO OUTSIDE DIRECTORS.

(a) The provisions of this SECTION 24 shall apply only to Awards
to Outside Directors in accordance with this SECTION 24. The Committee shall
have no authority to determine the timing of or the terms or conditions of any
award under this SECTION 24.

(b) At the date of the Parent's initial public offering, each
person serving as an Outside Director on such date will receive a Non-qualified
Stock Option to purchase 9,000 Shares at a per Share Option Price equal to the
initial public offering price. Such Option shall vest and become exercisable
with respect 3,000 Shares on each of the annual meeting of shareholders
("Annual Meeting") dates, beginning with the Annual Meeting in 1998.

(c) If any person who was not previously a member of the Board is
elected or appointed an Outside Director following the initial public offering
but prior to the date of the Annual Meeting in the year 2000, such Outside
Director will receive a Non-qualified Stock Option to purchase 7,000 Shares if
such Outside Director's service begins prior to the second anniversary of the
initial public offering, and 5,000 Shares if such Outside Directors service
begins after the second anniversary of the initial public offering but prior to
the date of the Annual Meeting in the year 2000. It is intended that such
grant may be increased or decreased to extent deemed appropriate by the Board,
in its sole discretion, to reflect the extent to which Director's expected
service prior to the Annual Meeting in 2000 may exceed two years or may be less
than one full year. The Option Price of each option granted pursuant to this
SECTION 24(c) shall equal the Fair Market Value on the Date of Grant. Options
granted under this SECTION 24(c) shall vest and become exercisable with respect
to 33.3% of the Shares on each Annual Meeting date following the Date of Grant.

(d) On the date of each Annual Meeting, beginning with the Annual
Meeting in 2000, unless this Plan has been previously terminated, each Outside
Director who will continue as a Director following such meeting will receive a
Non-qualified Stock Option to purchase 3,000 Shares. The Option Price per each
Option granted pursuant to this SECTION 24(d) shall equal the Fair Market Value
per Share on the Date of Grant. Such Option shall vest and become exercisable
with respect

<PAGE> 24
to all 3,000 Shares on the date of the next Annual Meeting if the Holder has
been a member of the Board until such date (whether or not such Holder will
remain a Director following such Annual Meeting).

(e) No Outside Director Option shall be exercisable prior to
vesting. Each Outside Director Option shall expire, if unexercised, on the
tenth anniversary of the Date of Grant. The Option Price may be paid in cash
or in Common Stock, including Shares subject to the Outside Director Option.

(f) Upon termination of an Outside Director's service as a
Director, all Outside Director Options theretofore exercisable and held by such
Outside Director will remain vested and exercisable through the expiration date
and all remaining Outside Director Options held by such Outside Director will
become exercisable and vested and remain so through the expiration date to the
extent of any Shares that would have become exercisable and vested within a
period of less than twelve months following the date of termination of his or
her status as Director. Any unvested Outside Director Options held by the
Outside Director on the date of termination of his or her status as Director
will be forfeited to the extent of any Shares that would not have become vested
and exercisable until at least twelve months from the date of termination of
his or her status as Director. The Board may, in its sole discretion, elect to
accelerate the vesting of any Outside Director Options in connection with the
termination of his or her status as Director.

(g) The Board, in its sole discretion, may determine to reduce the
size of any Outside Director Option prior to Date of Grant or to postpone the
vesting and exercisability of any Outside Director Option prior to Date of
Grant.

25. EFFECTIVE DATE AND TERMINATION DATE. The Plan shall be
effective as of its Effective Date, and shall terminate on the tenth
anniversary of such Effective Date.

CAPITAL SENIOR LIVING
CORPORATION

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

<PAGE> 1
EXHIBIT 10.9

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is made
and entered into on the 7th day of May, 1997, by and between Capital Senior
Living Corporation, a Delaware corporation ("CSL" or "the Company"), and
Jeffrey L. Beck, an individual residing in the State of Texas ("Employee").

1. EMPLOYMENT COMMENCEMENT; APPOINTMENT, TITLE AND DUTIES.

A) This Agreement shall commence upon the date on which
the Company, or a Designated Affiliate of the Company
(hereinafter defined) which controls the Company or
into which the Company merges, consolidates or
otherwise combines, has consummated a public offering
of its common stock ("Employment Commencement Date").
This Agreement shall terminate in the event the
Employment Commencement Date does not occur on or
before June 30, 1998.

B) CSL hereby employs Employee to serve in the positions
of Chief Executive Officer and as Co-Chairman of its
Board of Directors and a member of the Executive
Committee of the Board. In such capacity, Employee
shall report to the Board of Directors of CSL and
shall have such powers, duties and responsibilities
as are customarily assigned to the Chief Executive
Officer and Co-Chairman. In addition Employee shall
have such other duties and responsibilities as may
reasonably be assigned to him by the Company's Board
of Directors, including serving with the consent or
at the request of CSL on the board of directors of
affiliated corporations.

2. TERM OF AGREEMENT. The initial term of this Agreement shall be
for a four (4) year period commencing on the Employment Commencement Date;
however, the term of this Agreement shall automatically be extended on each
anniversary of the Employment Commencement Date so that there are three (3)
years remaining on the term of the Agreement. Except as set forth in Paragraph
14, this Agreement shall terminate upon the earlier of: (i) the date of the
voluntary resignation of Employee, (ii) the date of Employee's death or
determination of Employee's disability (as defined in Paragraph 6 below), (iii)
the date of notice by CSL to Employee that this Agreement is being terminated
by CSL whether "for cause" (as defined in Paragraph 6 below) or without cause,
or (iv) upon the date a notice of intent to resign for "good reason" (as
defined in Paragraph 6 below) is delivered to the Company by Employee.

3. ACCEPTANCE OF POSITION. Employee hereby accepts the positions
assigned by the Board of Directors, and agrees that during the term of this
Agreement he will perform his duties in a reasonable amount of time. Employee
agrees to perform his duties faithfully, diligently and to the best of his
ability, to use his best efforts to advance the best interests of the Company
at all times.
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<PAGE> 2
4. SALARY AND BENEFITS. During the term of this Agreement:

A) CSL shall pay to Employee a base salary at an annual
rate of not less than $175,000.00 per annum, paid
in approximately equal installments no less
frequently than semi-monthly. Employee shall be
eligible for an annual bonus, if available, as
determined by the Compensation Committee of the
Company (or the Company's Board of Directors if no
Compensation Committee has been established),
starting with the Employment Commencement Date.
Employee shall receive a performance and compensation
review on or about each anniversary of the Employment
Commencement Date. The Company shall deduct from
Employee's compensation and bonus all applicable
local, state, Federal or foreign taxes, including,
but not limited to, income tax, withholding tax,
social security tax and pension contributions (if
any).

B) Employee shall participate in all health, retirement,
Company-paid insurance, sick leave, disability,
expense reimbursement and other benefit programs, if
any, which CSL makes available, in its sole
discretion, to its senior executives; however,
nothing herein shall be construed to obligate the
Company to establish or maintain any employee benefit
program. The Company may purchase and maintain in
force a death and disability insurance policy in an
amount at all times equal to not less than an amount
equal to Employee's annual base salary multiplied by
three (3). The Company shall be the beneficiary of
said policy and shall use said policy for the
purposes described in Paragraph 7(A)(i), below.
Reimbursement of Employee's reasonable and necessary
business expenses incurred in the pursuit of the
business of the Company or any of its affiliates
shall be made to Employee upon his presentation to
the Company of itemized bills, vouchers or
accountings prepared in conformance with applicable
regulations of the Internal Revenue Service and the
policies and guidelines of the Company.

C) Employee shall be entitled to a minimum vacation time
in an amount of eight (8) weeks per year.

D) The Company agrees to provide Employee with a car
allowance of $300.00 per month, which shall be paid
when Employee's base salary is paid, gasoline credit
cards, and a long distance telephone credit card.
The Company also agrees to promptly reimburse
Employee for the cost of obtaining a mobile phone and
the monthly charges from the use of such mobile phone
upon Employee's submission of reasonably satisfactory
documentation of those costs and expenses to the
Company.

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<PAGE> 3
5. STOCK OPTIONS. If the Company adopts a stock option plan or other
incentive compensation plan, Employee shall receive options to purchase Company
Common Stock. The number of shares of Common Stock of the Company covered by
options to be granted to Employee and the exercise price of the options shall
be determined by the Compensation Committee, if it exists, and in the absence
of a Compensation Committee, by the Board of Directors. The number of shares,
exercise price and other terms of such options shall be at least as favorable
to Employee as those contained in options granted to the Company's chief
executive officer or any other officer of the Company and its subsidiaries.

6. CERTAIN TERMS DEFINED. For purposes of this Agreement:

A) Employee shall be deemed to be disabled if a physical
or mental condition shall occur and persist which, in
the written opinion of two (2) licensed physicians,
has rendered Employee unable to perform the duties of
Chief Executive Officer, Co-Chairman and member of
the Board of Directors of CSL for a period of ninety
(90) consecutive calendar days or more, and which
condition, in the opinion of such physicians, is
likely to continue for an indefinite period of time,
rendering Employee unable to return to his duties for
CSL. One (1) of the two (2) physicians shall be
selected in good faith by the Board of Directors of
CSL, and the other of the two (2) physicians shall be
selected in good faith by Employee. In the event
that the two (2) physicians selected do not agree as
to whether Employee is disabled, as described above,
then said two (2) physicians shall mutually agree
upon a third (3rd) physician whose written opinion as
to Employee's condition shall be conclusive upon CSL
and Employee for purposes of this Agreement.

B) A termination of Employee's employment by CSL shall
be deemed to be "for cause" if it is based upon (i) a
final, nonappealable conviction of Employee for
commission of a felony involving moral turpitude,
(ii) Employee's willful gross misconduct that causes
material economic harm to the Company or that brings
substantial discredit to the Company's reputation, or
(iii) Employee's material failure or refusal to
perform his duties in accordance with this Agreement,
if Employee has failed to cure such failure or
refusal to perform within thirty (30) days after the
Company notifies Employee in writing of such failure
or refusal to perform.

C) A resignation by Employee shall not be deemed to be
voluntary, and shall be deemed to be a resignation
for "good reason" if it is based upon (i) a material
diminution or change in Employee's duties, base
salary or annual minimum bonus which is not part of
an overall diminution or change for all executive
officers of the Company, or (ii) a material breach by
CSL of the Company's obligations to Employee under
this Agreement or under

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<PAGE> 4
the Company's stock option or incentive compensation
plan, if adopted, or (iii) a relocation of the
company's principal executive offices to any county
other than Dallas County or any county contiguous
thereto.

D) "Designated Affiliate of the Company" shall mean
Capital Senior Living Corporation, Capital Senior
Development, Inc., Capital Senior Management 1, Inc.,
Capital Senior Management 2, Inc. or other
affiliated entities formed to provide similar
services, such as Capital Senior Management 3, Inc.,
and Quality Home Health Care, Inc.

E) "Registration Event" shall mean the Company or any
Designated Affiliate of the Company has terminated
Employee other than "for cause," as described above,
or Employee's resignation for good reason. The date
on which a Registration Event occurs shall be the
date of termination.

F) "Affiliate" with regard to Employee means a person
that is controlled by him. For purposes of this
definition, "Control" when used with respect to any
person means the power to direct the management and
policies of such person, whether through the
ownership of voting securities, by contract or
otherwise.

7. CERTAIN BENEFITS AND OBLIGATIONS UPON TERMINATION.

A) In the event that Employee's employment terminates
(i) because of death or disability, (ii) because CSL
has terminated Employee other than "for cause," as
described above, or (iii) because Employee has
voluntarily resigned for "good reason," as described
above, then,

i) CSL shall pay Employee in accordance with its
Corporate Policies and Procedures Manual his
base salary plus his minimum annual bonus for
the balance of the term of this Agreement,
but not less than two (2) years (base salary
plus minimum annual bonus for three (3) years
if termination due to a Fundamental Change)
from the date of the notice of termination,
and Employee shall retain all his Company
stock options that are vested; provided,
however, the benefits described in this
Paragraph 7(A)(i) shall terminate at such
time as Employee materially breaches the
provisions of Paragraphs 8 or 9 hereof;

ii) A Fundamental Change shall be defined as any
of the following: (A) a merger,
consolidation, statutory share exchange or
sale, lease, exchange or other transfer (in
one transaction or a series of related
transactions) of all or substantially all of
the assets of the Company that requires the
consent or vote of the holders of the
-4-
<PAGE> 5
Company's Common Stock, other than a
consolidation, merger or share exchange of
the Company in which the holders of the
Company's Common Stock immediately prior to
such transaction have the same proportionate
ownership of Common Stock of the surviving
corporation immediately after such
transaction; (B) the stockholders of the
Company approve any plan or proposal for the
liquidation or dissolution of the Company;
(C) the cessation of control (by virtue of
their not constituting a majority of
directors) of the Board of Directors of the
Company by the individuals (the "Continuing
Directors") who (x) at the date of this
Agreement were directors or (y) become
directors after the date of this Agreement
and whose election or nomination for election
by the Company's stockholders was approved by
a vote of at least two-thirds of the
directors then in office who were directors
at the date of this Agreement or whose
election or nomination for election was
previously so approved; (D) the acquisition
of beneficial ownership (within the meaning
of Rule 13d- 3 under the Securities Exchange
Act of 1934) of an aggregate of 20% or more
of the voting power of the Company's
outstanding voting securities by any person
or group (as such term is used in Rule 13d-5
under the Securities Exchange Act of 1934)
who beneficially owned less than 15% of the
voting power of the Company's outstanding
voting securities on the date of this
Agreement, or the acquisition of beneficial
ownership of an additional 5% of the voting
power of the Company's outstanding voting
securities by any person or group who
beneficially owned at least 15% of the voting
power of the Company's outstanding voting
securities on the date of this Agreement;
provided, however, that notwithstanding the
foregoing, an acquisition shall not
constitute a Fundamental Change hereunder if
the acquiror is (x) a trustee or other
fiduciary holding securities under an
employee benefit plan of the Company and
acting in such capacity, (y) a wholly-owned
subsidiary of the Company or a corporation
owned, directly or indirectly, by the
stockholders of the Company in the same
proportions as their ownership of voting
securities of the Company or (z) any other
person whose acquisition of shares of voting
securities is approved in advance by a
majority of the Continuing Directors; or (E)
in a Title 11 bankruptcy proceeding, the
appointment of a trustee or the conversion of
a case involving the Company to a case under
Chapter 7.

iii) All accrued but unpaid or unused vacation,
sick pay and expense reimbursement shall be
calculated in accordance with CSL's Corporate
Policies and Procedures Manual and shall be
promptly paid to Employee upon such
termination.

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<PAGE> 6
B) In the event that Employee's employment terminates
for any other cause other than those set forth in
Paragraph 7(A), then,

i) CSL shall promptly pay Employee his base
salary and prorated minimum base bonus, up to
and through the date of termination; and

ii) All accrued but unpaid or unused vacation,
sick pay and expense reimbursement shall be
calculated in accordance with CSL's Corporate
Policies and Procedures Manual and promptly
paid to Employee.

C) In the event that Employee's employment terminates by
reason of his death, all benefits provided in this
Paragraph 7 shall be paid to Employee's estate or as
his executor or personal representative shall direct,
but payment may be deferred until Employee's executor
or personal representative has been appointed and
qualified pursuant to the law in effect in Employee's
jurisdiction of residence at the time of his death;

D) Registration Right.

i) Upon and following the occurrence of a
Registration Event, Employee shall have the
right, but not the obligation, to:

(A) Upon the written request of the
Employee delivered to the Company,
the Company will cause up to 100% of
the shares of Common Stock
beneficially owned by Employee
(directly or indirectly) as of the
date of such termination, plus all
shares of Common Stock that Employee
may acquire after his termination
pursuant to the exercise of stock
options held by Employee
(collectively, the "Registrable
Securities") to be included in a
registration statement under the
Securities Act of 1933, as amended
("Securities Act"). The Company
will not be required to file more
than two (2) registration statements
under this Paragraph D(i)(A) and
shall not be required to file more
than one registration statement
under this paragraph D(i)(A) during
each 12 month period after the date
of the Registration Event; and

(B) If the Company at any time proposes
to register any of its securities
under the Securities Act for sale to
the public, whether for its own
account or for the account of other
security holders or both (except
with respect to registration
statements on Forms S-4 or S-8 or
another form not

-6-
<PAGE> 7
available for registering the
Registrable Securities for sale to
the public), each such time it will
give written notice to Employee of
its intention so to do. Upon the
written request of Employee,
received by the Company within 30
days after the giving of any such
notice by the Company, the Company
will cause the Registrable
Securities as to which registration
shall have been so requested to be
included in the securities to be
covered by the registration
statement proposed to be filed by
the Company, all to the extent
requisite to permit the sale or
other disposition by Employee (in
accordance with its written request)
of such Registrable Securities so
registered; provided, however, that
if the managing underwriter of the
Company's offering delivers in good
faith a written opinion to Employee
that either because of (A) the kind
of securities which the Employee or
the Company intends to include in
the offering or (B) the size of the
offering which Employee or the
Company intend to make, the success
of the offering or the market for
the Company's common stock would be
materially and adversely affected by
the inclusion of the Registrable
Securities requested to be included
(I) in the event that the size of
the offering is the basis for the
managing underwriter's opinion, the
amount of the securities to be
offered for the account of the
Employee and each other person
registering securities of the
Company pursuant to similar
incidental registration rights shall
be reduced pro rata to the extent
necessary to reduce the total amount
of securities to be included in such
offering to the amount reasonably
recommended by such managing
underwriter; and (II) in the event
that the combination of securities
to be offered is the basis of such
managing underwriter's opinion, 1)
the Registrable Securities and other
securities to be included in such
offering shall be reduced as
described in clause (I) above or, 2)
if the actions described in clause
(I) would, in the reasonable
judgment of the managing
underwriter, be insufficient to
substantially eliminate the material
and adverse effect that inclusion of
the Registrable Securities requested
to be included would have on such
offering, such Registrable
Securities will be excluded from
such offering. Notwithstanding the
foregoing provisions, the Company
may withdraw any registration
statement referred to in this
Paragraph D(i)(B) without thereby
incurring any liability to

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<PAGE> 8
Employee. The Company shall not be
required to register shares of
Registrable Securities of Employee
after the Company has filed two (2)
registration statements which
included Registrable Securities and
such registration statements have
become effective, remained effective
for the period of distribution, and
the transaction described therein
were closed.

