ADCARE HEALTH SYSTEMS, INC (Form: 10-Q, Received: 11/14/2013 16:19:14)

September 30, 2013

September 30, 2012

Cumulative number of facilities

Cumulative number of operational beds

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33135

AdCare Health Systems, Inc.

(Exact name of registrant as specified in its charter)



Ohio		31-1332119
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)

1145 Hembree Road, Roswell, GA 30076

(Address of principal executive offices)

(678) 869-5116

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 31, 2013 : 15,767,645 shares of common stock with no par value were outstanding.

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AdCare Health Systems, Inc.

Form 10-Q

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		Page Number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)	5
	Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2013 (unaudited)	6
	Consolidated Statements of Cash Flow for the nine months ended September 30, 2013 and 2012 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52

Signatures		58

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Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Quarterly Report") and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this Quarterly Report and the Company’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are found at various places throughout this Quarterly Report. These statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. The Company’s actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company’s critical accounting policies and risks and uncertainties related to, but not limited to, overall industry environment, regulatory delays, negative clinical results, and the Company’s financial condition. These and other risks and uncertainties are described in more detail in the Company’s most recent Annual Report on Form 10-K, as well as other reports that the Company files with the SEC.

Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company’s views as of any subsequent date. The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with the SEC that discuss factors germane to the Company’s business.

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Part I. Financial Information

Item 1. Financial Statements

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in 000’s)



	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,724		$	15,937
Restricted cash and investments	3,473			1,742
Accounts receivable, net of allowance of $5,372 and $3,729	24,305			26,037
Prepaid expenses and other	1,519			489
Assets of disposal group held for sale	400			6,159
Total current assets	42,421			50,364

Restricted cash and investments	11,361			7,215
Property and equipment, net	149,676			151,064
Intangible assets - bed licenses	2,471			2,471
Intangible assets - lease rights, net	5,446			6,844
Goodwill	5,023			5,023
Lease deposits	1,694			1,720
Deferred loan costs, net	4,877			6,137
Other assets	22			3,611
Total assets	$	222,991		$	234,449

LIABILITIES AND EQUITY

Current liabilities:
Current portion of notes payable and other debt	$	21,634		$	6,941
Revolving credit facilities and lines of credit	3,111			1,498
Current portion of convertible debt, net of discount	13,803			10,948
Accounts payable	23,054			19,503
Accrued expenses	13,799			13,730
Liabilities of disposal group held for sale	93			3,662
Total current liabilities	75,494			56,282

Notes payable and other debt, net of current portion:
Senior debt	101,316			112,160
Bonds, net of discounts	12,940			16,088
Revolving credit facilities	6,167			7,706
Convertible debt	7,500			12,009
Other debt	231			864
Derivative liability	929			3,630
Other liabilities	1,516			1,394
Deferred tax liability	77			104
Total liabilities	206,170			210,237

Commitments and contingency (Note 16)

Preferred stock, no par value; 1,000 shares authorized; 450 shares issued and outstanding	9,159			9,159

Stockholders’ equity:
Common stock and additional paid-in capital, no par value; 29,000 shares authorized; 15,319 and 14,659 issued and outstanding	45,280			41,644
Accumulated deficit	(36,151		)	(25,753		)
Total stockholders’ equity	9,129			15,891
Noncontrolling interest in subsidiaries	(1,467		)	(838		)
Total equity	7,662			15,053
Total liabilities and equity	$	222,991		$	234,449

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in 000’s, except per share data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues:
Patient care revenues	$	55,344		$	52,633		$	166,986		$	140,522
Management revenues	521			588			1,529			1,637
Total revenues	55,865			53,221			168,515			142,159

Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)	46,102			44,475			141,219			115,645
General and administrative expense	4,583			3,957			14,017			12,204
Audit committee investigation expense	302			—			2,284			—
Facility rent expense	1,761			1,775			5,256			5,278
Depreciation and amortization	1,888			1,760			5,558			4,730
Salary retirement and continuation costs	5			38			154			38
Total expenses	54,641			52,005			168,488			137,895