(ii) If and whenever the Company is required by
Paragraph 7D(i)(A) to effect a demand
registration or Paragraph 7D(i)(B) to effect
a piggy back registration, the Company shall
as expeditiously as possible:

(a) prepare and file with the Securities
and Exchange Commission
("Commission") a registration
statement (which, in the case of an
underwritten public offering shall
be on Form S-1, Form S-2, Form S-3,
any successor forms thereto, or
other form of general applicability
satisfactory to the managing
underwriter selected as therein
provided) with respect to such
securities and use its best efforts
to cause such registration statement
to become and remain effective for
the period of the distribution
contemplated thereby ( as determined
hereinafter ); provided, however
that the Company may postpone the
filing, effectiveness, supplementing
or amending of the registration
statement for up to 90 days if, in
the good faith opinion of the
Company's Board of Directors, the
registration or sale of Registrable
Securities would adversely affect a
material financing, acquisition,
disposition of assets or stock,
merger or other comparable
transaction or would require the
Company to make public disclosure of
information the public disclosure of
which would have a material adverse
effect upon the Company. During any
time that the Company defers
amending or supplementing the
registration statement, the holders
of Registrable Securities shall
discontinue disposing of Registrable
Securities;

(b) subject to the proviso in
subparagraph (a), prepare and file
with the Commission such amendments
and supplements to such registration
statement and the prospectus used in
connection therewith as may be
necessary to keep such registration
statement effective for the period
of distribution and comply with the
provisions of the Securities Act
with respect to the disposition of
all Registrable Securities

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<PAGE> 9
covered by such registration
statement in accordance with the
intended method of disposition set
forth in such registration
statement for such period;

(c) furnish to Employee and to each
underwriter such number of copies of
the registration statement and the
prospectus included therein
(including each preliminary
prospectus) as such persons
reasonably may request in order to
facilitate the public sale or other
disposition of the Registrable
Securities covered by such
registration statement;

(d) use its best efforts to register or
qualify the Registrable Securities
covered by such registration
statement under the securities or
"blue sky" laws of such
jurisdictions as the Employee or, in
the case of an underwritten public
offering, the managing underwriter
reasonably shall request, provided
however, that the Company shall not
for any such purpose be required to
qualify generally to transact
business as a foreign corporation in
any jurisdiction where it is not so
qualified or to consent to general
service of process in any such
jurisdiction;

(e) use its best efforts to list or
qualify for quotation the
Registrable Securities covered by
such registration statement with any
securities exchange or inter-dealer
quotation system on which the common
stock of the Company is then listed
or quoted;

(f) notify Employee at any time when a
prospectus relating to Registrable
Securities is required to be
delivered under the Securities Act
or the happening of any event as a
result of which the prospectus
included in such registration
statement contains an untrue
statement of a material fact or
omits any fact necessary to make the
statements therein not misleading,
and, at the request of Employee, the
Company will prepare a supplement or
amendment to such prospectus so
that, as thereafter delivered to the
purchasers of such Registrable
Securities, such prospectus will not
contain an untrue statement of a
material fact or omit to state any
fact necessary to make the
statements therein not misleading,
provided that the 180-day period
described below will be tolled from
the time a prospectus contains such
a statement or omission until a
prospectus correcting such statement
or

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<PAGE> 10
omission has been delivered to the
Employee and may be delivered to the
purchasers of such Registrable
Securities in compliance with the
Securities Act.

(g) notify the Employee immediately, and
confirm the notice in writing, (1)
when the registration statement
becomes effective, (2) of the
issuance by the Commission of any
stop order or of the initiation, or
the threatening, of any proceedings
for that purpose, (3) of the receipt
by the Company of any notification
with respect to the suspension of
qualification of the Registrable
Securities for sale in any
jurisdiction or of the initiation,
or the threatening, of any
proceedings for that purpose, and
(4) of the receipt of any comments,
or requests for additional
information, from the Commission or
any state regulatory authority. If
the Commission or any state
regulatory authority shall enter
such a stop order or order
suspending qualification at any
time, the Company will promptly use
its best reasonable efforts to
obtain the lifting of such order;
and

(h) otherwise use its best efforts to
comply with-all applicable rules and
regulations of the Commission, and
make available to its security
holders as soon as reasonably
practicable, but not later than 15
months after the effective date of
the registration statement, a
statement covering a period of at
least 12 months beginning after the
effective date of the registration
statement, which earnings statement
shall satisfy the provisions of
Section 11(a) of the Securities Act.

For purposes hereof, the period of distribution of Registrable
Securities in a firm commitment underwritten public offering shall be deemed to
extend until each underwriter has completed the distribution of all securities
purchased by it, and the period of distribution of Registrable Securities in
any other registration shall be deemed to extend until the earlier of the sale
of all Registrable Securities covered thereby or 180 days after the effective
date thereof.

In connection with each registration hereunder, Employee will furnish
to the Company in writing such information with respect to it as a stockholder
as reasonably shall be necessary in order to assure compliance with federal and
applicable state securities laws.

In connection with each registration pursuant to Paragraph 7(D) hereof
covering an underwritten public offering, the Company and Employee agree to use
their best efforts to select a managing underwriter (and any co- managers) and
to enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.

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<PAGE> 11
(iii) All expenses incurred by the Company in
complying with Paragraph 7(D) hereof,
including, without limitation, all
registration and filing fees, printing
expenses, fees and disbursements of counsel
and independent public accountants for the
Company, fees and expenses (including counsel
fees) incurred in connection with complying
with state securities or "blue sky" laws,
fees of the National Association of
Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs
of insurance, and fees and disbursements of
one counsel for the Employee but excluding
any Selling Expenses, are called
"Registration Expenses." All underwriting
discounts and selling commissions applicable
to the sale of Registrable Securities are
called "Selling Expenses."

(a) The Company shall pay all
Registration Expenses attributable
to the shares of Registrable
Securities included in the
registration in connection with each
registration statement under
Paragraph 7(D) hereof.

(b) All Selling Expenses in connection
with each registration statement
under Paragraph 7(D) hereof shall be
borne by the Employee and any other
selling stockholder in proportion to
the number of shares sold by each
stockholder, or by such other
selling stockholders.

(iv) Subject to applicable law, the Company will
indemnify each underwriter, the Employee and
each person controlling any of them, against
all claims, losses, damages and liabilities,
including legal and other expenses reasonably
incurred, arising out of any untrue statement
of a material fact contained in the
registration statement, or any omission to
state a material fact required to be stated
in the registration statement or necessary to
make the statements not misleading, or
arising out of any violation by the Company
of the Securities Act, any state securities
or "blue-sky" laws or any applicable rule or
regulation. This indemnification will not
apply to any claims, losses, damages or
liabilities to the extent that they may have
been caused by an untrue statement or
omission based upon information furnished in
writing to the Company by such underwriter,
the Employee or controlling person,
respectively, expressly for use in the
registration statement. With respect to such
untrue statement or omission in the
information furnished in writing to the
Company by the Employee, the Employee will
indemnify the underwriters, the Company, its
directors and officers, and each person
controlling

-11-
<PAGE> 12
any of them against any losses, claims,
damages, expenses or liabilities to which any
of them may become subject as a result of
such untrue statement or omission.

(v) The registration rights of the Employee under
this Agreement may be transferred to any
trust formed by Employee to hold shares of
common stock and to any member of the family
of the Employee.

E) In the event of any merger, consolidation or share
exchange pursuant to which the Company is not the
surviving or resulting corporation, the Company's
obligations under this Paragraph 7 shall be assumed
by such surviving or resulting corporation.

F) The Employee shall not be required to mitigate the
amount of any payment provided for in this Paragraph
7 by seeking other employment or otherwise.

8. CONFIDENTIALITY. Employee hereby acknowledges his understanding
that as a result of his employment by CSL, he will have access to, and
possession of, valuable and important confidential or proprietary data,
documents and information concerning CSL, its operations and its future plans.
Employee hereby agrees that he will not, either during the term of his
employment with CSL, or at any time after the term of his employment with CSL,
divulge or communicate to any person or entity, or direct any employee or agent
of CSL or of his to divulge or communicate to any person or entity, or use to
the detriment of CSL or for the benefit of any other person or entity, or make
or remove any copies of, such confidential information or proprietary data or
information, whether or not marked or otherwise identified as confidential or
secret. Upon any termination of this Agreement for any reason whatsoever,
Employee shall surrender to CSL any and all materials, including but not
limited to drawings, manuals, reports, documents, lists, photographs, maps,
surveys, plans, specifications, accountings and any and all other materials
relating to the Company or any of its business, including all copies thereof,
that Employee has in his possession, whether or not such material was created
or compiled by Employee, but excluding, however, personal memorabilia belonging
to Employee and notes taken by him as a member of the Board of Directors. With
the exception of such excluded items, materials, etc., Employee acknowledges
that all such material is solely the property of CSL, and that Employee has no
right, title or interest in or to such materials. Notwithstanding anything to
the contrary set forth in this Paragraph 8, the provisions of this Paragraph 8
shall not apply to information which: (i) is or becomes generally available to
the public other than as a result of disclosure by Employee, or (ii) is already
known to Employee as of the date of this Agreement from sources other than CSL,
or (iii) is required to be disclosed by law or by regulatory or judicial
process.

9. NON-COMPETITION; NON-SOLICITATION. Employee hereby agrees that
during the term of his employment with the Company and for a period of one (1)
year after any termination for any reason whatsoever of this Agreement, he will
not and will cause his Affiliates not to, directly or indirectly, acquire,
develop or operate senior living facilities anywhere in the United States,
other than through the Company

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<PAGE> 13
and its subsidiaries except as otherwise requested by the Company. CSL hereby
acknowledges and agrees that (i) Employee's ownership of a class of securities
listed on a stock exchange or traded on the over-the-counter market that
represents five percent (5%) or less of the number of shares of such class of
securities then issued and outstanding, and (ii) Employee's services to Tri
Point Communities, L.P. and Tri Point Development, Inc. to own and develop
senior living facilities for the benefit of the Company shall not constitute a
violation of this Paragraph 9. Following the termination for any reason of
Employee's employment, Employee shall not for himself or any third party,
directly or indirectly employ, solicit for employment, or recommend for
employment any person employed by the Company or its affiliated companies
during the period of such person's employment and for a period of two (2) years
thereafter.

The parties hereto have carefully considered the necessity for
protection of the goodwill and business of the Company and the scope of such
protection. Employee acknowledges that the restrictions, prohibitions and
other provisions of this Section 9 are reasonable, fair and equitable in scope,
terms and duration, are necessary and essential to protect the legitimate
business interests and goodwill of the Company, are a material inducement to
the Company to enter into the transactions contemplated by this Agreement and
that adequate consideration has been and will be received by Employee for such
restrictions, prohibitions and other provisions.

10. WORK PRODUCT. The Employee agrees that all innovations,
improvements, developments, methods, designs, analyses, reports and all similar
or related information which relates to the Company's or any of its
subsidiaries' or affiliates' actual or anticipated business, or existing or
future products or services and which are conceived, developed or made by the
Employee while employed by the Company ("Work Product") belong to the Company
or such subsidiary or affiliate. The Employee will promptly disclose such Work
Product to the Board and perform all actions reasonably requested by the Board
(whether during or after the employment period) to establish and to confirm
such ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).

11. LEGAL ACTION. In the event of a breach by Employee of the
provisions of Paragraphs 8, 9, or 10, Employee and the Company agree that the
Company, shall, in addition to any other available remedies, be entitled to an
injunction restraining Employee from violating the terms of the applicable
Paragraph and that said injunction is appropriate and proper relief for such
violation.

12. NOTICES. All notices and other communications provided to either
party hereto under this Agreement shall be in writing and delivered by hand
delivery, overnight courier service or certified mail, return receipt
requested, to the party being notified at said party's address set forth
adjacent to said party's signature on this Agreement, or at such other address
as may be designated by a party in a notice to the other party given in
accordance with this Agreement. Notices given by hand delivery or overnight
courier service shall be deemed received on the date of delivery shown on the
courier's delivery receipt or log. Notices given by certified mail shall be
deemed received three (3) days after deposit in the U.S. Mail.

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<PAGE> 14
13. CONSTRUCTION. In construing this Agreement, if any portion of
this Agreement shall be found to be invalid or unenforceable, the remaining
terms and provisions of this Agreement shall be given effect to the maximum
extent permitted without considering the void, invalid or unenforceable
provision. In construing this Agreement, the singular shall include the
plural, the masculine shall include the feminine and neuter genders, as
appropriate, and no meaning or effect shall be given to the captions of the
paragraphs in this Agreement, which are inserted for convenience of reference
only.

14. CHOICE OF LAW; SURVIVAL. This Agreement shall be governed and
construed in accordance with the internal laws of the State of Texas without
resort to choice of law principles. The provisions of Paragraphs 7, 8, 9, and
10 shall survive the termination of this Agreement for any reason whatsoever.

15. INTEGRATION; AMENDMENTS. This is an integrated Agreement. This
Agreement constitutes and is intended as a final expression and a complete and
exclusive statement of the understanding and agreement of the parties hereto
with respect to the subject matter of this Agreement. All negotiations,
discussions and writings between the parties hereto relating to the subject
matter of this Agreement are merged into this Agreement, and there are no
rights conferred, nor promises, agreements, conditions, undertakings,
warranties or representations, oral or written, expressed or implied, between
the undersigned parties as to such matters other than as specifically set forth
herein. No amendment or modification of or addendum to, this Agreement shall
be valid unless the same shall be in writing and signed by the parties hereto.
No waiver of any of the provisions of this Agreement shall be valid unless in
writing and signed by the party against whom it is sought to be enforced.

16. BINDING EFFECT. This Agreement is binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns; PROVIDED, HOWEVER, that Employee shall
not be entitled to assign his interest in this Agreement (except for an
assignment by operation of law to his estate), or any portion hereof, or any
rights hereunder, to any party. Any attempted assignment by Employee in
violation of this Paragraph 16 shall be null, void, ab initio and of no effect
of any kind or nature whatsoever.

IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above to be effective as of the date specified in the preamble
of this Agreement.

CAPITAL SENIOR LIVING
CORPORATION
a Delaware corporation

Address:
14160 Dallas Parkway, #300
Dallas, TX 75240 By: /s/ JAMES A. STROUD
-------------------------
Its: COO
------------------------

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<PAGE> 15
EMPLOYEE: JEFFREY L. BECK

Address:
6211 Raintree Court /s/ JEFFREY L. BECK
Dallas, TX 75240 ----------------------------
Jeffrey L. Beck

-15-

<PAGE> 1
EXHIBIT 10.10

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is made
and entered into on the 7th day of May, 1997, by and between Capital Senior
Living Corporation, a Delaware corporation ("CSL" or "the Company"), and James
A. Stroud, an individual residing in the State of Texas ("Employee").

1. EMPLOYMENT COMMENCEMENT; APPOINTMENT, TITLE AND DUTIES.

B) CSL hereby employs Employee to serve in the positions
of Chief Operating Officer and as Co- Chairman of its
Board of Directors and a member of the Executive
Committee of the Board. In such capacity, Employee
shall report to the Board of Directors of CSL and
shall have such powers, duties and responsibilities
as are customarily assigned to the Chief Operating
Officer and Co-Chairman. In addition Employee shall
have such other duties and responsibilities as may
reasonably be assigned to him by the Company's Board
of Directors, including serving with the consent or
at the request of CSL on the board of directors of
affiliated corporations.

C) Employee shall be entitled to a minimum vacation time
in an amount of eight (8) weeks per year.

6. CERTAIN TERMS DEFINED. For purposes of this Agreement:

A) Employee shall be deemed to be disabled if a physical
or mental condition shall occur and persist which, in
the written opinion of two (2) licensed physicians,
has rendered Employee unable to perform the duties of
Chief Operating Officer, Co-Chairman and member of
the Board of Directors of CSL for a period of ninety
(90) consecutive calendar days or more, and which
condition, in the opinion of such physicians, is
likely to continue for an indefinite period of time,
rendering Employee unable to return to his duties for
CSL. One (1) of the two (2) physicians shall be
selected in good faith by the Board of Directors of
CSL, and the other of the two (2) physicians shall be
selected in good faith by Employee. In the event
that the two (2) physicians selected do not agree as
to whether Employee is disabled, as described above,
then said two (2) physicians shall mutually agree
upon a third (3rd) physician whose written opinion as
to Employee's condition shall be conclusive upon CSL
and Employee for purposes of this Agreement.

7. CERTAIN BENEFITS AND OBLIGATIONS UPON TERMINATION.

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<PAGE> 6
B) In the event that Employee's employment terminates
for any other cause other than those set forth in
Paragraph 7(A), then,

i) CSL shall promptly pay Employee his base
salary and prorated minimum base bonus, up to
and through the date of termination; and

ii) All accrued but unpaid or unused vacation,
sick pay and expense reimbursement shall be
calculated in accordance with CSL's Corporate
Policies and Procedures Manual and promptly
paid to Employee.

D) Registration Right.

i) Upon and following the occurrence of a
Registration Event, Employee shall have the
right, but not the obligation, to:

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<PAGE> 9
covered by such registration
statement in accordance with the
intended method of disposition set
forth in such registration statement
for such period;

-9-
<PAGE> 10
omission has been delivered to the
Employee and may be delivered to the
purchasers of such Registrable
Securities in compliance with the
Securities Act.

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<PAGE> 12
any of them against any losses, claims,
damages, expenses or liabilities to which any
of them may become subject as a result of
such untrue statement or omission.

(v) The registration rights of the Employee under
this Agreement may be transferred to any
trust formed by Employee to hold shares of
common stock and to any member of the family
of the Employee.

F) The Employee shall not be required to mitigate the
amount of any payment provided for in this Paragraph
7 by seeking other employment or otherwise.

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<PAGE> 13
States, other than through the Company and its subsidiaries except as otherwise
requested by the Company. CSL hereby acknowledges and agrees that (i)
Employee's ownership of a class of securities listed on a stock exchange or
traded on the over-the-counter market that represents five percent (5%) or less
of the number of shares of such class of securities then issued and
outstanding, and (ii) Employee's services to Tri Point Communities, L.P. and
Tri Point Development, Inc. to own and develop senior living facilities for the
benefit of the Company shall not constitute a violation of this Paragraph 9.
Following the termination for any reason of Employee's employment, Employee
shall not for himself or any third party, directly or indirectly employ,
solicit for employment, or recommend for employment any person employed by the
Company or its affiliated companies during the period of such person's
employment and for a period of two (2) years thereafter.

IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above to be effective as of the date specified in the preamble
of this Agreement.

CAPITAL SENIOR LIVING
CORPORATION
a Delaware corporation

Address:
14160 Dallas Parkway, #300
Dallas, TX 75240 By:/s/ JEFFREY L. BECK
-------------------------
Its: CEO
------------------------

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<PAGE> 15
EMPLOYEE: JAMES A. STROUD

Address:
7229 Mason Dells /s/ JAMES A. STROUD
Dallas, TX 75230 ----------------------------
James A. Stroud

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<PAGE> 1
EXHIBIT 10.32

MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT (the "Agreement") entered into this ______
day of __________________________________, 199______ by and between Tri Point
Communities, L.P., ("Owner"), a ________________________________________
organized under the laws of the state of Texas, and CAPITAL SENIOR LIVING,
INC., ("Capital"), a corporation organized under the laws of the state of
Texas.

PREAMBLE

OWNER by this Agreement is engaging Capital to provide management
services relating to the operation of _________________________ ("Facility"),
a senior living community located in _____________________________________,
________________________________.

This Agreement is founded on the following assumptions:

Owner retains primary responsibility to:

a. Establish the policies of the Facility and to plan
for its short-range and long-range goals.

b. Review and evaluate the performance of Capital in
carrying out the established policies and in
attaining the goals established by Owner.

c. Annually review and approve the budget.

d. Annually review the policies and goals which have
been established.

Capital assumes primary responsibility to:

a. Implement the policies established by Owner.

b. Supervise the day-to-day management of the Facility,
including all resident activities.

c. Provide to Owner full, timely and accurate
information as to past operations.

d. Provide to Owner projections and recommendations
relating to the future operations of the Facility.

The parties therefore agree as follows:

1
<PAGE> 2
I. RESPONSIBILITIES OF CAPITAL

A. RECOMMENDED POLICIES. Capital shall recommend policies and
goals to be established by Owner and shall evaluate such
policies and goals on an ongoing basis.

B. MANAGEMENT DUTIES. Capital shall supervise the operation of
the Facility, provide management services, install operating
procedures and oversee day-to-day operations, all subject to
and in accordance with the budgets approved by and policies
established by Owner.

C. MARKETING DUTIES. Capital shall manage and supervise the
marketing program. Capital shall establish and periodically
review the residency agreement and if required, recommend
changes thereof.

D. EMPLOYEES. All Facility-based Employees, including the
administrative employees, shall be employees of Capital.
Capital shall have sole authority over Facility-based
Employees and Non-Facility-based Employees who are directly
responsible for the Facility and all matters pertaining
thereto and shall be responsible for all actions and omissions
of such employees occurring pursuant to Capital's employee
policy manual. All costs of hiring, equipping and providing
the services of Facility-based Employees, including, but not
limited to, compensation, health insurance, employer liability
insurance, payroll taxes, bonding, workers compensation
insurance, benefits and vacations shall be an expense of
Capital. To the extent the above-stated expenses are incurred
in accordance with the Facility Budget or approved by Owner,
they shall be reimbursed from the Facility operations or Owner
as the case may be.

E. OPERATING PROCEDURES. Capital shall develop, install and
maintain operating procedures, systems and controls.

F. FACILITY EXPANSION. Capital shall make recommendations
regarding remodeling or expansion of the Facility.

G. BUDGETS. Capital shall prepare for review and approval by
Owner based on reasonable standards annual operating budgets
for revenue, expense and cash flow of the Facility and a
capital expenditures budget. Budgets shall be prepared in
advance of each fiscal year. Cash flow projections shall
accompany each operating budget. It is to be understood that
budgets are only estimates and guidelines of future results
and that budget overruns may occur from time to time.

H. FINANCIAL CONTROLS. Capital shall establish and maintain a
system of financial controls for the Facility.

2
<PAGE> 3
I. MONTHLY FINANCIAL STATEMENTS. Capital shall provide to Owner,
on a monthly basis, financial statements and related financial
reports. Such statements and reports shall be provided by the
20th day after the end of the month. These reports shall be
in the form attached as Exhibit "A."

J. MARKETING REPORTS. Capital shall, on a weekly and monthly
basis, provide sales and occupancy reports to Owner, as well
as the results of the annual resident satisfaction survey.

K. LEGAL COUNSEL. Capital, at Facility expense, shall coordinate
with Owner the utilization of legal counsel relating to
Facility operations.

L. RENTAL COLLECTIONS AND DISBURSEMENTS. Capital shall collect
the revenues from the residents and, on behalf of Owner,
deposit all such funds in a residential depository account at
a FDIC insured bank approved by Owner. The style of the
account shall be in the name of the Facility with designated
representatives from Owner and Capital being the only parties
authorized to draw from said account.

On an as needed basis, Capital shall transfer the funds from
the above stated account into an Operating Expense Account in
the name of the Facility. The account shall be in a FDIC
insured bank approved by Owner. The style of the account
shall be in the name of the Facility with designated
representatives from Owner and Capital being the only parties
authorized to draw from said account. Capital shall pay out
of such Operating Expense Account all operating expenses for
which payment has been approved in accordance with the budget
or approved by Owner (including Capital's Management Fee and
any other sums due to Capital from Owner), and all other sums
properly payable pursuant to any of the provisions of this
Agreement. Capital shall hold, remit or expend the balance of
such funds, if any, as Owner may direct. These funds shall
not be co-mingled with funds from any other projects and/or
facilities managed and/or operated by Capital.

M. ACCOUNTING SYSTEMS AND SOFTWARE. Capital shall provide to
Owner, during the term of this Agreement, appropriate on-site
accounting systems and software, which shall include complete
accounting, bookkeeping and record keeping services for the
Facility, specifically including, but not limited to, resident
billings, accounts payable, accounts receivable, general
ledger and inventory records and maintain demographic
information on the residents. Acquisition of software for
Facility based operations, software maintenance and update
charges will be budgeted expenses of the Facility. Payroll
processing may be delegated to a third party, the cost of
which will be the responsibility of the Facility.

3
<PAGE> 4
II. OWNER'S RESPONSIBILITIES

A. POLICIES. Owner shall establish the policies for the
Facility.

B. GOALS. Owner shall establish the short range and long range
goals of the Facility.

C. BUDGETS. Owner shall review and approve budgets for the
operation of the Facility.

D. CAPITAL'S PERFORMANCE. Owner shall review and evaluate the
performance of Capital in carrying out the policies for the
Facility.

E. LEGAL COUNSEL. Owner shall obtain legal counsel to perform
all necessary legal services relating to Owner's ownership of
the Facility.

F. AUDITS. Owner, at its discretion, may engage certified public
accountants to perform annual audits of the Facility as well
as prepare any other reports required for federal or state
regulatory agencies which require licensure and/or
certification. Every quarter, upon receipt of reasonable
notice to Capital, all financial records pertaining to the
Facility will be open for inspection and review by Owner's
representatives. All labor and expense associated with such
review shall be borne by Owner.

G. DIRECTIVES. In order to assure proper coordination, Owner
shall issue any directions concerning the operations of the
Facility only through the President or Vice President of
Capital.

H. OPERATING REPORTS. During the term of this Agreement, Owner
shall, within fourteen (14) days of issuance, furnish to
Capital copies of any and all Facility-related reports,
including the annual audit (if any).

I. CHANGE OF RESIDENCY AGREEMENT. Owner shall not change the
Residency Agreement without consulting with and seeking
approval of Capital unless required to do so to comply with
any applicable law or regulation.

J. DECISIONS. Owner shall examine documents submitted by Capital
and render decisions pertaining thereto promptly to avoid
unreasonable delay.

K. UNIFORM ACCOUNTS. Facility shall use the uniform chart of
accounts recommended by Capital.

L. FURNISHING INFORMATION. Owner agrees at its expense to
install and maintain a computer terminal at the Facility
compatible with the mainframe computer currently in use by
Capital and to transmit data to Capital via telephone lines.

4
<PAGE> 5
M. RIGHT OF FIRST REFUSAL (SALE).

1. The Owner hereby agrees that so long as Capital is not
in default in the performance of any duty or any
obligation hereunder, Capital shall have the option
exercisable on not less than two (2) months nor more
than four (4) months notice to purchase the Facility
at a purchase price equal to the Fair Market Value as
defined in the Facility Lease Agreement attached as
Exhibit "B" (the "Lease") of the Facility. In the
event Capital purchases the Facility pursuant to this
option, the Owner shall, upon receipt from Capital of
the applicable purchase price, deliver to Capital a
deed with covenants only against acts of the Owner
conveying the entire interest of the Owner in and to
the Facility to Capital subject to all Legal
Requirements as defined in the Lease, all of the
matters described in clauses (a), (b), (e) and (g) of
Section 11.5.2 of the Lease, Impositions as defined
in the Lease, any Liens as defined in the Lease
created by Capital, any Liens as defined in the Lease
created in accordance with the terms of this
Agreement or consented to by Capital, the claims of
all persons claiming by, through or under Capital,
any other matters assented to by Capital and all
matters for which Capital has responsibility under
this Agreement, and any Encumbrance permitted under
Article 20 as defined in the Lease which Capital
elects to assume. The applicable purchase price shall
be paid in cash to the Owner, or as the Owner may
direct, in federal or other immediately available
funds except as otherwise mutually agreed by the
Owner and Capital. All expenses of such conveyance,
including, without limitation, title examination
costs, standard (and extended) coverage title
insurance premiums, attorneys, fees incurred by the
Owner in connection with such conveyance, recording
and transfer taxes and recording fees and other
similar charges shall be paid by Capital.

2. In the event that it becomes necessary to determine
the Fair Market Value as defined in the Lease of the
Facility for any purpose of this Agreement, 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, the Owner (or Capital, as the case may be)
shall by notice to Capital (or the Owner, as the case
may be) appoint a second person as appraiser on its
behalf.

3. 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 Facility to determine the Fair Market
Value as defined in the Lease of the Facility 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 Capital's
or the Owner'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(10%) of the lesser of
such amounts, then the Fair Market Value as defined
in the Lease of the Facility 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 as defined in the
Lease of the Facility, whichever is earlier, either
the Owner or Capital 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 as defined in the Lease of the
Facility 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 the Owner and Capital as the Fair Market
Value of the Facility.

4. 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.

The Owner and Capital 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.

5
<PAGE> 6

5. Capital shall agree to enter into a Subordination
Agreement on reasonable terms and conditions with any
lender from whom Owner obtains a loan secured by the
Facility.

N. OPTION TO LEASE.

The Owner hereby agrees that so long as Capital is not in
default in the performance of any duty or any obligation
hereunder, the Manager shall have the option to lease the
Facility at any time during the term of this Agreement
(including any extension thereof) by providing the Owner with
at least ninety (90) days prior written notice of such
election. Within thirty (30) days after the receipt of the
Manager's notice to lease, the parties shall enter into a
lease agreement substantially in the form attached hereto as
Exhibit "B" (the "Lease"), which Lease shall include, without
limitation, a ten (10) year initial term (with three (3)
five-year renewal terms) and rental payments equal to the fair
market value (which will be a negotiated percentage of total
project costs) as determined immediately prior to the initial
term of the Lease and immediately prior to any renewal terms.

III. INSURANCE.

A. Capital shall maintain, in full force and effect, at the
Facility's expense, the following insurance protecting Owner
and Capital and their officers and employees:

1. Employee's fidelity insurance

2. Workers compensation and employers liability insurance

3. Professional liability insurance

4. Comprehensive general public liability insurance and
overlying umbrella liability coverage against loss or
liability for damages for personal injury or death
occurring on, in or about the Facility.

Such policy or policies shall be written by a responsible
insurance company or companies satisfactory to Owner and in
kind and amounts satisfactory to Owner. Certificates of
insurance showing compliance with the foregoing requirements
shall be furnished by Capital to Owner. Certificates shall
state

6
<PAGE> 7
that the policy or policies will not be canceled or altered
without at least 30 days prior written notice to Owner.

B. Owner shall procure and maintain, in full force and effect, at
Owner's expense the following insurance protecting Owner and
Capital and their officers and employees:

1. Property Insurance for loss or damage by fire and
other perils insurable under the broad form of
extended coverage insurance available in the area
where the Facility is located, and improvements, and
contents thereof, constituting all or any portion of
the Facility.

2. Insurance for automobiles owned or hired by Owner and
used in connection with the Facility.

Such policy or policies shall be written by a responsible
insurance company or companies satisfactory to Capital in kind
and amounts satisfactory to Capital. Certificates of
insurance showing compliance with the foregoing requirements
shall be furnished by Owner to Capital. Certificates shall
state that the policy or policies will not be canceled or
altered without at lease thirty (30) days prior written notice
to Capital.

IV. TERM AND TERMINATION OF THIS AGREEMENT.

A. TERM AND TERMINATION WITHOUT CAUSE. This Agreement shall
commence on the date set forth on the first page hereof.
Payment under Section V shall commence on the date of the
first resident move-in. The term of this Agreement shall
continue for a period of ten (10) years from the date of the
first resident move-in (the "Initial Term") and continue for
the Initial Term unless terminated by law or otherwise
according to its terms. Capital shall have the option to
extend the term of this Agreementfor an additional five (5)
year renewal option on the same terms and conditions as herein
provided (the "Extended Term").

B. If Owner terminates the Agreement prior to the expiration of
the Initial Term without cause or if Capital terminates this
Agreement during the Initial Term for cause as provided in
Paragraph IV. B. below, severance compensation in an amount
equal to the then-current monthly management fee times the
number of months remaining in the Initial Term shall be paid
to Capital upon the effective date of termination. Any such
termination shall be effective upon the expiration of the
ninety (90) day period following the giving of the notice or
on such later date as may be specified in the notice.

7
<PAGE> 8
C. TERMINATION FOR CAUSE.

1. This Agreement may be terminated by Owner for cause
for the following reasons:

a. In the event of material breach by Capital of
a material term hereof, which breach is not
cured within sixty (60) days after notice by
Owner.

b. In the event that a petition in bankruptcy is
filed by Capital or its permitted assignee,
or in the event Capital or its permitted
assignee makes an assignment for the benefit
of creditors or takes advantage of an
insolvency act, by notice to Capital or
assignee.

c. In the event that (i) Capital's or any
permitted assignee's corporate existence is
dissolved and the duties under this Agreement
are not assumed by Capital or an affiliate of
Capital (ii), Capital or any permitted
assignee ceases to do business for any
reason, by notice to Capital or such assignee
and the duties under this Agreement are not
assumed by Capital or Capital's Affiliate.

d. At any time after the Initial Term, with or
without cause.

2. This Agreement may be terminated for cause by Capital
in the event that Capital fails to receive
reimbursement of reimbursable expenses or any
compensation due Capital pursuant to the terms of
this Agreement or any other compensation due Capital,
and such failure continues for a period of sixty (60)
days after Capital's written notice thereof to Owner,
however, that this Agreement shall not be so
terminated if Owner pays Capital all such expenses
and compensation then due and payable on or before
the expiration of said sixty (60) day period.

3. No termination of this Agreement shall affect any
obligation owing by either party hereto to the other
which accrued prior to the effective date of such
termination.

C. COVENANTS SURVIVING TERMINATION. The termination of this
Agreement shall not terminate the right of Owner or Capital to
indemnification relating to events occurring during the term
of this Agreement under Article VI. K. and to protection of
Owner's or Capital's property rights under Article VI.B.

8
<PAGE> 9
V. COMPENSATION

A. OPERATIONS MANAGEMENT FEES. Owner shall pay to Capital a fee
in the amount set forth below, payable by the fifteenth day of
each month. Payment shall commence on the date of the first
resident move-in.

1. The amount to be paid monthly shall be 5% of Gross
Revenues generated during the immediately proceeding
month provided that the monthly management fee shall
not be less than Five Thousand Dollars ($5,000.00)
("Monthly Management Fee"). "Gross Revenues" shall
be defined as gross monthly revenues from the
operation of the Facility. Gross Revenues shall not
include (i) security deposits received from residents
and, if applicable, interest accrued thereon for the
benefit of the residents until such deposits or
interest are applied for rental payments; (ii)
proceeds from the sale or depositions of all or any
part of such Facility; (iii) insurance proceeds
received by Owner as a result of any insured loss
(except proceeds for rent loss insurance; (iv)
capital contributions made by any partner of Owner;
(v) loans by Owner; and (vi) proceeds from capital,
financing and any other transactions not in the
ordinary course of operation of such Facility. The
Monthly Management Fee for the Facility shall be
payable monthly in arrears following calculations
thereof upon submission of a monthly statement for
such Facility from Capital. It is agreed between
Owner and Capital that if the Gross Revenues of the
Facility are insufficient to pay all disbursements,
including the Monthly Management Fee or any portion
thereof, then Owner shall remain responsible for such
disbursements. It is further agreed between Owner
and Capital that in no event will any disbursement be
made to Owner from any Facility Account until all
accrued and unpaid fees to Capital and repayments, if
any, to Capital for Capital's advancement of funds to
cover any insufficiencies in such Facility's Rental
or Payroll Account have been paid in full.

2. In addition to the Monthly Management Fee stated
above, Owner shall also pay Capital a marketing
lease-up fee of $500.00 for each unit leased at the
time the unit is initially occupied.

B. CERTAIN EXPENSES. In accordance with the Annual Budgets, the
Facility will reimburse Capital for the cost of reasonable
transportation, lodging and meal expenses for
non-Facility-based employees of Capital or its outside
consultants when traveling in connection with the performance
of the services being performed pursuant to this Agreement,
together with any reasonable long distance telephone expenses,
copying, mailing or

9
<PAGE> 10
express shipments and other miscellaneous out of pocket
expenses that relate to the marketing and management of the
Facility. Relocation, education, professional memberships and
licensing expenses of the Facility-based administrative
employees shall also be an expense of the Facility subject to
Owner's prior approval.

VI. MISCELLANEOUS

A. INSURANCE-SUBROGATION. No indemnity shall be paid to the
other party under this Agreement where the claim, damage,
liability, loss or expense incurred was required to be insured
against by such other party. Any insurance policies obtained
by the parties pursuant to this Agreement shall contain
provisions or have the effect of waiving any right of
subrogation by the insurer of one party against the other
party or its insurer.