Income from Operations	1,224			1,216			27			4,264

Other Income (Expense):
Interest expense, net	(3,462		)	(3,695		)	(10,253		)	(9,475		)
Acquisition costs, net of gains	(33		)	(342		)	(607		)	(1,160		)
Derivative gain (loss)	1,989			(2,105		)	2,178			(1,342		)
(Loss) gain on extinguishment of debt	(6		)	500			(33		)	500
(Loss) gain on disposal of assets	(6		)	—			(10		)	2
Other income (expense)	15			(229		)	15			(258		)
Total other expense, net	(1,503		)	(5,871		)	(8,710		)	(11,733		)

Loss from Continuing Operations Before Income Taxes	(279		)	(4,655		)	(8,683		)	(7,469		)
Income tax benefit (expense)	54			(111		)	(24		)	(132		)
Loss from Continuing Operations	(225		)	(4,766		)	(8,707		)	(7,601		)

(Loss) Income from Discontinued Operations, Net of Tax	(188		)	126			(1,402		)	203
Net Loss	(413		)	(4,640		)	(10,109		)	(7,398		)

Net Loss Attributable to Noncontrolling Interests	195			134			629			420
Net Loss Attributable to AdCare Health Systems, Inc.	(218		)	(4,506		)	(9,480		)	(6,978		)

Preferred stock dividend	(306		)	—			(918		)	—
Net Loss Attributable to AdCare Health Systems, Inc. Common Stockholders	$	(524	)	$	(4,506	)	$	(10,398	)	$	(6,978	)

Net (loss) income per Common Share attributable to AdCare Health Systems, Inc.
Common Stockholders -
Basic:
Continuing Operations	$	(0.02	)	$	(0.32	)	$	(0.61	)	$	(0.51	)
Discontinued Operations	(0.01		)	0.01			(0.09		)	0.01
	$	(0.03	)	$	(0.31	)	$	(0.70	)	$	(0.50	)

Diluted:
Continuing Operations	$	(0.02	)	$	(0.32	)	$	(0.61	)	$	(0.51	)
Discontinued Operations	(0.01		)	0.01			(0.09		)	0.01
	$	(0.03	)	$	(0.31	)	$	(0.70	)	$	(0.50	)

Weighted Average Common Shares Outstanding:
Basic	14,962			14,498			14,805			13,825
Diluted	14,962			14,498			14,805			13,825

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in 000’s)

(Unaudited)



	Common Stock Shares	Common Stock and Additional Paid-in Capital		Accumulated Deficit			Noncontrolling Interests			Total
Balances, December 31, 2012	14,659	$	41,644	$	(25,753	)	$	(838	)	$	15,053

Stock-based compensation expense	—	737		—			—			737

Exercises of options and warrants	38	67		—			—			67

Issuance of stock for converted debt	622	2,823		—			—			2,823

Preferred stock dividend	—	—		(918		)	—			(918		)

Nonemployee warrants for services	—	9		—			—			9

Net loss	—	—		(9,480		)	(629		)	(10,109		)
Balances, September 30, 2013	15,319	$	45,280	$	(36,151	)	$	(1,467	)	$	7,662

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000’s)

(Unaudited)



	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(10,109	)	$	(7,398	)
Loss (Income) from discontinued operations, net of tax	1,402			(203		)
Loss from continuing operations	(8,707		)	(7,601		)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	5,558			4,730
Warrants issued for services	9			2
Stock-based compensation expense	737			639
Lease expense in excess of cash	121			419
Amortization of deferred financing costs	1,727			1,585
Amortization of debt discounts	501			646
Derivative (gain) loss	(2,178		)	1,342
Loss (gain) on debt extinguishment	33			(500		)
Deferred tax expense	(27		)	(12		)
Loss (gain) on disposal of assets	10			(2		)
Provision for bad debts	3,374			2,286
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable	(2,693		)	(10,739		)
Prepaid expenses and other	(997		)	(106		)
Other assets	580			93
Accounts payable and accrued expenses	4,335			9,891
Net cash provided by operating activities - continuing operations	2,383			2,673
Net cash provided by operating activities - discontinued operations	213			797
Net cash provided by operating activities	2,596			3,470

Cash flows from investing activities:
Proceeds from sale of property and equipment	—			3
Change in restricted cash and investments and escrow deposits for acquisitions	(5,998		)	(1,820		)
Acquisitions	—			(52,482		)
Proceeds from notes receivable	3,240			—
Purchase of property and equipment	(3,285		)	(2,666		)
Net cash used in investing activities - continuing operations	(6,043		)	(56,965		)
Net cash provided by (used in) investing activities - discontinued operations	1,580			(293		)
Net cash used in investing activities	(4,463		)	(57,258		)

Cash flows from financing activities:
Proceeds from debt	7,372			58,788
Proceeds from convertible debt	—			2,500
Repayment on notes payable	(5,387		)	(7,819		)
Change in lines of credit	74			1,787
Debt issuance costs	(407		)	(2,763		)
Exercise of warrants and options	67			137
Proceeds from stock issuances, net	—			3,837
Dividends paid on preferred stock	(918		)	—
Net cash flows provided by financing activities - continuing operations	801			56,467
Net cash flows used in financing activities - discontinued operations	(2,147		)	(170		)
Net cash flows (used in) provided by financing activities	(1,346		)	56,297
Net Change in Cash	(3,213		)	2,509
Cash, Beginning	15,937			7,364
Cash decrease due to deconsolidation of variable interest entities	—			(180		)
Cash, Ending	$	12,724		$	9,693

Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	7,984		$	9,632
Conversions of debt and other liabilities to equity	$	2,331		$	—
Acquisitions in exchange for debt and equity instruments	$	—		$	7,800
Warrants issued for financing costs	$	9		$	641
Restricted stock issued for financing costs	$	—		$	175

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2013 and 2012

NOTE 1. DESCRIPTION OF BUSINESS

AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”), owns and operates skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. The Company, through wholly owned separate operating subsidiaries, as of September 30, 2013 , operates 47 facilities comprised of 43 skilled nursing facilities, three assisted living facilities and one independent living/senior housing facility totaling approximately 4,800 beds. The Company’s facilities provide a range of health care services to their patients and residents including, but not limited to, skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of September 30, 2013 , of the total 47 facilities, the Company owned and operated 26 facilities, leased and operated nine facilities, managed 11 facilities for third parties and had one consolidated variable interest entity (a "VIE"). As part of the Company’s strategy to focus on the growth of skilled nursing facilities, the Company decided in the fourth quarter of 2011 to exit the home health business; therefore, this business is reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of the home health business in 2012. Additionally, in the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio and executed a sublease arrangement to exit the skilled nursing business in Jeffersonville, Georgia. The six Ohio assisted living facilities and the Jeffersonville, Georgia skilled nursing facility had an aggregate of 313 units in service. These seven facilities are also reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of four of the six Ohio assisted living facilities in December 2012, one in February 2013, and one in May 2013. On June 12, 2013, the Company executed two sublease arrangements effective as of June 30, 2013 to exit the skilled nursing business in Tybee Island, Georgia. The two skilled nursing facilities had an aggregate of 135 units in service. These two facilities are also reported as discontinued operations (see Note 11 — Discontinued Operations ).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the three and nine months ended September 30, 2013 and 2012, are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2012 , has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

You should read these consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2012 included in our Annual Report on Form 10-K for the year ended December 31, 2012 , filed with the SEC on July 8, 2013.

The Company operates in one business segment. These statements include the accounts of AdCare Health Systems, Inc. and its controlled subsidiaries. Controlled subsidiaries include AdCare’s majority owned subsidiaries and one VIE in which AdCare has control as primary beneficiary. All inter-company accounts and transactions were eliminated in the consolidation.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

See Note 1 to our Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 , for a description of all significant accounting policies.

Reclassifications

Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation with no effect on the Company’s consolidated financial position or results of

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operations. These reclassifications did not affect total assets, total liabilities, or stockholders’ equity. These reclassifications in the December 31, 2012 Consolidated Balance Sheets included separating "Bonds, net of discounts" within "Notes payable and other debt" within the "Total liabilities" to define the Company’s debt instruments in further detail. Reclassifications were made to September 30, 2012 Consolidated Statements of Operations to reflect the same facilities in discontinued operations for both periods presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Patient Care Receivables and Revenues

Patient care accounts receivable and revenues for the Company are recorded in the month in which the services are provided.