B. PROPERTY OF CAPITAL. Trade names, including the name "Product
2000," architectural and design concepts and plans, ideas and
documents, forms, occupancy development material, specifically
for and related to Owner and/or its Facility shall be the
exclusive property of Owner. Trade names, ideas and
documents, forms and occupancy development material, not
directly related to the Facility and supplied by Capital are
to be considered proprietary and will remain the property of
Capital. Either party may only use such materials which are
the property of the other and information in the operation and
management of the Facility, and may not use such materials or
information after termination of this Agreement for the
development or expansion of the Facility or for new projects
for itself or others without the written consent of the party
owning such material or information.

C. STATUS OF PARTIES. It is expressly understood and agreed that
Capital shall act as an independent contractor in the
performance of this Agreement. No provision hereof shall be
deemed or construed to create a partnership or a joint venture
between Owner with respect to the Facility or otherwise.

D. ADDITIONAL ACTION. In order to carry out the intent and
spirit of this Agreement, Owner and Capital will do all acts
and things necessary including the execution of other
agreements.

E. ENTIRE AGREEMENT. This Agreement sets forth the entire
Agreement between Capital and Owner. Any change or
modification of this Agreement must be in writing and signed
by all parties hereto.

F. BINDING EFFECT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, their
successors and assigns.

10
<PAGE> 11
G. ASSIGNMENT, ETC. Except for an assignment by Capital to an
affiliate, Capital shall not, without Owner's prior written
approval (which approval shall not be unreasonably withheld),
assign any of its rights or obligations under this Agreement.

H. GOVERNING LAW. This Agreement, its interpretation, validity
and performance shall be governed by the laws of the State of
Texas.

I. NON-COMPETE. Without the prior written consent of Capital,
for a period of three years following termination of this
Agreement, Owner will not employ or engage any person who was
a Capital employee assigned to the administrative staff of the
Facility at any time during the last twelve (12) months of the
term of this Agreement. This section shall not apply to Owner
upon sale of the Facility or termination of the Agreement by
Owner for cause.

J. CONDITIONS BEYOND CONTROL OF PARTIES. Neither party shall be
held liable for failure to comply with any of the terms of
this Agreement when such failure has been caused solely by
fire, labor dispute, strike, war, insurrection, government
restrictions, force majeure, or act of God beyond the control
and without fault on the part of the party involved, provided
such party uses due diligence to remedy such default.
Circumstances are likely to arise from time to time which may
require that budgets be exceeded, and Capital shall not be
liable for budget overruns.

K. INDEMNIFICATION. Owner will indemnify and hold harmless
Capital from any and all liability arising incident to Owner's
performance of its duties under this Agreement. Capital will
indemnify and hold harmless Owner from any and all liabilities
arising incident to Capital's performance of its duties under
this Agreement.

Owner shall also indemnify and hold Capital harmless against
any and all losses, costs or expenses incurred by Capital by
reason of, arising out of or in any way related to
noncompliance by the Facility with all applicable state,
federal and local laws, ordinances, rules and regulations
relating to the physical condition of the property of the
Facility, provided Capital shall promptly notify Owner of
Capital's knowledge of any such noncompliance.

L. ARBITRATION. In the event of any dispute, claim or
controversy of any kind between the parties, concerning this
Agreement or the termination of this Agreement, the matter
shall be submitted to arbitration in accordance with rules of
the American Arbitration Association. The parties jointly
shall agree on an arbitrator. If the parties are unable to
agree, in good faith within a reasonable time, on the
selection of an arbitrator, either party may request
appointment of an arbitrator chosen by the American

11
<PAGE> 12
Arbitration Association who shall be the Selected Arbitrator.
Such arbitrator shall be limited in his decision to a choice
between the final position as requested by each party. Said
arbitration shall be held in Dallas/Ft. Worth, Texas or such
other place as is mutually agreeable. The arbitration
decision shall be final and binding on both parties unless the
arbitration is fraudulent or so grossly erroneous as to
necessarily imply bad faith. Costs of arbitration are to be
shared by both parties equally, provided that the arbitrator
may choose to award the costs of arbitration against the
losing party if the arbitrator determined that the final
position urged by the losing party was not reasonable.

12
<PAGE> 13
CAPITAL SENIOR LIVING, INC.
- --------------------------------------

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

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

13
<PAGE> 14

EXHIBIT B

FACILITY LEASE AGREEMENT

TRI POINT COMMUNITIES, L.P.

as
Lessor

AND

CAPITAL SENIOR _________, INC.

as
Lessee

Dated as of _________________________________, 19__

For Premises Located At

_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
<PAGE> 15
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 LEASED PROPERTY; TERM; CONSTRUCTION;
EXTENSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Extended Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE 2 DEFINITIONS AND RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE 3 RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.1 Rent for Land, Leased Improvements, Related Rights and Fixtures . . . . . . . . . . . . . . 15
3.2 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.4 Additional Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.5 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.6 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.7 No Lessee Termination or Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.7.1 No Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.7.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.7.3 Independent Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.8 Abatement of Rent Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE 4 IMPOSITIONS; TAXES; UTILITIES, INSURANCE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1 Payment of Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1.1 Lessee To Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1.2 Installment Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1.3 Returns and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1.4 Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1.5 Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 Notice of Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.3 Adjustment of Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.4 Utility Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.5 Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.6 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.6.1 Lessor's Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.6.2 Use of Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>

ii
<PAGE> 16
<TABLE>
<S> <C> <C>
4.6.3 Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6.4 Other Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6.5 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6.6 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6.7 Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6.8 Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ARTICLE 5 OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY;
INSTALLATION, REMOVAL AND REPLACEMENT OF
PERSONAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1 Ownership of the Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 Personal Property; Removal and Replacement of Personal Property . . . . . . . . . . . . . . 21
5.2.1 Lessee To Equip Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2.2 Sufficient Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2.3 Removal and Replacement; Lessor's Option to Purchase . . . . . . . . . . . . . . . 21

ARTICLE 6 SECURITY FOR LEASE OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.1 Security for Lessee's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.1.1 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.1.2 Purchase-Money Security Interests, Receivables
and Equipment Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE 7 CONDITION AND USE OF LEASED PROPERTY;
MANAGEMENT AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Condition of the Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.2 Use of the Leased Property; Compliance; Management . . . . . . . . . . . . . . . . . . . . 23
7.2.1 Obligation to Operate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.2.2 Permitted Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.2.3 Compliance with Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . 24
7.2.4 No Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2.5 No Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2.6 No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2.7 Compliance with Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2.8 Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

ARTICLE 8 REPAIRS; RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1 Maintenance and Repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1.1 Lessee's Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1.2 No Lessor Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.1.3 Lessee May Not Obligate Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.2 Encroachments; Title Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>

iii
<PAGE> 17
<TABLE>
<S> <C> <C>
ARTICLE 9 MATERIAL STRUCTURAL WORK AND
CAPITAL ADDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.1 Lessor's Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.2 General Provisions as to Capital Additions and Certain
Material Structural Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.2.1 No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.2.2 Lessee's Proposal Regarding Capital Additions
and Material Structural Work . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.2.3 Lessor's Options Regarding Capital Additions
and Material Structural Work . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.2.4 Lessor May Elect to Finance Capital Additions
or Material Structural Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.3 Capital Additions and Material Structural Work Financed by Lessor . . . . . . . . . . . . . 28
9.3.1 Lessee's Financing Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.3.2 Lessor's General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.3.3 Payment of Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.4 General Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.5 Non-Capital Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

ARTICLE 10 WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.1.1 Existence; Power; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.1.2 Valid and Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1.3 Single Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1.4 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1.6 No Liens or Insolvency Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1.7 No Burdensome Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.8 Commercial Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.9 Adequate Capital, Not Insolvent . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.10 Not Delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.11 No Affiliate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.12 Taxes Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.13 Financials Complete and Accurate . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.1.14 Pending Actions, Notices and Reports . . . . . . . . . . . . . . . . . . . . . . . 34
10.1.15 Compliance with Legal and Other Requirements . . . . . . . . . . . . . . . . . . . 35
10.1.16 No Action By Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . 35
10.1.17 Property Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
10.1.18 Third Party Payor Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1.19 Rate Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1.20 Free Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1.21 No Proposed Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1.22 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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10.1.23 No Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10.1.24 No Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10.1.25 Nothing Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10.1.26 No Margin Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1.27 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1.28 Principal Place of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1.29 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1.30 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1.31 Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.2 Continuing Effect of Representations and Warranties . . . . . . . . . . . . . . . . . . . . 39

ARTICLE 11 FINANCIAL AND OTHER COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.1 Status Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.2 Financial Statements; Reports; Notice and Information . . . . . . . . . . . . . . . . . . . 40
11.2.1 Obligation To Furnish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.2.2 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.2.3 No Material Omission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.2.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.3 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.3.1 No Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.3.2 No Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.4 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.4.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.4.2 Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.4.3 Compliance With Legal Requirements And Applicable
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4.4 Books And Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4.5 Participation in Third Party Payor Programs . . . . . . . . . . . . . . . . . . . . 45
11.4.6 Conduct of its Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4.7 Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4.8 Subordination of Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . 46
11.4.9 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.4.10 Additional Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.5 Additional Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.5.1 Restrictions Relating to Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.5.2 No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.3 Limits on Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.4 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.5 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.6 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.7 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.5.8 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
11.5.9 Forgiveness of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
11.5.10 Value of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
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11.5.11 Changes in Fiscal Year and Accounting Procedures . . . . . . . . . . . . . . . . . 48

ARTICLE 12 INSURANCE AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.1 General Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.1.1 Types and Amounts of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.1.2 Insurance Company Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 50
12.1.3 Policy Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
12.1.4 Notices; Certificates and Policies . . . . . . . . . . . . . . . . . . . . . . . . 50
12.1.5 Lessor's Right to Place Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.1.6 Payment of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.1.7 Irrevocable Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.1.8 Blanket Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.1.9 No Separate Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.1.10 Assignment of Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.2 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.2.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.2.2 Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.2.3 Limitation on Lessor Liability . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.2.4 Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

ARTICLE 13 FIRE AND CASUALTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
13.1 Restoration Following Fire or Other Casualty . . . . . . . . . . . . . . . . . . . . . . . 54
13.1.1 Following Fire or Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
13.1.2 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
13.1.3 Disbursement of Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 55
13.2 Disposition of Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
13.2.1 Proceeds To Be Released to Pay For Work . . . . . . . . . . . . . . . . . . . . . . 58
13.2.2 Proceeds Not To Be Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
13.2.3 Lessee Responsible for Short-Fall . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.3 Tangible Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.4 Restoration of Certain Improvements and the Tangible
Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.5 No Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.6 Termination of Certain Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.8 Application of Rent Loss and/or Business Interruption Insurance . . . . . . . . . . . . . . 60
13.9 Obligation To Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

ARTICLE 14 CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
14.1 Parties' Rights and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
14.2 Total Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
14.3 Partial or Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
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14.4 Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
14.5 Award Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
14.6 Control of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

ARTICLE 15 PERMITTED CONTESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
15.1 Lessee's Right to Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
15.2 Lessor's Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
15.3 Lessee's Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

ARTICLE 16 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
16.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
16.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
16.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
16.4 Lessee Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
16.5 Application of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
16.6 Intentionally omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
16.7 Lessors's Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
16.8 No Waiver By Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
16.9 Right of Forbearance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
16.10 Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

ARTICLE 17 SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING
OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
17.1 Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
17.2 Transfer of Permits and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
17.3 No Acceptance of Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
17.4 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

ARTICLE 18 PURCHASE OF THE LEASED PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.1 Purchase of the Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.2 Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.2.1 Designation of Appraisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.2.2 Appraisal Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.2.3 Specific Enforcement and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 74

ARTICLE 19 SUBLETTING AND ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
19.1 Subletting and Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
19.2 Permitted Sublease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
19.3 Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
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ARTICLE 20 TITLE TRANSFERS AND LIENS GRANTED BY LESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
20.1 No Merger of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
20.2 Transfers By Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
20.3 Lessor May Grant Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
20.4 Subordination and Non-Disturbance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

ARTICLE 21 LESSOR OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
21.1 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
21.2 Memorandum of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
21.3 Default by Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

ARTICLE 22 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

ARTICLE 23 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

ARTICLE 24 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
24.1 Broker's Fee Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
24.2 No Joint Venture or Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
24.3 Amendments, Waivers and Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
24.4 Captions and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
24.5 Time is of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
24.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
24.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
24.8 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
24.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
24.10 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
24.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
24.12 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
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EXHIBIT A LEGAL DESCRIPTION OF THE LAND
EXHIBIT B PERMITTED ENCUMBRANCES
EXHIBIT C NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
EXHIBIT D OPEN COST REPORTS
EXHIBIT E RATE LIMITATIONS
EXHIBIT F FREE CARE REQUIREMENTS
EXHIBIT G CURRENT RATES
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FACILITY LEASE AGREEMENT

This FACILITY LEASE AGREEMENT ("Lease") is dated as of the
______________ day of _______________________________ ___, 19____ and is
between Tri Point Communities, L.P. ("Lessor"), a Texas limited partnership
having its principal office at 14160 Dallas Parkway, Suite 300, Dallas, Texas
75240, and Capital Senior ____________________________, Inc. ("Lessee"), a
Delaware corporation, having its principal office at 14160 Dallas Parkway,
Suite 300, Dallas, Texas 75240.

ARTICLE 1

LEASED PROPERTY; TERM; CONSTRUCTION; EXTENSIONS

1.1 Leased Property. Upon and subject to the terms and conditions
hereinafter set forth, the Lessor leases to the Lessee and the Lessee rents and
leases from the Lessor all of the 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 benefiting 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) 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 the 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,
<PAGE> 23
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 __________ (the "Commencement Date") and end ten
(10) years later on ___________________ (the "Expiration Date"); provided,
however, that this Lease may be sooner terminated as hereinafter provided. In
addition, the 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, the 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 Lessee's extension options shall be exercised by the
Lessee by giving written notice to the 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. The Lessee shall have no right to rescind any such
notice once given. The 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.

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, Section and other subdivisions of
this Lease or the other applicable Lease Document.

Accounts: As defined in the UCC.

Accreditation Body: 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.

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<PAGE> 24
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, five percent (5%) 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.

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.

Award: All compensation, sums or anything of value awarded, paid or
received on a total or partial Condemnation.

Bankruptcy Code: Subsection 365(h) of the United States Bankruptcy
Code, 11 U.S.C. [S]365(h), as the same may hereafter be amended and including
any successor provision thereto.

Base Rent: As defined in Section 3.1.

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 the Lessor's depository bank is
located.

Capital Additions: Collectively, all new buildings and additional
structures annexes 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 capacity of a Facility, (ii) change the purpose for which
such 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 the
Lessee whether paid for by the Lessee or the 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, the Lessor.

Casualty: As defined in Section 13.1.

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<PAGE> 25
Chattel Paper: As defined in the UCC.

Code: The Internal Revenue Code of 1986, as amended.

Commencement Date: As defined in Section 1.2.

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 the 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.

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 this Lease.

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.

Date of Taking: The date the Condemnor has the right to possession of
the property being condemned.

4
<PAGE> 26
Documents: As defined in the UCC.

Encumbrance: As defined in Section 20.3.

Environmental Laws: Collectively, all Legal Requirements applicable
to (i) environmental conditions on, under or emanating from the Leased Property
and (ii) the generation, storage, transportation, utilization, disposal,
management or release (whether or not on, under or from the Leased Property) of
Hazardous Substances by the Lessee.

ERISA: The Employment Retirement Income Security Act of 1974, as
amended.

Event of Default: As defined in Article 16.

Expiration Date: As defined in Section 1.2.

Extended Terms: As defined in Section 1.3.

Facility: The __________unit, [INSERT DESCRIPTION OF FACILITY]
facility [OPTIONAL: to be] known as [INSERT NAME] [OPTIONAL: to be
constructed] on the Land (together with related parking and other amenities)].

Failure to Operate: As defined in Article 16.

Failure to Perform: As defined in Article 16.

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 the 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 the Lessor and the Lessee (including, without
limitations as a negotiated percentage of total project costs) and (c) not
taking into account any reduction in value resulting from any Lien to which the
Leased Property, the Lessee or the Lessor is otherwise required to remove 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

5
<PAGE> 27
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 the
Lessor in any way in connection with the financing of any Capital Addition.

Fiscal Quarter: Each of the three (3) month periods commencing on
January lst, April 1st, July 1st and October lst.

Fiscal Year: The twelve (12) month period from January 1st to
December 31st.

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 resident revenues received or receivable for the use
of, or otherwise by reason of, all rooms, 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):

6
<PAGE> 28
(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 Agencies
or Third Party Payors,

(ii) allowances according to GAAP for uncollectible
accounts,

(iii) all proper 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 upon or measured by said Gross Revenues which is
added to or made a part of the amount billed to the patient 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;

(vi) the cost of any federal, state or local governmental
program imposed specially to provide or finance indigent patient 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 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, only the
rental actually received by the Lessee from such non-Affiliate shall be
included in Gross Revenues.

Hazardous Substances: Collectively, (i) any "hazardous material,"
"hazardous substance," "hazardous waste," "oil," "regulated substance," "toxic
substance," "restricted hazardous waste", "special waste" or words of similar
import as defined under any of the Environmental Laws; (ii) asbestos in any
form; (iii) urea formaldehyde foam insulation; (iv) polychlorinated biphenyl
(v) radon gas; (vi) flammable explosives; (vii) radioactive materials; (viii)
any chemical, containment, solvent, material, pollutant or substance that may
be dangerous or detrimental to the Leased Property, the environment, or the
health and safety of the residents and other occupants of the Leased Property
or of the owners or occupants of any other real property nearby the Leased
Property and (iv) any substance, the generation, storage, transportation,
utilization, disposal, management, release or location of which, on, under or
from the Leased Property is prohibited or otherwise regulated pursuant to any
of the Environmental Laws.

Impositions: Collectively, all taxes (including, without limitation,
all capital stock and franchise taxes of the Lessor, all ad valorem, property,
sales, use, single business, gross receipts,

7
<PAGE> 29
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 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 the Lessee), which at any time prior to during or in respect of the
Term hereof and thereafter until the Leased Property is surrendered to the
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) the Lessor or the 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
the foregoing, nothing contained in this Lease shall be construed to require
the Lessee to pay (1) any tax based on net income (whether denominated as a
franchise or capital stock or other tax) imposed on the Lessor or any other
Person, except the Lessee or its successors, (2) any net revenue tax of the
Lessor or any other Person, except the Lessee and its successors, (3) any tax
imposed with respect to the sale, exchange or other disposition by the Lessor
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; 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 the 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 the Lessee shall be equitably apportioned based upon all
properties owned by the 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 five (5) years as calculated by the Federal Reserve Board.

8
<PAGE> 30
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.

Land: As defined in Article 1.

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, and any and all other
instruments, documents, certificates 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 the Lessee's obligations relating to
the Leased Property, including, without limitation, the Lessee's obligations
hereunder.