The Company provides services to certain patients under contractual arrangements with third-party payors, primarily under Federal Medicare and state Medicaid programs. Amounts paid under these contractual arrangements are subject to review and final determination by the appropriate government authority or its agent. In the opinion of management, adequate provision was made in the consolidated financial statements for any adjustments resulting from the respective government authorities’ review.

For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.

Potentially uncollectible patient accounts are provided for on the allowance method based upon management’s evaluation of outstanding accounts receivable at period-end and historical experience. Uncollected accounts that are written off are charged against the allowance. As of September 30, 2013 and December 31, 2012 , management recorded an allowance for uncollectible accounts of $5.4 million and $3.7 million , respectively.

Management Fee Receivables and Revenues

Management fee receivables and revenue are recorded in the month that services are provided. As of September 30, 2013 and December 31, 2012 , there was no allowance for uncollectible management fee receivables.

Fair Value Measurements and Financial Instruments

Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 — Quoted market prices in active markets for identical assets or liabilities

Level 2 — Other observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3 — Significant unobservable inputs

The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, notes payable and other debt, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all ASUs. For the three months ended September 30, 2013 and through the date of this Quarterly Report, all ASUs issued, effective and not yet effective, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

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NOTE 3. EARNINGS PER SHARE

Basic earnings per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted-average number of common and dilutive common equivalent shares from stock options, warrants and convertible promissory notes using the treasury stock method. For all periods presented, diluted net loss per share is the same as basic net loss per share, as the inclusion of equivalent shares from outstanding common stock options, warrants and convertible promissory notes would be anti-dilutive.



	Three Months Ended September 30,
	2013							2012
(Amounts in 000’s, except per share data)	Income (loss)			Shares	Per Share			Income (loss)			Shares	Per Share
Continuing Operations:
Loss from continuing operations	$	(225	)					$	(4,766	)
Net loss attributable to noncontrolling interests	195							134
Basic loss from continuing operations	$	(30	)	14,962	$	—		$	(4,632	)	14,498	$	(0.32	)
Preferred stock dividend	(306		)	14,962	$	(0.02	)	—			—	$	—
Effect of dilutive securities: Stock options, warrants outstanding and convertible debt (a)
Diluted loss from continuing operations	$	(336	)	14,962	$	(0.02	)	$	(4,632	)	14,498	$	(0.32	)

Discontinued Operations:
Basic (loss) income from discontinued operations	(188		)	14,962	$	(0.01	)	126			14,498	$	0.01
Diluted (loss) income from discontinued operations	(188		)	14,962	$	(0.01	)	126			14,498	$	0.01

Net Loss Attributable to AdCare:
Basic loss	(524		)	14,962	$	(0.03	)	(4,506		)	14,498	$	(0.31	)
Diluted loss	(524		)	14,962	$	(0.03	)	(4,506		)	14,498	$	(0.31	)



	Nine Months Ended September 30,
	2013							2012
(Amounts in 000’s, except per share data)	Income (loss)			Shares	Per Share			Income (loss)			Shares	Per Share
Continuing Operations:
Loss from continuing operations	$	(8,707	)					$	(7,601	)
Net loss attributable to noncontrolling interests	629							420
Basic loss from continuing operations	$	(8,078	)	14,805	$	(0.55	)	$	(7,181	)	13,825	$	(0.51	)
Preferred stock dividend	(918		)	14,805	$	(0.06	)	—			—	$	—
Effect of dilutive securities: Stock options, warrants outstanding and convertible debt (a)
Diluted loss from continuing operations	$	(8,996	)	14,805	$	(0.61	)	$	(7,181	)	13,825	$	(0.51	)

Discontinued Operations:
Basic (loss) income from discontinued operations	(1,402		)	14,805	$	(0.09	)	203			13,825	$	0.01
Diluted (loss) income from discontinued operations	(1,402		)	14,805	$	(0.09	)	203			13,825	$	0.01

Net Loss Attributable to AdCare:
Basic loss	(10,398		)	14,805	$	(0.70	)	(6,978		)	13,825	$	(0.50	)
Diluted loss	(10,398		)	14,805	$	(0.70	)	(6,978		)	13,825	$	(0.50	)

(a) Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:

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(Amounts in 000’s)	September 30, 2013	December 31, 2012
Outstanding Stock Options	1,357	1,351
Outstanding Warrants - employee	1,876	1,806
Outstanding Warrants - nonemployee	1,904	1,961
Convertible Debt shares issuable(a)	6,406	7,140
Total anti-dilutive securities	11,543	12,258

(a) The number of shares issuable upon conversion of convertible promissory notes reflected in the tables above is 120% of the aggregate principal amount of the convertible promissory notes divided by the current conversion price, which is the number of shares required to be reserved for issuance by the Company under the applicable registration rights agreement.

NOTE 4. LIQUIDITY AND PROFITABILITY

For the nine months ended and as of September 30, 2013 , we had a net loss of $10.1 million and negative working capital of $33.1 million . At September 30, 2013 , we had $12.7 million in cash and cash equivalents and $166.7 million in indebtedness, including current maturities and discontinued operations, of which $38.5 million is current debt (including the Company’s outstanding subordinated convertible promissory notes with a principal amount in the aggregate of $4.5 million and $9.3 million that mature in March 2014 and August 2014 , respectively). Our ability to

achieve profitable operations is dependent on continued growth in revenue and controlling costs.

We anticipate that scheduled debt service (excluding approximately $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, that the Company believes will be refinanced on a longer term basis but including principal, interest, collateral and capital improvement fund or other escrow deposits) will total approximately $33.4 million and cash outlays for acquisition costs, maintenance capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $5.3 million for the 12 months ending September 30, 2014 . We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. Although we anticipate the conversion to common stock of the Company’s outstanding subordinated convertible promissory notes with a principal amount in the aggregate of $7.7 million that mature in August 2014 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.7 million that were converted into shares of common stock of the Company in October 2013 (see Note 18 - Subsequent Events), we believe that our anticipated cash flow and funding sources would allow us to pay these notes in cash. These promissory notes are convertible at the option of the holder into shares of common stock of the Company at $3.73 per share. The closing price of the common stock exceeded $3.79 per share from January 1, 2013 through November 6, 2013. We have been successful in recent years in raising new equity capital and in October 2013 the Company issued 500,000 shares of Series A Preferred Stock at $25.00 per share receiving proceeds of approximately $11.2 million after deducting underwriting discounts and other offering-related expenses (see Note 18 - Subsequent Events) . As discussed further below, if we are unable to refinance the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans due to our limited liquidity in such an event.

Based on existing cash balances, anticipated cash flows for the 12 months ending September 30 , 2014, the anticipated refinancing of the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, and the net proceeds from the issuance of 500,000 shares of Series A Preferred Stock in October 2013, we believe there will be sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months . On a longer term basis, we have approximately $65.9 million of debt payments and maturities due between 2015 and 2017, excluding subordinated convertible promissory notes which are convertible into shares of common stock. We believe our long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

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currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating results or refinance current debt (including the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively), then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans.

NOTE 5. RESTRICTED CASH AND INVESTMENTS

The following table sets forth the Company’s various restricted cash, escrow deposits and investments:



(Amounts in 000’s)	September 30, 2013		December 31, 2012
Defeased bonds escrow	$	3,145	$	—
HUD escrow deposits	65		279
Principal and interest escrow	—		106
Lender's collection account	105		—
Collateral certificates of deposit	158		1,357
Total current portion	3,473		1,742

HUD reserve replacement	362		372
Reserves for capital improvements	1,613		1,602
Restricted investments for other debt obligations	9,386		5,241
Total noncurrent portion	11,361		7,215

Total restricted cash and investments	$	14,834	$	8,957

NOTE 6. PROPERTY AND EQUIPMENT

The following table sets forth the Company’s property and equipment:



(Amounts in 000’s)	Estimated Useful Lives (Years)	September 30, 2013		December 31, 2012
Buildings and improvements	5-40	$	139,707	$	137,842
Equipment	2-10	11,645		10,448
Land	—	8,469		8,469
Computer related	2-10	2,884		2,670
Construction in process	—	713		510
		163,418		159,939
Less: Accumulated depreciation and amortization expense		13,742		8,875
Property and equipment, net		$	149,676	$	151,064

Depreciation and amortization expense was approximately $1.9 million and $5.6 million for the three and nine months ended September 30, 2013 , respectively, and $1.8 million and $4.7 million for the three and nine months ended September 30, 2012 , respectively.