Lease Obligations: Collectively, all indebtedness, covenants,
liabilities, obligations, agreements and undertakings (other than the Lessor's
obligations) under this Lease and the other Lease Documents.

Leased Improvements: As defined in Article 1.

Leased Property: As defined in Article 1.

Leasing Group: Collectively, the Lessee, 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 and health-care licensing
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 the 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 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

9
<PAGE> 31
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's Election Notice: As defined in Section 14.3.

Lessor: As defined in the preamble of this Lease and its successors
and assigns.

Lessor's Investment: The sum of (i) _____ plus (ii) the aggregate
amount of all Subsequent Investments.

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
the Lessee or any Sublessee and any other Person pursuant to which the 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
the Lessee or any Sublessee.

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 [ss] 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 [ss] 1395 et
seq.) and any statute succeeding thereto.

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<PAGE> 32
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.

Obligations: Collectively, the Lease obligations and the Related
Party Obligations.

Officer's Certificate: A certificate of the Lessee signed on behalf
of the Lessee by the Chairman of the Board of Directors, the President, any
Vice President or the Treasurer of the Lessee, or another officer authorized to
so sign by the Board of Directors or By-Laws of the 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.

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 the
Lessor.

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.

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.

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<PAGE> 33
Primary Intended Use: The use of the Facility as a [ ] facility
with _________ ( ) units or such additional number of 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 the Lessor.

Principal Place of Business: As defined in Section 10.1.

Proceeds: As defined in the UCC.

Provider Agreements: All participation, provider and reimbursement
agreements or arrangements now or hereafter in effect for the benefit of the
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 the Lessee's or such Sublessee's participation in any Third Party Payor
Program.

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 the 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: [________________________]

Rent: Collectively, the Base Rent, the Additional Charges and all
other sums payable under this Lease and the other Lease Documents.

Rent Adjustment Date: Each ______ anniversary of the Commencement
Date during the Term of the Lease, including, without limitation, any Extended
Terms.

Rent Insurance Proceeds: As defined in Section 13.8.

Residence Agreements: All contracts, agreements and consents executed
by or on behalf of any resident or other Person seeking services at the
Facility, including, without limitation, assignments of benefits and
guarantees.

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<PAGE> 34
Retainage: As defined in Section 13.1.

State: The state or commonwealth in which the Leased Property is
located.

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, whether oral or in writing, now in existence or
subsequently entered into by the Lessee, encumbering or affecting the Leased
Property.

Sublessee: Any sublessee, licensee, concessionaire, tenant or other
occupant under any of the Subleases, but, excluding any resident of the
Facility under any Resident Agreement.

Subsequent Investments: The aggregate amount of all sums expended and
liabilities incurred by the 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).

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 the Lessee and used in connection with the operation of
the Leased Property.

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 Party Payor Programs: Collectively, all third party payor
programs in which the Lessee or any Sublessee presently or in the future may
participate, including without limitation,

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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.

UCC: The Uniform Commercial Code as in effect from time to time in
the (INSERT STATE].

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 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 the 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 units affected by
such Casualty or partial or temporary Taking.

Work: As defined in Section 13.1.

Work Certificates: As defined in Section 13.1.

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" 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 the
Lessor's attorneys shall be deemed to include, without limitation, special
counsel and local counsel for the 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

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<PAGE> 36
"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 Rent for Land, Leased Improvements, Related Rights and
Fixtures. The Lessee will pay to the Lessor, in lawful money of the United
States of America, at the Lessor's address set forth herein or at such other
place or to such other Person as the Lessor from time to time may designate in
writing, rent for the Leased Property, as follows: The Lessee shall pay to the
Lessor a base rent (the "Base Rent") per annum that is equal to [INSERT AMOUNT
DOLLARS ($ ) equal to a negotiated percentage of total project costs determined
immediately prior to the Initial Term and immediately prior to any Extended
Terms] and that is payable in advance in equal, consecutive monthly
installments due on the first day of each calendar month, commencing on
__________________________; provided, however, that on each Rent Adjustment
Date, the Base Rent shall be adjusted to equal the Base Rent then in effect
multiplied by _____________________.

3.2 Intentionally Omitted.

3.3 Intentionally Omitted.

3.4 Additional Charges. Subject to the rights to contest as set
forth in Article 15, in addition to-the Base Rent, (a) the 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
the Lessee assumes or agrees to pay under this Lease, and (b) in the event of
any failure on the part of the Lessee to pay any of those items referred to in
clause (a) above, the 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 the 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 the
Lessee pays any Additional Charges to the Lessor pursuant to any requirement of
this Lease, the 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.

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3.5 Intentionally Omitted.

3.6 Net Lease. The Rent shall be paid absolutely net to the
Lessor, so that this Lease shall yield to the Lessor the full amount of the
installments of Base Rent and 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 this Lease, the 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 the 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 the Lessor and the 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, the Lessee's
use of the Leased Property or the interference with such use by any Person
(other than the Lessor, except to the extent permitted hereunder) or by reason
of eviction by paramount title; (c) any claim that the Lessee has or might have
against the Lessor, (d) any default or breach of any warranty by the Lessor
under this Lease or any other Lease Document, (e) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceedings affecting the Lessor or any assignee or transferee of the
Lessor or (f) any other cause whether similar or dissimilar to any of the
foregoing, other than a discharge of the Lessee from any of the Lease
Obligations as a matter of law.

3.7.2 Waiver. The 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 the Lessee to any abatement, reduction,
suspension or deferment of the Rent or other sums payable by the Lessee
hereunder, except as otherwise specifically and expressly provided in this
Lease.

3.7.3 Independent Covenants. The obligations of the Lessor and the
Lessee hereunder shall be separate and independent covenants and agreements and
the Rent and all other sums payable by the 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.

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,
Base Rent then due during the Lease Year in which such Taking occurs shall be
reduced to equal the product of (i) the then current Base Rent multiplied by
(ii) the difference between one minus a fraction the numerator of which is the
Award, the denominator of which is the fair Market Value of the Leased
Property, and (b) in the case of such a temporary

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Taking, by reducing the Base Rent for the period of such a temporary Taking, by
the net amount of the Award received by the Lessor.

For the purposes of this Section 3.8, the "net amount of the Award
received by the Lessor" shall mean the Award paid to the Lessor on account of
such Taking, minus all costs and expenses incurred by the Lessor in connection
therewith, and minus any amounts paid to or for the account of the 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 Section 4.1.2 and
Article 15, the 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 the Lessee will
promptly furnish the 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.

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), the 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 the 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. The 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 the
Lessor's net income, gross receipts, franchise taxes and taxes on its capital
stock, and the 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. The Lessor and the 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, the Lessee shall file
all personal property tax returns in such jurisdictions where it may legally so
file. The Lessor, to the extent it possesses the same, and the 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.

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Where the Lessor is legally required to file personal property tax returns, if
the Lessee notifies the Lessor of the obligation to do so in each year at least
thirty (30) days prior to the date any protest must be filed, the Lessee will
be provided with copies of assessment notices so as to enable the 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 the Lessee shall be paid over to or retained by the Lessee.
If a Lease Default shall have occurred and be continuing, at the Lessor's
option, such funds shall be paid over to the Lessor and/or retained by the
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 the Lessor, at the Lessee's
option and sole cost and expense, and subject to compliance with the provisions
of Article 15, the Lessee may contest, protest, appeal, or institute such other
proceedings as the Lessee may deem appropriate to effect a reduction of any
Imposition and the Lessor, at the Lessee's cost and expense as aforesaid, shall
fully cooperate in a reasonable manner with the Lessee in connection with such
protest, appeal or other action.

4.2 Notice of Impositions. The Lessor shall give prompt notice to
the Lessee of all Impositions payable by the Lessee hereunder of which the
Lessor at any time has knowledge, but the Lessor's failure to give any such
notice shall in no way diminish the 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 the Lessor and the Lessee,
whether or not such Impositions are imposed before or after such expiration or
termination, and the Lessee's obligation to pay its prorated share thereof
shall survive such expiration or termination.

4.4 Utility Charges. The 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 the Lessee
surrenders the Leased Property in the manner required by this Lease.

4.5 Insurance Premiums. The 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 the Lessee yields up the
Leased Property in the manner required by this Lease. All such premiums shall
be paid annually in advance and the Lessee shall furnish the Lessor with
evidence satisfactory to the 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, the Lessee may pay such insurance premiums to
the insurer in monthly installments so long as the applicable insurer is
contractually obligated to give the 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 the

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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 the Lessor at the times required hereunder, the 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 the
Lessee to the Lessor.

4.6 Deposits.

4.6.1 Lessor's Option. At the option of the Lessor, which may be
exercised at any time, the Lessee shall, upon written request of the Lessor, on
the first day on 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 the
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 the Lessee hereunder shall be estimated
by the Lessor with an appropriate adjustment to be promptly made between the
Lessor and the Lessee as soon as such amount becomes determinable. In
addition, the 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 the 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 the Lessee under this
Section 4.6 shall be held by the 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 the Lessor, and shall be
deposited by the Lessor at such bank as the Lessor may, from time to time
select, and the Lessor shall not be liable to the Lessee or any other Person
(a) based on the 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, the Lessor shall
bear no responsibility for the financial condition of, nor any act or omission
by, the Lessor's depository bank. The income from such investment or interest
on such deposit shall be paid to the 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. The Lessee shall give not less than
ten (10) days prior written notice to the 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 the 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, the

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Lessee shall not be in default hereunder by virtue of the failure of the Lessor
to pay such Imposition or such insurance premium and the Lessor shall pay any
interest or fine assessed by virtue of the Lessor's failure to pay such
Imposition or insurance premium.

4.6.3 Deficits. If for any reason any deposit held by the 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 the Lessor, the Lessee shall deposit an
additional amount with the Lessor, increasing the deposit held by the Lessor so
that the 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. The 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
the Lessor, the Lessee shall deposit with the Lessor the amount in excess of
the sums previously deposited with the 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 the
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 the Lessor's
interest under this Lease, the original the 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 then in its possession to such
assignee (as the subsequent holder of the Lessor's interest in this Lease) and
upon such transfer, the original the 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
the Lessee shall look solely to said assignee, as the subsequent holder of the
Lessor's interest under this Lease, in reference thereto. The original the
Lessor named herein or the applicable successor in interest transferring the
deposits shall provide written notice to the Lessee of such transfer.

4.6.6 Security. All amounts deposited with the Lessor pursuant to
the provisions of this Section 4.6 shall be held by the Lessor as additional
security for the payment and performance of the Obligations and, upon the
occurrence of any Lease Default, the 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, are sums then held by the Lessor under this Section 4.6 shall be
refunded to the Lessee.

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4.6.8 Receipts. The Lessee shall deliver to the Lessor copies of
all notices, demands, claims, bills and receipts in relation to the Impositions
and insurance premiums immediately upon receipt thereof by the Lessee.

ARTICLE 5

OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY;
INSTALLATION, REMOVAL AND REPLACEMENT OF
PERSONAL PROPERTY

5.1 Ownership of the Leased Property. The Lessee acknowledges
that the Leased Property is the property of the Lessor and that the 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. The 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, 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 the Lessee.

5.2.2 Sufficient Personal Property. The 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 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. In addition, the Lessee shall (a) furnish all necessary replacements of
obsolete items of the Tangible Personal Property during the Term, unless the
Lessee provides the Lessor with an explanation (reasonably acceptable to the
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 the Lessor, deliver to the Lessor, a
detailed inventory of all such Tangible Personal Property.

5.2.3 Removal and Replacement; Lessor's Option to Purchase. The
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 TWENTY-FIVE THOUSAND DOLLARS ($25,000),
individually or ONE HUNDRED THOUSAND DOLLARS ($100,000) collectively, except if
such Tangible Personal Property is simultaneously suitably replaced or the
Lessee provides the Lessor with an explanation (reasonably satisfactory to the
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, the 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 the Lessee
or the Lessor. Upon the expiration or earlier termination of this Lease, the
Lessor shall have the

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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 the Lessor) upon payment of its
book value (the Lessee's cost, minus depreciation), but not in excess of its
fair market value or (b) requiring the Lessee to remove the Tangible Personal
Property. If the Lessor exercises its option to purchase the Tangible Personal
Property, the price to be paid by the 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 the Lessor and (ii) applied to the Lease
Obligations before any payment to the Lessee. If the Lessor requires the
removal of the Tangible Personal Property, then all of the Tangible Personal
Property that is not removed by the Lessee within ten (10) days following such
request shall be considered abandoned by the Lessee and may be appropriated,
sold, destroyed or otherwise disposed of by the Lessor without first giving
notice thereof to the Lessee, without any payment to the Lessee and without any
obligation to account therefor.

ARTICLE 6

SECURITY FOR LEASE OBLIGATIONS

6.1 Security for Lessee's Obligations.

6.1.1 Security. Notwithstanding anything to the contrary set forth
herein, in no event shall the Lessee be required to grant to the Lessor any
security interest in Receivables; provided, however, upon any Lease Default or
the expiration or earlier termination of this Lease, the Lessee shall provide
the Lessor with copies of its books and records relating to Receivables, even
if excluded from the security granted to the Lessor, so as to facilitate
continuity of patient care and billing.

6.1.2 Purchase-Money Security Interests, Receivables and Equipment
Leases. Notwithstanding any other provision hereof regarding the creation of
Liens, but subject to section 11.3.1, the Lessee may (a) grant priority
purchase money security interests in items of Tangible Personal Property, (b)
lease Tangible Personal Property from equipment Lessors and (c) grant a prior
security interest in Receivables to an institutional lender which is providing
a working capital line of credit to the Lessee for the exclusive use of the
Facility. Security interests granted by the Lessee in full compliance with the
provisions of this Section 6.1.2 are referred to as "Permitted Prior Security
Interests."

ARTICLE 7

CONDITION AND USE OF LEASED PROPERTY;
MANAGEMENT AGREEMENTS

7.1 Condition of the Leased Property. The Lessee acknowledges
receipt and delivery of possession of the Leased Property and that the Lessee
has examined and otherwise has acquired

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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. The Lessee is leasing the Leased
Property "AS-IS" in its present condition. The Lessee waives any claim or
action against the Lessor in respect to the condition of the Leased Property.
THE 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 THE LESSEE. THE LESSEE HEREBY ASSUMES ALL
RISK OF THE PHYSICAL CONDITION OF THE LEASED PROPERTY, THE SUITABILITY OF THE
LEASED PROPERTY FOR THE 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 the Lessor, at any time and from time to time
during the Term, the Lessee shall engage one (1) or more independent
professional consultants, engineers and inspectors, qualified to do business in
the State and acceptable to the Lessor to perform any environmental and/or
structural investigations and/or other inspections of the Leased Property and
the Facility as the 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 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 the Lessor reasonably determines that the results
of such testing or inspections are unsatisfactory, within thirty (30) days of
notice from the Lessor, the Lessee shall commence such appropriate remedial
actions as may be reasonably requested by the 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.

7.2 Use of the Leased Property; Compliance; Management.

7.2.1 Obligation to Operate. The 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. During the entire Term, the Lessee shall use
the Leased Property, or permit the Leased Property to be used, only for the
Primary Intended Use. The 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 the Lessor, which consent may be withheld in the Lessor's sole and
absolute discretion.

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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 the Lessee, any Manager or any other Person sell or
otherwise provide to any residents, other occupants or invitees therein, or
permit to be kept, used or sold in or about the Leased Property, any article
which may he prohibited by any Legal Requirement or by any of the Insurance
Requirements. Furthermore, the 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. The Lessee shall not commit or suffer to be
committed any waste on, in or under the Leased Property, nor shall the Lessee
cause or permit any nuisance thereon.

7.2.5 No Impairment. The lessee shall neither suffer nor permit the
Leased Property to be used in such a manner as (a) might reasonably tend to
impair the Lessor's title thereto or (b) may reasonably make possible a claim
or claims of adverse usage or adverse possession by the public or if implied
dedication of the Leased Property.

7.2.6 No Liens. Except as permitted pursuant to Section 6.1.2, the
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.

7.2.7 Compliance with Legal Requirements. The Lessee covenants and
agrees that the Leased Property shall not be used for any unlawful purpose and
that the 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, 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 or desirable 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, the Lessee may, upon prior written notice to the
Lessor, contest any Legal Requirement to the extent permitted by, and in
accordance with, Article 15.

7.2.8 Management Agreements. From and after the Commencement Date,
the Lessee shall not enter into any Management Agreement without the prior
written approval of the Lessor, in each instance, which approval shall not be
unreasonably withheld. The Lessee shall not, without the prior written
approval of the 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 the Lessee of any of its remedies under
the Management Agreement as a result of any default by the

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<PAGE> 46
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, the 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.

Each Management Agreement shall provide that the Lessor shall be
provided notice of any defaults thereunder and, at the Lessor's option, an
opportunity to cure such default. The Lessee shall furnish to the Lessor,
within three (3) days after receipt thereof, or after the mailing or service
thereof by the Lessee, as the case may be, a copy of each notice of default
which the 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 the 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, the 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 the Lessee
(except in the case of an emergency) enter upon the Leased Property and
perform, 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 the 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
the Lessee to the Lessor or such receiver, and, the Lessor shall have the same
rights and remedies for failure to pay such costs on demand as for the Lessee's
failure to pay any other sums due hereunder.

ARTICLE 8

REPAIRS; RESTRICTIONS

8.1 Maintenance and Repair.

8.1.1 Lessee's Responsibility. The Lessee, at its sole cost and
expense, shall keep the Leased Property and all private roadways, sidewalks and
curbs appurtenant thereto which are under the Lessee's control in good order
and repair (whether or not the need for such repairs occurs as a result of the
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, the 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

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of, or during, the Term and thereafter until the Lessee surrenders the Leased
Property in the manner required by this Lease. In addition, the 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 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. The 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, the Lessee shall obtain the 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 the Lessee in connection with such Material Structural Work.
Notwithstanding the foregoing, in the event of a bona fide emergency during
which the Lessee is unable to contact the appropriate representatives of the
Lessor, the Lessee may commence such Material Structural Work as may be
necessary in order to address such emergency without the Lessor's prior
approval, provided, however, that the Lessee shall immediately thereafter
advise the Lessor of such emergency and the nature and scope of the Material
Structural Work commenced and shall obtain the Lessor's approval of the
remaining Material Structural Work to be completed.

8.1.2 No Lessor Obligation. The 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 the Lessor shall be construed as (a) constituting the
consent or request of the 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 the 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 the 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
the Lessor in the Leased Property. Without limiting the generality of the
foregoing, the right title and interest of the 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

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to the Leased Property at or by the request of the Lessee or any other Person
other than the Lessor. The 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 the Lessor, the
Lessee shall, at its sole cost and expense, subject to the 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 the 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, the 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 encroachment, violation or impairment and nothing contained
herein shall limit the Lessee's obligations to operate the Leased Property 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. The 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 the
Lessor, which consent may be withheld by the Lessor, in its sole and absolute
discretion, the Lessee shall make no Capital Addition or Material Structural
Work to the Leased Property (including, without limitation, any change in the
size or unit 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 the Lessor has granted its
prior written approval, the following terms and conditions shall apply unless
otherwise expressly set forth in the Lessor's written approval.

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9.2.1 No Liens. The 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 the Lessee desires to undertake any Capital Addition or
material Structural Work, the Lessee shall submit to the Lessor in writing a
proposal setting forth in reasonable detail any proposed Capital Addition or
Material Structural Work and shall provide to the 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 the 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
out and a good faith estimate of the change, if any, in the Gross Revenues that
the Lessee anticipates will result from the construction of such Capital
Addition.

9.2.3 Lessor's Options Regarding Capital Additions and Material
Structural Work. The Lessor shall have the options of: (a) denying permission
for the 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 the 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 the
Lessor may in its discretion impose or (d) any combination of the foregoing.
Unless the Lessor notifies the Lessee in writing of a contrary election within
forty-five (45) days of the Lessee's request, the 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 the 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. The Lessee may request that the
Lessor provide or arrange financing for a Capital Addition or Material
Structural Work by providing to the Lessor such information about the Capital
Addition or Material Structural Work as the Lessor may reasonably request,
including, without limitation, all information referred to in Section 9.2
above. The Lessee understands, however, that the Lessor shall be under no
obligation to agree to such request. Nevertheless, the Lessor shall use
reasonable efforts to notify the Lessee, within forty-five (45) days of receipt
of such information, as to whether the 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 the Lessor's
then existing terms and prevailing conditions to compensate the Lessor for the
additional funds advanced by it). The Lessee may withdraw its request by
notice to the Lessor at any time before such time as the Lessee accepts the
Lessor's

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terms and conditions. All advances of funds for any such financing shall be
made in accordance with the 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 the Lessor agrees to
finance the proposed Capital Addition or Material Structural Work and the
Lessee accepts the Lessor's proposal therefor, in addition to all other items
which the Lessor or any applicable Financing Party may reasonably require, the
Lessee shall provide to the Lessor the following:

(a) prior to any advance of funds, (i) any information,
opinions, certificates, Permits or documents reasonably requested by the Lessor
or an applicable Financing Party which are necessary to confirm that the Lessee
will be able to use the Capital Addition upon the completion thereof or the
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 the 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 the 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 the 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 the Lessor so as to vest title to the Capital Addition or
the applicable Material Structural Work in the 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 the Lessor, providing for any changes required by the Lessor
including, without limitation, changes in the Base Rent and the legal
description of the Land;

(d) upon payment therefor, a deed conveying to the 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 the Lessor;

(e) upon completion of the Capital Addition or the
Material Structural Work, a final as-built survey thereof reasonably
satisfactory to the Lessor, if required by the 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 the Lessor and any Financing
Party (i) updating the same without any additional exception except as may be
reasonably permitted by the Lessor, (ii) if applicable, including the
Additional Land in the

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premises covered by such title insurance policy and (iii) increasing the
coverage thereof by an amount equal to any amount paid by the 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);

(g) simultaneous with the initial advance of funds, if
appropriate, (i) an owner's policy of title insurance insuring fee simple title
in any Additional Land conveyed to the Lessor pursuant to subparagraph (d) free
and clear of all Liens except those approved by the 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 the Lessor, an
appraisal of the Leased Property by an M.A.I. appraiser acceptable to the
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 twenty-five percent (125%) 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 the 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 the
Lessee authorizing the execution and delivery of the lease amendment and any
other documents and instruments as may be reasonably required by the 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, the Lessee shall be deemed to have agreed to pay, upon
demand, all costs and expenses reasonably incurred by the Lessor and any Person
participating with the 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 the
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 the 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

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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, without limitation, tie-ins of buildings or other structures
or utilities, unless the Lessee shall have obtained the prior written approval
of the Lessor, which approval may be withheld in the 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. The 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, the
Lessee shall always comply with and satisfy the conditions of Section 9.4,
mutatis, mutandis. The 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 he paid by
the 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 the
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 the Lessee is unable to contact the
appropriate representatives of the Lessor, the Lessee may commence such
additions, modifications and improvements as may be necessary in order to
address such emergency without the Lessor's prior approval, as long as the
Lessee immediately thereafter advises the Lessor of such emergency and the
nature and scope of the additions, modifications and improvements performed and
obtains the Lessor's approval of the remaining work to be completed.

ARTICLE 10

WARRANTIES AND REPRESENTATIONS

10.1 Representations and Warranties. The Lessee hereby represents
and warrants to, and covenants and agrees with, the Lessor that:

10.1.1 Existence; Power; Qualification. The Lessee is a corporation
duly organized, validly existing and in good standing under the laws of
___________. The 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;

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10.1.2 Valid and Binding. The Lessee is duly authorized to make and
enter into all of the Lease Documents to which the Lessee is a party and to
carry out the transactions contemplated therein. All of the Lease Documents to
which the Lessee is a party have been duly executed and delivered by the
Lessee, and each is a legal, valid and binding obligation of the Lessee,
enforceable in accordance with its terms.

10.1.3 Single Purpose. The 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 operation of the Leased Property for the
Primary intended Use.

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 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 the Lessor of the Lease Documents
to which it is a party).

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 the 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.

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10.1.7 No Burdensome Agreements. The Lessee 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. The 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.

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. The Lessee has not created, incurred,
guaranteed, endorsed, assumed or suffered to exist any liability (whether
direct or contingent) for borrowed money from any Affiliate of the Lessee that
is not fully subordinated to the Lease Obligations pursuant to a written
agreement in form and substance acceptable to the Lessor.

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 the 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

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<PAGE> 55
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 the Lessor
continue to be reasonable (with respect to the material assumptions upon which
such projections are based) and the 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.

10.1.14 Pending Actions, Notices and Reports.

(a) action or investigation pending or, to the best
knowledge and belief of the Lessee, threatened, anticipated or contemplated
(nor, to the knowledge of the 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) The most recent utilization reviews relating to the
Leased Property by all applicable Third Party Payors, Accreditation Bodies and
Governmental Authorities and reviews or scrutiny by any managed care or
utilization review companies have not had a material adverse impact on the
utilization of units or programs at any of the Leased Property. No claims or

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<PAGE> 56
assertions have been made in any utilization review that any of the practices
or procedures used at the Leased Property are improper or inappropriate other
than such claims or assertions which singly and in the aggregate will not have
a material adverse impact on the Leased Property; and

(d) The Lessee has delivered or caused to be delivered to
the Lessor true and correct copies of all licenses, inspection surreys 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.

10.1.15 Compliance with Legal and Other Requirements.

(a) The 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 the Lessee. Without
limiting the foregoing, the 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 the 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) The Facility is accredited by [INSERT ANY OTHER
APPLICABLE ORGANIZATIONS] and there are no deficiencies in either the Leased
Property or any services provided at the Facility that would prevent the
extension of the accreditation of the Facility by (INSERT ANY OTHER APPLICABLE
ORGANIZATIONS] after their next regularly scheduled inspections.

10.1.16 No Action By Governmental Authority. There is no action
pending or, to the best knowledge and belief of the 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 the 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
(collectively referred to herein as the "Permitted Encumbrances"); and the
Lessee shall warrant and defend the Lessor's title to the Leased Property
against any and all claims and demands of every kind and nature whatsoever;

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(b) There is no Condemnation or similar proceeding
pending with respect ro or affecting the Leased Property, and the Lessee is not
aware, to the best of the Lessee's knowledge and belief, that any such
proceeding is contemplated;

(c) No part of the Leased Property has been damaged by
any fire or other casualty. The Leased Improvements are in good operating
condition and repair, ordinary wear and tear excepted, free from known defects
in construction or design;

(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) 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 the Lessee is included within the
definition of the Leased Property;

(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;

(h) All utilities necessary for the use and operation of
the Facility are 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 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 the Lessor to be readily obtainable; and

(i) The Lessee has made no structural alterations or
improvements to any of the Leased Improvements that changed the foot-print of
any of the Leased Improvements, added an additional story to any of the Leased
Improvements, decreased the amount of parking available on the Leased Property
or otherwise involved any alteration which would be regulated by applicable
zoning requirements and the Lessee has no actual knowledge of any such
structural alteration or improvement made to any of the Leased Improvements
during the last ten (10) years

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<PAGE> 58
and has no knowledge of any such structural alteration or renovation made to
any of the Leased Improvements or any such decrease in parking during such
period.

10.1.18 Third Party Payor Agreements.

(a) The Lessee or the Facility is fully qualified as a
provider of services under and participates in all Third Party Payor Programs
and referral programs as is necessary for the prudent operation of the Facility
in the good faith exercise of commercially reasonable business judgment.

(b) Attached hereto as EXHIBIT C is a list of national
accounts and local discount agreements, which constitute all of the agreements
between the Lessee or the Facility, on the one hand, and Third Party Payors on
the other hand, pursuant to which the Lessee or the Facility agrees to provide
services based on a discount factor from the rates regularly charged for
services rendered by the Lessee or the Facility.

(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.

(d) All cost reports and financial reports submitted to
any Third Party Payor with respect to the Facility by any member of the Leasing
Group have been materially accurate and complete and have not been misleading
in any material respect. As a result of any audits by any Third Party Payor,
there are no related recoupment claims made or contests pending or threatened
other than such recoupment claims or contests 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. As of the date hereof, no
cost reports for the Facility remain open or unsettled other than those listed
on EXHIBIT D.

10.1.19 Rate Limitations. Except as disclosed on EXHIBIT E, 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 F, there are no
Contracts, Permits or Legal Requirements which require that a percentage of
beds or slots in any program at the Facility be reserved for Medicaid or
Medicare eligible residents or that the Facility provide a certain amount of
welfare, free or charity care or discounted or government assisted patient
care.

10.1.21 No Proposed Changes. The 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

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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 residents at the Facility or require that the Lessee or the
Facility obtain a certificate of need, Section 1122 approval or the equivalent,
which the 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:

(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 the 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

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<PAGE> 60
prevent all statements contained herein and therein from being misleading.
There is no fact within the special knowledge of the Lessee which has not been
disclosed herein or in writing to the Lessor that materially adversely affects,
or in the future, insofar as the 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. The 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 Lessor's 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. The Lessee is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.

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 the Lessee is located at 14160 Dallas Parkway,
Suite 300, Dallas, Texas 75240 (the "Principal Place of Business").

10.1.29 Labor Matters. There are no proceedings now pending, nor, to
the best of the 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. The 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.

10.2 Continuing Effect of Representations and Warranties. All
representations and warranties contained in this Lease and the other Lease
Documents shall constitute continuing

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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 the 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, in the second and third sentences of Section 10.1.13, and in the
second and third sentences of Section 10.1.18(d) 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 the Lessor, the Lessee shall furnish to the 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 the Lessor may
request and may be relied upon by the 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. The Lessee will furnish and shall
cause to be furnished to the Lessor the following statements, information and
other materials:

(a) Annual Statements. Within ninety (90) 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 (y) any Sublessee for the preceding
fiscal year, certified and audited by, and with the unqualified opinion of,
independent certified public accountants acceptable to the Lessor and certified
as true and correct by the Lessee or the applicable Sublessee, as the case may
be (and, without limiting anything else contained herein, the Consolidated
Financials for the 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 the Lessee and each
Sublessee, stating whether, to the best of the signer's knowledge and belief
after making due inquiry, the Lessee 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
the Lessee or the applicable Sublessee, as the case may be, regarding the
existence of any reportable conditions or

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material weaknesses and (iv) a statement certified as true and correct by the
Lessee setting forth all Subleases 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 such Subleases
as may be reasonably requested by the Lessor.

(b) 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 assisted living matters and
(ii) Contracts (involving payments in the aggregate in excess of $100,000 per
annum), including, without limitation, all Provider Agreements.

(c) 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.

(d) 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 the 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, the 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 the Lessee or any Sublessee.

(e) 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 the Lessee or any Sublessee to any
Governmental Authority, Accreditation Body or any Third Party Payor with
respect to the Leased Property.

(f) Other Information. with reasonable promptness, such
other information as the Lessor may from time to time reasonably request
respecting (i) the financial condition and affairs of each member of the
Leasing Group 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.

(g) 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

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giving of notice or the passage of time, or both, could constitute a Lease
Default, a written statement of the Lessee setting forth the details of such
Lease Default, event or circumstance and the action which the Lessee proposes
to take with respect thereto.

(h) 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.

(i) 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 the Lessor, any letter of comments directed by such accountant to the
management of any such member of the Leasing Group.

(j) Adverse Developments. Promptly after the Lessee
acquires knowledge thereof, written notice of:

(i) the potential termination of any Permit or Provider
Agreement necessary for the 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 the 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 the Lessee or the Facility for the participation in any
Medicaid, Medicare or other Third Party Pavor Program;

(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 the
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.

(k) Responses To Inspection Reports. Within thirty (30)
days after receipt of an inspection report relating to the Leased Property from
the Lessor, a written response describing in detail prepared plans to address
concerns raised by the inspection report.

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(l) 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.

(m) Annual Budgets. At least thirty (30) days prior to
the end of each Fiscal Year, the Lessee, any sublessee and/or any manager shall
submit to the 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, the Lessee any Sublessee and/or any
Manager shall submit to the 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 the 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.

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 the 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. The Lessor shall afford any information
received pursuant to the provisions of the Lease Documents the same degree of
confidentiality that the Lessor affords similar information proprietary to the
Lessor; provided, however, that the 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 the Lessor has
provided such information in accordance with the terms hereof) and provided,
further, that the Lessor shall have the unconditional right to (a) disclose any
such information as the 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 the Lessor and
any member of the Leasing Group. Without limiting the foregoing, the Lessor
may also utilize any information furnished to it hereunder as and to the extent
(i) counsel to the 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) the Lessor is required or requested by
any Governmental Authority to disclose any such information and/or (iii) the
Lessor is requested to disclose any such information by any of its lenders or
potential lenders. The Lessor shall not be liable in any way for any
subsequent disclosure of such

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information by any Person to whom the Lessor provided such information in
accordance with the terms hereof. Nevertheless, in connection with any such
disclosure, the Lessor shall inform the recipient of any such information of
the confidential nature thereof. The Lessor 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. The Lessee covenants and agrees that,
throughout the Term and as long as the Lessee is in possession of the Leased
Property;

11.3.1 No Indebtedness. The Lessee shall not create, incur, assume
or suffer to exist any liability for borrowed money except (i) Indebtedness to
the 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 the Lessor in accordance with the terms of
Article 9 hereof, (v) Indebtedness to an Affiliate, provided, that, such
Indebtedness is fully subordinated to this Lease pursuant to a written
agreement in form and substance acceptable to the Lessor, and (vi) other
Indebtedness of the Lessee in the aggregate amount not to exceed ___________
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.

11.3.2 No Guaranties. The 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. The Lessee covenants and agrees that
throughout the Term and any periods thereafter that the Lessee remains in
possession of the Leased Property:

11.4.1 Maintenance of Existence. If the Lessee is a corporation,
trust or partnership, during the entire time that this Lease remains in full
force and effect, the 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, the Lessee
shall not suffer the use in connection with any renovations or other
construction relating to the Leased Property of any

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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 the
Lessee does not have absolute and unencumbered title, and the Lessee 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 renovations
or construction, subject to the Lessee's right to contest to the extent
provided for in Article 15.

11.4.3 Compliance With Legal Requirements And Applicable Agreements.
The 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.

11.4.4 Books And Records. The Lessee 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
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. The 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. The Lessee will maintain, and cause
any Sublessee and any Manager to maintain, experienced and competent
professional management with respect to its business and with respect to the
Leased Property. The Lessee, any Sublessee and any Manager shall conduct, in
the ordinary course, the operation of the Facility, and the Lessee and any
Sublessee shall not enter into any other business or venture during the Term,
or such time as the Lessee or any Sublessee is in possession of the Leased
Property.

11.4.7 Address. The Lessee shall provide the Lessor thirty (30)
days' prior written notice of any change of its Principal Place of Business
from its current Principal Place of Business. The Lessee shall maintain all
books and records relating to its business, solely at its Principal Place of
Business and at the Leased Property. The Lessee shall not (a) remove any books
or records relating to the Lessee's business from either the Leased Property or
the Lessee's Principal Place of Business or (b) relocate its Principal Place of
Business until after receipt of a certificate from the Lessor, signed by an
officer thereof, stating that the 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.

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11.4.8 Subordination of Affiliate Transactions. Without limiting the
provisions of any other Section of this Lease, any payments to be made by the
Lessee to (a) any member of the Leasing Group (or any Affiliate of any member
of the Leasing Group) or (b) any Affiliate of the Lessee, in connection with
any transaction between the 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, the 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 the
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,
the Lessee shall permit the 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, the 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), the Lessee
shall (i) provide the Lessor with prior notice of such acquisition and (ii)
shall take such actions and enter into such agreements as the Lessor shall
reasonably request in order to grant the 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 the
Lessor.

11.5 Additional Negative Covenants. The Lessee covenants and
agrees that, throughout the Term and such time as the Lessee remains in
possession of the Leased Property:

11.5.1 Restrictions Relating to Lessee. Except as may otherwise be
expressly provided in any of the other Lease Documents, the Lessee shall not,
without the prior written consent of the Lessor, in each instance, which
consent may be withheld in the sole and absolute discretion of the 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 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 11.3.1(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

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equals or is less than TWENTY-FIVE THOUSAND DOLLARS ($25,000), individually, or
ONE HUNDRED THOUSAND DOLLARS ($100,000) 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 the
Lessee provides the Lessor with an explanation (reasonably satisfactory to the
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 the Lessee in the ordinary course of
business; and (vi) subject to the terms of the [Shareholder Guarantee
Agreement], distributions to the shareholders of the Lessee;

(b) permit the use of the Facility for any purpose other
than the Primary Intended Use; or

11.5.2 No Liens. The 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 the
Lessee's interest therein) or the 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 Subleases, (b) the Permitted Encumbrances, (c) Liens which are
consented to in writing by the Lessor, (d) Liens for those taxes of the Lessor
which the 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 the 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 the Lessor.

11.5.3 Limits on Affiliate Transactions. The Lessee shall not enter
into any transaction with any Affiliate, 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, the 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 Intentionally Omitted.

11.5.5 No Default. The Lessee shall not commit any default or breach
under any of the Lease Documents.

11.5.6 Intentionally Omitted.

11.5.7 Intentionally Omitted.

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11.5.8 ERISA. The 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 the Lessor to the amount
of the aggregate past service liability thereby created.

11.5.9 Forgiveness of Indebtedness. The 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 the Lessor as of the date hereof, the Lessee will not
write up (by creating an appraisal surplus or otherwise) the value of any
assets of the Lessee; above their cost to the Lessee, less the depreciation
regularly allowable thereon.

11.5.11 Changes in Fiscal Year and Accounting Procedures. The Lessee
shall not, without the prior written consent of the Lessor, in each instance,
which consent may be withheld in the Lessor's reasonable discretion (a) change
its fiscal year or capital structure 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-the 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 the Lessee.

ARTICLE 12

INSURANCE AND INDEMNITY

12.1 General Insurance Requirements. During the Term of this Lease
and thereafter until the Lessee surrenders the Leased Property in the manner
required by this Lease, the 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. The Lessee's insurance shall
include the following:

(a) property loss and physical damage insurance on an
all-risk basis (with only such exceptions as the 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 the 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

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construction, such insurance shall be on a builder's-risk, completed value,
non-reporting form with permission to occupy;

(b) flood insurance (if the Leased Property or any
portion thereof is situates 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 the 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 the Lessor;

(d) earthquake insurance (if deemed necessary by the
Lessor) in limits and with deductibles acceptable to the Lessor;

(e) environmental impairment liability insurance (if
available) in limits and with deductibles acceptable to the Lessor;

(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 the 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 (10%) 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 the 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;

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(k) subsidence insurance (if deemed necessary by the
Lessor) in limits acceptable to the Lessor; and

(l) such other insurance as the 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.

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 the 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 the 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
the 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 canceled or
materially modified except upon thirty (30) days, prior written notice to the
Lessor and any Fee Mortgagee;

(d) be payable to the 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 the Lessor and any Fee Mortgagee;

(f) expressly waive any right of subrogation on the part
of the insurer against the Lessor, any Fee Mortgagee or the Leasing Group; and

(g) otherwise be in such forms as shall be reasonably
acceptable to the Lessor.

12.1.4 Notices; Certificates and Policies. The Lessee shall promptly
provide to the Lessor copies of any and all notices (including notice of
non-renewal), claims and demands which the Lessee receives from insurers of the
Leased Property. At least ten (10) days prior to the

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expiration of any insurance policy required hereunder, the Lessee shall deliver
to the Lessor certificates and evidence of insurance relating to all renewals
and replacements thereof, together with evidence, satisfactory to the Lessor,
of payment of the premiums thereon. The Lessee shall deliver to the 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) ninety (90) days after the effective date of each
such policy and (b) ten (10) days after receipt thereof by the Lessee.

12.1.5 Lessor's Right to Place Insurance. If the Lessee shall fail
to obtain any insurance policy required hereunder by the Lessor, or shall fail
to deliver the certificate and evidence of insurance relating to any such
policy to the Lessor, or if any insurance policy required hereunder (or any
part thereof) shall expire or be canceled or become void or voidable by reason
of any breach of any condition thereof, or if the 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 the Lessor, the 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 the Lessor, and, at its option, the
Lessor may obtain such insurance and pay the premium or premiums therefor; in
which event any amount so paid or advanced by the 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
the Lessee to the 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 the Lessor alone (rather than jointly
to the Lessee and the Lessor). The Lessor is hereby authorized to adjust and
compromise any such loss with the consent of the Lessee or, following any Lease
Default, whether or not cured, without the consent of the Lessee, and to
collect and receive such proceeds in the name of the Lessor and the Lessee, and
the Lessee appoints the Lessor (or any agent designated by the Lessor) as the
Lessee's attorney-in-fact with full power of substitution, to endorse the
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 the 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 the 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 the 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 the Lessee may suffer and shall survive the
same. Such power of attorney, is provided solely to protect the interests of
the Lessor and shall not impose

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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
willful misconduct.

12.1.8 Blanket Policies. Notwithstanding anything to the contrary
contained herein, the 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 the Lessee and its Affiliates;
provided, however, that the coverage afforded to the Lessor shall not be
reduced or diminished or 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. The Lessee shall not, on the 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 the 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 the Lessor, are
included therein as insureds and (b) losses are payable under said insurance in
the same manner as losses are required to be payable under this Lease. The
Lessee shall immediately notify the 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. The Lessee hereby assigns to
the Lessor all rights of the Lessee in and to any unearned premiums allocable
to the Leased Property on any insurance policy required hereunder to be
furnished by the Lessee which may become payable or are refundable after the
occurrence of an Event of Default hereunder. In the event that this Lease is
terminated for any reason (other than the purchase of the Leased Property by
the Lessee), the insurance policies required to be maintained hereunder,
including all right, title and interest of the Lessee thereunder, shall become
the absolute property of the Lessor.

12.2 Indemnity.

12.2.1 Indemnification. Except with respect to the gross negligence
or willful misconduct of the Lessor or any of the other indemnified Parties, as
to which no indemnity is provided, the Lessee hereby agrees to defend with
counsel acceptable to the Lessor, indemnify and hold harmless the 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, the 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 the
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

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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 '@rom any act, fault, omission to act or
misconduct by any member of the Leasing Group or any Affiliate of the 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) the 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) the 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 the 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 the Lessee under this Section 12.2.1 shall be a demand
obligation of the Lessee to the 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 Lessor, any Fee Mortgagee and their respective
successors, assigns, employees, servants, agents, attorneys, officers,
directors, shareholders, partners and owners.

12.2.3 Limitation on Lessor Liability. Neither the Lessor nor any
Affiliate of the 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 the Lessee and the Lessor
shall not in any manner be held responsible therefor. Notwithstanding the
foregoing, the Lessor shall not be released from liability for any injury,
loss, damage or liability suffered directly by the Lessee to the extent caused
directly by the gross negligence or willful misconduct of the 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 the 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

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foreclosures, levies or executions of Liens (other than those created by the
Lessor in accordance with the provisions of Article 20) is assumed by the
Lessee and, in the absence of the gross negligence or willful misconduct as set
forth in Section 12.2.3, the 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 the Lessee to any abatement
of Rent (except for an abatement, if any, as specifically provided for in
Section 3.8).

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"), the Lessee shall give immediate written notice thereof
to the Lessor and, subject to the terms of this Article 13, the 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 twenty (120) 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 two-hundred and
seventy (270) 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, the Lessee shall comply with the following requirements:

(a) The Lessee shall furnish to the Lessor complete plans
and specifications for the work (collectively, the "Plans and Specifications"),
for the 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 the 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;

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(b) The Lessee shall furnish to the 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;

(c) The Lessee shall furnish to the 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 the Lessor and which the Lessor shall be
required to apply toward restoration of the Leased Property as provided in
Section 13.2;

(d) The Lessee shall furnish to the 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 the
Lessee; and

(e) The Lessee shall not commence any of the work until
the Lessee shall have complied with the requirements set forth in clauses (a)
through (d) immediately above, as applicable, and, thereafter, the 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 the Lessee is unable to contact the appropriate
representatives of the Lessor, the Lessee may commence such work as may be
necessary in order to address such emergency without the Lessor's prior
approval, as long as the Lessee immediately thereafter advises the Lessor of
such emergency and the nature and scope of the Work performed and obtains the
Lessor's approval of the remaining Work to be completed.

13.1.3 Disbursement of Insurance Proceeds. If, as provided in
Section 13.2, the 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 the Lessee in accordance with the terms and
conditions of this Lease, the 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. The Lessor shall
not be required to make disbursements more often than at thirty (30) day
intervals. The 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, the Lessee
shall have received the 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

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(collectively, the "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 the 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 staling 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 the 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 paid, 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) The Lessee shall deliver to the 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
Certificate, which Liens shall be discharged upon disbursement of the funds
then being requested, (ii) any Fee Mortgage and (iii) the Permitted
Encumbrances. The 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 the
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, the Lessee shall deliver to

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the Lessor, upon the request of the 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) The Lessee shall deliver to the Lessor (i) an opinion
of counsel (satisfactory to the 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 the 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.

The Lessor, at its option, may waive any of the foregoing requirements in whole
or in part in any instance. Upon compliance by the Lessee with the foregoing
requirements (excerpt for such requirements, if any, as the Lessor may have
expressly elected to waive), and to the extent of (x) the insurance proceeds,
if any, which the 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 the Lessee, the Lessor shall make available for payment to the
Persons named in the work Certificate the respective amounts stated in said
certificates) 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 the Lessor that the Work
shall be fully completed in accordance with the Plans and Specifications and
the requirements of the 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, the Lessee shall
promptly deliver to the 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 the Lessor
insuring the Leased Property against all mechanic's

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and materialman's liens accompanied by the final lien waivers from the general
contractor and all subcontractors;

(iii) a certificate by the Lessee in form and substance
reasonably satisfactory to the Lessor, listing all costs and expenses in
connection with the completion of the Work and the amount paid by the 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 the 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, the Lessee shall obtain
and deliver to the 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, the Lessor shall pay the
Retainage to the Lessee or to those Persons entitled thereto and if there shall
be insurance proceeds or cash deposits, other than the Retainage, held by the
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, the Lessor shall pay over
such proceeds or cash deposits to the Lessee.

No inspections or any approvals of the work during or after
construction shall constitute a warranty or representation by the Lessor, or
any of its agents or 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, including any failure to act, relating to the Lessor are
performed solely for the benefit of the Lessor to assure the payment and
performance of the Lease Obligations and are not for the benefit of the 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, the 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;

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(c) The Lessee demonstrates to the Lessor's satisfaction
that the Lessee has the financial ability to satisfy the Lease Obligations
during such repair or restoration; and

(d) no sublease (excluding Resident Agreements) material
to the operation of the Facility immediately prior to such damage or taking
shall have been canceled 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) the 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 two hundred and seventy (270) 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 the Lessee may either (i)
acquire the Leased Property from the Lessor for a purchase price equal to the
greater of (x).the Lessor's 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 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, the Lessee shall be entitled
upon payment of the full purchase price to receive all property insurance
proceeds (less any costs and expenses incurred by the Lessor in collecting the
same), or (ii) terminate this Lease, in which event (subject to the provisions
of the last sentence of this Section 13.2.1.) the Lessor shall be entitled to
receive and retain the insurance proceeds; provided, however, that the Lessee
shall only have such right of termination effective upon payment to the 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 the Lessor (net of costs and expenses incurred by the
Lessor in collecting the same) accruals (3) the greater of the Lessor's
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, the Lessor shall assign to the Lessee
any outstanding insurance claims.

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13.2.3 Lessee Responsible for Short-Fall. If the cost of the Work
exceeds the amount of proceeds received by the Lessor from the property
insurance required under Article 12 (net of costs and expenses incurred by the
Lessor in collecting the same), the 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 the Lessee to the 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 the 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, the Lessor shall pay such insurance proceeds to the Lessee to
reimburse the 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 the Lessee is required or elects to restore the Facility, the
Lessee shall either (a) restore (i) all alterations and improvements to the
Leased Property made by the Lessee and (ii) the Tangible Personal Property or
(b) replace such alterations and improvements and the Tangible 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 the Lessee to extend the
Term of this Lease, granted to the Lessee herein and any right of the Lessee to
purchase the Leased Property contained in this Lease to be terminated and to be
without further force or effect.

13.7 Waiver. The 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 the 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 the Lessor and dealt
with as follows:

(a) if the Work has been promptly and diligently
commenced by the 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, the Lessor shall each month pay to the 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 co the rental loss and/or
business interruption for the preceding month minus an amount

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accrual 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 the 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 protected by the Lessor, shall be held by the 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 the
Lessor (net of costs and expenses incurred by the Lessor in collecting the
same) exceed the amounts required under clauses (a) and (b) above, the excess
shall be paid to the 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, the Lessor may at its option use or release the
Rent Insurance Proceeds to pay for the Work and, if a Lease Default exists, the
Lessor may apply all such insurance proceeds towards the Lease Obligations or
hold such proceeds as security therefor.

13.9 Obligation To Account. Upon the Lessee's written request,
which may not be made not more than once in any three (3) month period, the
Lessor shall provide the Lessee with a written accounting of the application of
all insurance proceeds received by the 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 temporarily Unsuitable For Its Primary Intended Use for
a period not likely to, or which does not, exceed two hundred and seventy (270)
days. If, however, the Leased Property is thereby so rendered permanently or
temporarily Unsuitable For Its Primary Intended Use: (a) the 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) the Lessee

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shall have the right to acquire the Leased Property from the 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 Lessor's 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, the Lessor may overrule the Lessee's election under clause (a) or
(b) and instead either (1) terminate this Lease as of the date when the Lessee
is required to surrender possession of the portion of the Leased Property so
taken or (2) compel the 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 unit
capacity of the Facility if operated in accordance with its Primary Intended
Use. The Lessee shall exercise its election under this Section 14.3 by giving
the Lessor notice thereof ("Lessee's Election Notice") within sixty (60) days
after the Lessee receives notice of the Taking. The Lessor shall exercise its
option to overrule the Lessee's election under this Section 14.3 by giving the
Lessee notice of the Lessor's exercise of its rights under Section 14.3 within
thirty (30) days after the Lessor receives the Lessee's Election Notice. If,
as the result of any such partial or temporary Taking, this Lease is not
terminated as provided above, the 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.@, the Lessee shall accomplish all necessary restoration and the
Lessor shall release the net proceeds of such Award to reimburse the 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), the 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 the Lessor and Rent shall be abated as set forth
in Section 3.7.

14.5 Award Distribution. In the event the 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 the Lessee and the Lessor
agrees to assign to the Lessee all of the Lessor's rights thereto in any other
event, the entire Award shall belong to and be paid to the Lessor.

14.6 Control of Proceedings. Subject to the rights of any Fee
Mortgagee, unless and until the 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 the Lessor; provided, however, that the
Lessor shall keep the Lessee apprised of the progress of all such proceedings
and shall solicit

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the Lessee's advice with respect thereto and shall give due consideration to
any such advice. In addition, the Lessee shall reimburse the 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, the Lessee's obligation to so reimburse the Lessor shall be diminished
by the amount of the Award, if any, received by the Lessor which is in excess
of the Lessor's Investment.

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, the Lessee,
any Sublessee or any Manager on their own or on the Lessor's behalf (or in the
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 the 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 the 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 the 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), the Lessee shall deliver to the Lessor an Officer's
Certificate and opinion of counsel, if the 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) the Lessee shall give such cash
security as may be demanded in good faith by the 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
the Lessor or any member of the Leasing Group, the 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 the Lessee to contest the payment of Rent or any other sums payable by
the Lessee to the Lessor under any of the Lease Documents.

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15.2 Lessor's Cooperation. The Lessor, at the Lessee's sole cost
and expense, shall execute and deliver to the Lessee such authorizations and
other documents as may reasonably be required in any such contest, so long as
the same does not expose the Lessor to any civil or criminal liability, and, if
reasonably requested by the Lessee or if the Lessor so desires, the Lessor
shall join as a party therein.

15.3 Lessee's Indemnity. The Lessee, as more particularly provided
for in Section 12.2, shall indemnify, defend (with counsel acceptable to the
Lessor) and save the Lessor harmless against any liability, cost or expense of
any kind, including without limitation, attorneys, fees and expenses that may
be imposed upon the 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 the Lessor to exercise its
remedies hereunder and under any of the other Lease Documents:

(a) any failure of the 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 (v) below (a "Failure to
Perform"), continuing for thirty (30) days after the giving of notice by the
Lessor to the 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, (4) the Lessee commences the cure thereof within
thirty (30) days after the giving of such notice by the Lessor to the Lessee,
(ii) the Lessee 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 Lessee and (iv) such Failure to Perform does not impair the
value of, or the Lessor's rights with respect to, the Leased Property;

(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 is a continuing representation or warranty
pursuant to Section 10.2;

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(e) 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;

(f) 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;

(g) 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;

(h) in the event that, without the prior written consent
of the Lessor, in each instance, which consent may be withheld by the Lessor in
its sole and absolute discretion:

i. 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
if such member of the Leasing Group shall be a operation of law or otherwise),
partnership, joint venture, syndicate or other group;

iii. more than [ percent ( %)], in the aggregate, of 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 (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;

(i) the death, incapacity, liquidation, dissolution or
termination of existence of the any member of the Leasing Group or the merger
or consolidation of any member of the Leasing Group with any other Person;

(j) if, without the prior written consent of the Lessor,
in each instance, which consent may be withheld by the Lessor in its sole and
absolute discretion, the Lessee's or any Sublessee's interest in the Leased
Property shall be, directly or indirect mortgaged, encumbered

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(by any voluntary or involuntary Lien other than Permitted Encumbrances),
subleased, sold, assigned, hypothecated or otherwise transferred (whether by
operation of law or otherwise);

(k) 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 the Lessee or any Sublessee, whether or not the applicable
creditor or obligee elects to declare the obligations of the 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 the Lessor's reasonable opinion, may impair the
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
the 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 the 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 ONE HUNDRED THOUSAND DOLLARS ($100,000);

(l) intentionally omitted;

(m) 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 of any member of the Leasing Group whether or lot 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 map or line of credit shall mean and
include any line of credit established in an amount equal to or greater than
FIVE HUNDRED THOUSAND DOLLARS ($500,000);

(n) except as a result of Casualty or a partial or
complete Condemnation, if the Lessee or any Sublessee ceases operation of the
Facility for a period in excess of thirty (30) days (a "Failure to Operate");

(o) if one or more judgments against the Lessee or any
Sublessee or attachments against the 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;

(p) if 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

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judgment shall continue unsatisfied and in effect for a period of ten (10)
consecutive days without an insurance company satisfactory to the Lessor (in
its sole and absolute discretion) having agreed to fund such award or judgment
in a manner satisfactory to the Lessor (in its sole and absolute discretion)
and in either case such award or judgment shall, in the reasonable opinion of
the Lessor, have a material adverse affect on the ability of any member of the
Leasing Group to operate the Facility;

(q) if 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 the Lessor, in each instance, which consent may be withheld in the
Lessor's reasonable discretion, shall not be renewed or extended upon the
expiration of the stated term thereof;

(r) if, after the 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 the 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 the Lessee or such
Sublessee is declared ineligible to continue its participation in the Medicare
and/or Medicaid programs;

(s) 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 the operation of the Facility in accordance with the
Primary Intended Use; and

(t) 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;

(u) the appointment of a temporary manager (or operator)
for the Leased Property by any Governmental Authority; or

(v) the entry of an order by a court with jurisdiction
over the Leased Property to close the Facility, to transfer one or more
residents from the Facility as a result of an allegation of abuse or neglect or
to take any action to eliminate an emergency situation then existing at the
Facility.

16.2 Remedies.

(a) if any Lease Default shall have occurred, the Lessor
may at its option terminate this Lease by giving the 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 the Lessor shall have
specifically elected by a written

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notice to so terminate the Lease) and all rights of the Lessee under this Lease
shall cease. Notwithstanding the foregoing, in the event of the Lessee's
failure to pay Rent, if such Rent remains unpaid beyond ten (10) days from the
due date thereof, the 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 the 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 the Lessor, and no other act done by or on
behalf of the Lessor, shall constitute an acceptance of surrender of the Leased
Property by the Lessee or reduce the 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 the Lessor.

(b) To the extent permitted under applicable law, the
Lessee shall pay as Additional Charges all costs and expenses (including,
without limitation, attorneys, fee and expenses) reasonably incurred by or on
behalf of the Lessor as a result of any Lease Default.

(c) if any Lease Default shall have occurred, whether or
not this Lease has been terminated pursuant to Paragraph (a) of this Section,
the Lessee shall, to the extent permitted under applicable law, if required by
the Lessor so to do, upon not less than ten (10) days' prior notice from the
Lessor, immediately surrender to the Lessor the Leased Property pursuant to the
provisions of Paragraph (a) of this Section and quit the same, and the Lessor
may enter upon and repossess the Leased Property by reasonable force, summary
proceedings, ejectment or otherwise, and may remove the 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 residents 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 the Lessor may claim ownership of
the Tangible Personal Property as set forth in Section 5.2.3 hereof or the
Lessor may exercise its rights as secured party under the Security Agreement.
The Lessor shall use reasonable, good faith efforts to relet the Leased
Property or otherwise mitigate damages suffered by the Lessor as a result of
the Lessee's breach of this Lease.

(d) In addition to all of the rights and remedies of the
Lessor set forth in this Lease and the other Lease Documents, if the 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 the Lessee shall also
pay to the Lessor (i) a late payment service charge (in order to partially
defray the 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 the Lessee hereunder or to relieve the
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 the Lessee or the repossession of the
Leased Property, (c) the failure or inability of the Lessor, notwithstanding
reasonable good faith efforts, to relet the Leased Property, (d) the

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reletting of the Leased Property or (e) the failure of the Lessor to collect or
receive any rentals due upon any such reletting, shall relieve the Lessee of
its liability and obligations hereunder, all of which shall survive any such
termination, repossession or reletting. In any such event, the Lessee shall
forthwith pay to the Lessor all Rent due and payable with respect to the Leased
Property to and including the date of such termination, repossession or
eviction. Thereafter, the Lessee shall forthwith pay to the Lessor, at the
Lessor's option, either:

(i) the sum of: (x) all Rent that is due and unpaid at
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 the Lessor for all damage proximately caused bv the Lessee's failure
to perform 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 the Lessee's right of possession or other rights under this
Lease had not been terminated, or if the 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 the Lessor may enforce, by action or otherwise, any other term
or covenant of this Lease. There shall be credited against the Lessee's
obligation under this Clause (ii) amounts actually collected by the Lessor from
another tenant to whom the Leased Property may have actually been leased or, if
the Lessor is operating the Leased Property for its own account, the actual net
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, the 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 the
Lessee which are received by the 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 the Lessor may reasonably determine
or as may be required by the laws of the State.

16.6 Intentionally omitted.

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16.7 Lessors's Right to Cure. If the 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, the Lessor, after five (5) Business Days' prior notice to the 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 the 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 the Lessor's opinion, ma be necessary or appropriate therefore No such entry
shall be deemed an eviction of the Lessee. All sums so paid by the 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 the Lessee to the Lessor on demand as an Additional Charge.
The obligations of the Lessee and rights of the Lessor contained in this
Article shall survive the expiration or earlier termination of this Lease.

16.8 No Waiver By Lessor. The 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 the 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
failure, delay or waiver, give the Lessor does not intend to, from insisting
upon the strict representations and warranties Lessor can exercise any of its
the Lessor must thereafter, as a result of such notice to the Lessee or any
other Person that or may not, give a further waiver or to refrain performance
of the terms, conditions, covenants, set forth in the Lease Documents before
the 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 the Lessor and the Lessee or any other
Person.

The acceptance by the 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 the Lessor's remedies at that time or at any subsequent time,
(b) constitute an accord and satisfaction or (c) nullify any prior exercise of
any remedy, without the express written consent of the Lessor. Any failure by
the 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 the 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

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the maximum extent not prohibited by applicable law, the 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 the Lessor and, except as may be otherwise specifically agreed to by
the Lessor in writing, no forbearance on the part of the Lessor, no extension of
the time for the payment of the whole or any part of the Obligations, and no
other indulgence given by the Lessor to the Lessee or any other Person, shall
operate to release or in any manner affect the original liability of the Lessee
or such other Persons, or to limit, prejudice or impair any right of the Lessor,
including, without limitation, the right to realize upon any collateral, or any
part thereof, for any of the Obligations evidenced or secured by the Lease
Documents; notice of any such extension, forbearance or indulgence being hereby
waived by the Lessee and all those claiming by, through or under the 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 the
Lessor under any of the other Lease Documents or at law or in equity, all of
which are hereby reserved by the Lessor, and this Lease is made and accepted
without prejudice to any such rights and remedies. All of the rights and
remedies of the Lessor under each of the Lease Documents shall be separate and
cumulative and may be exercised concurrently or successively in the Lessor's
sole and absolute discretion.

ARTICLE 17

SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING OVER

17.1 Surrender. The Lessee shall, upon the expiration or prior
termination of the Term (unless the Lessee has concurrently purchased the
Leased Property in accordance with the terms hereof), vacate and surrender the
Leased Property to the 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 the 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 the Lessor, and (c) any damage or destruction
resulting from a Casualty or Taking that the 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 the Lessee has
concurrently purchased the Leased Property in accordance with the terms
hereof), upon any request made from time to time by the Lessor, the Lessee
shall (a) promptly and diligently use its best effort s 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 the Lessor
or its designee and/or (ii) arrange for the transfer or assignment of such
Permits and Contracts to the 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

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fullest extent possible) and assist the Lessor or its designee in obtaining
such Permits and Contracts (whether by transfer, assignment or otherwise).
Such efforts and cooperation on the part of the 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
the Lessor. Furthermore, the Lessee shall not take any action or refrain from
taking any action which would defer, delay or jeopardize the process of the
Lessor or its designee obtaining said Permits and Contracts (whether by
transfer, assignment or otherwise). Without limiting the foregoing, the 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.

The Lessee hereby appoints the Lessor as its attorney-in-fact, with
full power of substitution to take such actions, in the event that the Lessee
fails to comply with any request made by the Lessor hereunder, as the 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 the 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 the Lessee may suffer and
shall survive the same. Such power of attorney 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 willful misconduct.

17.3 No Acceptance of Surrender. Except at the expiration of the
Term in the ordinary course, no surrender to the 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 the Lessor and no act by the Lessor or any
representative or agent of the Lessor, other than such a written acceptance by
the Lessor, shall constitute an acceptance of any such surrender.

17.4 Holding Over. If, for any reason, the 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 the 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 the Lessee pursuant to the provisions of this Lease with respect to
the Leased Property. During such period of tenancy, the 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 the Lessor to the holding over of the Lessee after the
expiration or earlier termination of this Lease.

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ARTICLE 18

PURCHASE OF THE LEASED PROPERTY

18.1 Purchase of the Leased Property. If this Lease is in full
force and effect and there exists no Event of Default which has not been cured
within the applicable grace period, then the Lessee shall have the option
exercisable on not less than six (6) months nor more than twenty-four (24)
months notice to purchase the Leased Property beginning on the anniversary of
the Commencement Date at a purchase price equal to the Fair Market Value of the
Leased Property. In the event the Lessee purchases the Leased Property from
the Lessor pursuant to any of the terms of this Lease, the Lessor shall, upon
receipt from the 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 the Lessee a deed with covenants
only against acts of the Lessor conveying the entire interest of the Lessor in
and to the Leased Property to the 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 the Lessee, any Liens created in accordance
with the terms of this Lease or consented to by the Lessee, the claims of all
Persons claiming by through or under the Lessee, any other matters assented to
by the Lessee and all matters for which the Lessee has responsibility under any
of the Lease Documents, but otherwise not subject to any other Lien created by
the Lessor from and after the Commencement Date (other than an Encumbrance
permitted under Article 20 which the Lessee elects to assume). The applicable
purchase price shall be paid in cash to the Lessor, or as the Lessor may
direct, in federal or other immediately available funds except as otherwise
mutually agreed by the Lessor and the Lessee. All expenses of such conveyance,
including, without limitation, title examination costs, standard (and extended)
coverage title insurance premiums, attorneys, fees incurred by the Lessor in
connection with such conveyance, recording and transfer taxes and recording
fees and other similar charges shall be paid by the 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, the Lessor (or the Lessee, as the case may be) shall by
notice to the Lessee (or the 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 the Lessee's or the
Lessor's request, then the determination of such appraiser shall be final and

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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 (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 the Lessor or the 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 the Lessor and the 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. The Lessor and the 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.

ARTICLE 19

SUBLETTING AND ASSIGNMENT

19.1 Subletting and Assignment. Except as set forth in Section
19.2, the Lessee may not, without the prior written consent of the Lessor,
which consent may be withheld in the 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 the Lessee or sales, pledges, hypothecations or other
transfers (including, without limitation, any transfer by operation of law) of
the capital or the assets of the Lessee. Any such assignment, pledge, sale,
hypothecation or other transfer made without the Lessor's consent shall be void
and of no force and effect.

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19.2 Permitted Sublease. Notwithstanding the foregoing, the Lessee
shall have the right to enter into Resident Agreements without the prior
consent of the Lessor.

19.3 Attornment. The Lessee shall insert in each Sublease approved
by the 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 the Lessor hereunder, (b) in the event this Lease shall terminate before the
expiration of such Sublease, the Sublessee thereunder will, at the Lessor's
option, attorn to the 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 the Lessor stating that the Lessee is in default under this
Lease, the Sublessee shall thereafter be obligated to pay all rentals accruing
under said Sublease directly to the Lessor or as the Lessor may direct. All
rentals received from the Sublessee by the Lessor shall be credited against the
amounts owing by the Lessee under this Lease.

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 the 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 the
Lessor hereunder arising or accruing from and after the date of such conveyance
or transfer, the original the 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 the 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 the Lessee,
but subject to the terms and conditions set forth below in this Section 20.3,
the 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 ocher means of financing or refinancing, provided that the Lessee
shall have no obligation to make payments under such Encumbrances. The 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
the

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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".

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, the Lessor shall obtain and deliver to
the 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) the Lessee shall not he disturbed in peaceful
enjoyment of the Leased Property nor shall this Lease be terminated or canceled
at any time, except in the event that the Lessor shall have the right to
terminate this Lease under the terms and provisions expressly set forth herein,
(ii) the 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 the 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 the 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 the Lessor.

At the request from time to time by any Fee Mortgagee, the Lessee
shall (a) subordinate this Lease and all of the Lessee's rights and estate
hereunder to the Fee Mortgage held by such Fee Mortgagee and (b) agree that the
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 the Lessor under this Lease for the balance of the Term then
remaining. To effect the intent and purpose of the immediately preceding
sentence, the Lessee agrees to execute and deliver such instruments in
recordable form as are reasonably requested by the 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.

ARTICLE 21

LESSOR OBLIGATIONS

21.1 Quiet Enjoyment. As long as the 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 per-form its obligations thereunder, the Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property throughout the
Term, free of any claim or other action by the Lessor or anyone claiming by,
through or under the Lessor, but subject to the Permitted Encumbrances and such
Liens as may hereafter be

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consented to by the Lessee. No failure by the Lessor to comply with the
foregoing covenant shall give the 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 the Lessee hereunder. Notwithstanding the
foregoing, the Lessee shall have the right by separate and independent action
to pursue any claim it may have against the Lessor as a result of a breach by
the Lessor of the covenant of quiet enjoyment contained in this Article 21.

21.2 Memorandum of Lease. The Lessor and the 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 contained herein shall be made. The
Lessee shall pay all recording costs and taxes associated therewith.

21.3 Default by Lessor. The Lessor shall be in default of its
obligations under this Lease only if the 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 the Lessee (or 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 the 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 the 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.

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 the Lessee:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------

With a copy to:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------

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If to the Lessor:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------

With copies to:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------

or such other address as the Lessor or the Lessee shall hereinafter from time
to time designate by a written notice to the others given in such manner. Any
notice given to the Lessee by the Lessor at any time shall not imply that such
notice or any further or similar notice was or is required.

ARTICLE 23

INTENTIONALLY OMITTED

ARTICLE 24

MISCELLANEOUS PROVISIONS

24.1 Broker's Fee Indemnification. The Lessee shall and hereby
agrees to indemnify, defend (with counsel acceptable to the Lessor) and hold
the 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. Notwithstanding the foregoing, the Lessor shall have the
option of conducting its own defense against any such claims with counsel of
the Lessor's choice, but at the expense of the Lessee, as aforesaid. This
indemnification shall include all attorneys' fees and expenses and court costs
reasonably incurred by the 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 the
Lessor and the Lessee. The Lessee is not the agent or representative of the
Lessor and nothing contained herein or in any of the other Lease Documents
shall make, or be construed to make, the Lessor liable to any Person for goods
delivered to the Lessee, services performed with respect to the Leased Property
at the direction of the Lessee or for debts or claims accruing against the
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

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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 Permits and/or the Contracts.
References herein and in the other Lease Documents to any of the Lease
Documents, the Management Agreements, the Permits and/or the Contracts shall be
deemed to include any renewals, replacements, amendments, extensions,
substitutions, revisions, consolidations or modifications thereof.

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, Permit and/or the
Contract is not intended to constitute an agreement or consent by the Lessor to
any such renewal, replacement, amendment, substitution, revision, consolidation
or modification; but, rather as a reference only to those instances where the
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 may be executed in one or more
Counterparts, each of which taken together shall constitute an original and all
of which shall constitute one and 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.

24.8 WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, THE LESSOR AND THE 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

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TO THE LEASE OR ANY OF THE LEASE DOCUMENTS. The Lessee hereby certifies that
neither the Lessor nor any of the Lessor's representatives, agents or counsel
has represented expressly or otherwise that the 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 the 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 the 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 is waiving in
this paragraph in 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 the Lessee and
the Lessee's legal representatives and permitted successors and assigns and (b)
the Lessor and any other Person who may now or hereafter hold the interest of
the Lessor under this Lease and their respective successors and assigns.
Notwithstanding the foregoing, the 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 the Lessor, in each instance, which consent may be
withheld in the 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 the Lessor, its successors, assigns and
participants (if any, the Indemnified Parties, the Lessee, 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 the 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 the 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 the Lessor at any time, if, in the
Lessor's sole and absolute discretion, the Lessor deems it advisable or
desirable to do so.

24.11 Governing Law. This Lease shall be construed and the rights
and obligations of the Lessor and the Lessee shall be determined in accordance
with the laws of the State of Texas.

The Lessee hereby consents to personal jurisdiction in the courts of
the State and the United States District Court for the District in which the
Leased Property is situated 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, the Lessor's relationship of 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

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exercise of any remedy under any of the Lease Documents and expressly waives
any and all objections the 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, the Lessee or the
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.

The 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.

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:

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

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EXHIBIT A

LEGAL DESCRIPTION OF THE LAND

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<PAGE> 104
EXHIBIT B

PERMITTED ENCUMBRANCES

83
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EXHIBIT C

NATIONAL ACCOUNTS AND LOCAL DISCOUNTS

84
<PAGE> 106
EXHIBIT D

OPEN COST REPORTS

85
<PAGE> 107
EXHIBIT E

RATE LIMITATIONS

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<PAGE> 108
EXHIBIT F

FREE CARE REQUIREMENTS

<PAGE> 1
Exhibit 23.1

Consent of Independent Auditors

We consent to the reference to our firm under the captions "Summary Financial
Data", "Selected Financial Data" and "Experts" and to the use of our report
dated July 3, 1997, in Amendment No. 2 to the Registration Statement (Form S-1
No. 333-33379) and related Prospectus of Capital Senior Living Corporation for
the registration of 9,000,000 shares of its common stock.

/s/ Ernst & Young LLP
Ernst & Young LLP

Dallas, Texas
September 24, 1997

<PAGE> 1
EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Partners
HealthCare Properties, L.P.:

We consent to the inclusion of our report dated February 7, 1997, except as to
the fifth paragraph of note 4, which is as of March 21, 1997, with respect to
the consolidated balance sheets of HealthCare Properties, L.P. and Subsidiaries
(a Delaware Limited Partnership) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, partnership equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in Amendment No. 2 to the Form S-1 of Capital Senior
Living Corporation dated September 30, 1997, and to the reference to our firm
under the heading "Experts" in the prospectus.

KPMG Peat Marwick LLP

Dallas, Texas
September 30, 1997

<PAGE> 1
EXHIBIT 23.3

CONSENT OF PROPOSED DIRECTOR

The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Capital Senior Living Corporation (the "Registrant")
in the Prospectus constituting part of the Registration Statement of the
Registrant filed under the Securities Act of 1933, as amended.

/s/ Gordon I. Goldstein MD
-------------------------------
Name: Gordon I. Goldstein MD
Date: September 12, 1997

<PAGE> 1
EXHIBIT 23.4

CONSENT OF PROPOSED DIRECTOR

/s/ Victor W. Nee
--------------------------
Name: Victor W. Nee
Date: September 12, 1997

<PAGE> 1

EXHIBIT 23.5

CONSENT OF PROPOSED DIRECTOR

/s/ Frank Miller
-------------------------
Name: Frank Miller
Date:
---------------------

<PAGE> 1

EXHIBIT 23.6

CONSENT OF PROPOSED DIRECTOR

/s/ James A. Moore
-----------------------------
Name: James A. Moore
Date: September 29, 1997