During the quarter ended March 31, 2012, the Company recognized a $0.4 million impairment charge to write down the carrying value of an office building located in Rogers, Arkansas. The office building was acquired in 2011. The purchase price allocation for that acquisition was deemed to be final as of December 31, 2011. Subsequent to December 31, 2011, it was determined that the acquired office building would not be utilized and the building was not in use as of March 31, 2012. The impairment charge represents a change in fair value from value recognized in the purchase price allocation. The impairment charge is classified as depreciation expense in the consolidated statement of operations.

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NOTE 7. INTANGIBLE ASSETS AND GOODWILL

There have been no impairment adjustments to goodwill during the three and nine months ended September 30, 2013 . The Company recognized an impairment loss of $0.7 million related to two facilities in Tybee Island, Georgia during the nine months ended September 30, 2013 (see Note 11 — Discontinued Operations ).

Intangible assets consist of the following:



(Amounts in 000’s)	Bed Licenses (included in property and equipment)			Bed Licenses - Separable		Lease Rights			Total
Balances, December 31, 2012
Gross	$	38,478		$	2,471	$	9,545		$	50,494
Accumulated amortization	(1,438		)	—		(2,701		)	(4,139		)
Net carrying amount	$	37,040		$	2,471	$	6,844		$	46,355

Acquisitions	—			—		—			—
Disposals	—			—		—			—
Impairment losses	—			—		(721		)	(721		)
Amortization expense	(932		)	—		(677		)	(1,609		)

Balances, September 30, 2013
Gross	38,478			2,471		9,545			50,494
Impairment losses	—			—		(721		)	(721		)
Accumulated amortization	(2,370		)	—		(3,378		)	(5,748		)
Net carrying amount	$	36,108		$	2,471	$	5,446		$	44,025

Amortization expense for bed licenses included in property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2013 , respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2012 , respectively. Amortization expense for lease rights was approximately $0.2 million and $0.7 million for the three and nine months ended September 30, 2013 , respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2012 , respectively. For the nine months ended September 30, 2013 , the Company recognized an impairment loss of $0.7 million related to two facilities in Tybee Island, Georgia (see Note 11 — Discontinued Operations ).

Expected amortization expense for all definite lived intangibles for each of the years ended December 31 is as follows:



(Amounts in 000’s)	Bed Licenses		Lease Rights
2013 (a)	$	320	$	225
2014	1,283		844
2015	1,283		719
2016	1,283		719
2017	1,283		719
Thereafter	30,656		2,220
Total expected amortization expense	$	36,108	$	5,446

(a) Estimated amortization expense for the year ending December 31, 2013 includes only amortization to be recorded after September 30, 2013 .

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The following table summarizes the carrying amount of goodwill at September 30, 2013 as compared with December 31, 2012 :



	(Amounts in 000’s)
Balances, December 31, 2012
Gross	$	5,023
Accumulated impairment losses	—
Total	$	5,023

Goodwill acquired in acquisitions	—
Disposed in sale of business, net	—
Impairment losses	—

Balances, September 30, 2013
Gross	$	5,023
Accumulated impairment losses	—
Total	$	5,023

The Company does not amortize goodwill or indefinite lived intangibles, which consist of separable bed licenses.

NOTE 8. ACCRUED EXPENSES

Accrued expenses consist of the following:



(Amounts in 000’s)	September 30, 2013		December 31, 2012
Accrued payroll related	$	4,338	$	5,626
Accrued employee benefits	4,932		3,790
Real estate and other taxes	1,670		1,245
Other accrued expenses	2,859		3,069
Total accrued expenses	$	13,799	$	13,730

NOTE 9. NOTES PAYABLE AND OTHER DEBT

Notes payable and other debt consist of the following:



(Amounts in 000’s)	September 30, 2013		December 31, 2012
Senior debt - guaranteed by HUD (a)	$	4,093	$	9,699
Senior debt - guaranteed by USDA	27,914		28,370
Senior debt - guaranteed by SBA	6,013		6,189
Senior debt - bonds, net of discount (b)	16,123		16,265
Senior debt - other mortgage indebtedness	78,361		75,188
Revolving credit facilities and lines of credit	9,278		9,204
Convertible debt issued in 2010, net of discount	9,344		10,948
Convertible debt issued in 2011	4,459		4,509
Convertible debt issued in 2012	7,500		7,500
Other debt	3,617		4,004
Total	$	166,702	$	171,876
Less: current portion	38,548		19,387
Less: portion included in liabilities of disposal group held for sale	—		3,662
Notes payable and other debt, net of current portion	$	128,154	$	148,827

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(a) The senior debt - guaranteed by the U.S. Department of Housing and Urban Development (“HUD”) includes $3.6 million related to the Vandalia HUD mortgage note classified as liabilities of disposal group held for sale at December 31, 2012, that was assumed by the buyer of the Hearth & Home of Vandalia assisted living facility that the Company sold in a transaction that closed in May 2013.

(b) The senior debt - bonds, net of discount includes $3.1 million related to the outstanding bonds that were assumed by the Company upon its acquisition of the Quail Creek skilled nursing facility in July 2012, which, pursuant to the applicable loan agreement, will be prepaid on March 1, 2014.

Scheduled Maturities

The schedule below summarizes the scheduled maturities as of September 30, 2013 for each of the next five years and thereafter.



	(Amounts in 000’s)
2014	$	38,314
2015	36,115
2016	17,558
2017	19,715
2018	3,728
Thereafter	51,457
Subtotal	166,887
Less: unamortized discounts ($57 classified as current)	(476		)
Plus: unamortized premiums ($291 classified as current)	291
Total notes and other debt	$	166,702

Debt Covenant Compliance

As of September 30, 2013 , the Company (including its consolidated VIE) has more than forty credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial measurements). Some covenants are based on annual financial metric measurements whereas others are based on monthly or quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of September 30, 2013 , the Company has not been in compliance with certain financial and administrative covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including as necessary modifications to future covenant requirements or the elimination of certain requirements in future periods.

Senior Debt—Guaranteed by HUD

Hearth and Home of Vandalia

In connection with the Company’s January 2012 refinancing of the assisted living facility known as Hearth and Home of Vandalia (“Vandalia”), owned by a wholly owned subsidiary of AdCare, the Company issued a note, insured by HUD, to a financial institution for a total amount of $3.7 million that matures in 2041. The HUD note requires monthly principal and interest payments with a fixed interest rate of 3.74% . The Company incurred deferred financing costs on the note of approximately $0.2 million , which are being amortized to interest expense over the life of the note. The HUD note has a prepayment penalty of 8% starting in 2014 declining by 1% each year through 2022. This note was assumed by the buyer in the closing of the sale of this facility that occurred in May 2013 pursuant to the terms of the sale agreement related to the sale of six of the Company’s assisted living facilities located in Ohio.

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Senior Debt - Other Mortgage Indebtedness

Little Rock

On June 27, 2013, certain wholly-owned subsidiaries of the Company entered into a Third Modification Agreement with PrivateBank, dated as of June 26, 2013, which modified that certain Loan Agreement, dated March 30, 2012, between such subsidiaries and PrivateBank. Pursuant to the modification, PrivateBank waives certain financial covenants under the credit facility regarding the minimum fixed charge coverage ratio and minimum EBITDAR of one of the subsidiaries that is the operator of the Company’s skilled nursing facility located in Little Rock, Arkansas.

Quail Creek Credit Facility

On September 27, 2013, QC Property Holdings, LLC (“QC”), a wholly owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Quail Creek Credit Facility”), with Housing & Healthcare Funding, LLC (“HHCF”). The Quail Creek Credit Facility provides for a $5.0 million principal amount secured credit facility. The proceeds of the Quail Creek Credit Facility will be used primarily to repay certain outstanding bonds that were assumed by QC upon its acquisition of the 118 -bed skilled nursing facility located in Oklahoma City, Oklahoma known as the Quail Creek Nursing & Rehabilitation Center in July 2012. Pursuant to the loan agreement, the outstanding bonds will be prepaid on March 1, 2014 at par plus accrued interest to the prepayment date. The outstanding principal and accrued interest to the prepayment date in the amount of $3.1 million has been deposited into a restricted defeased bonds escrow account.

The Quail Creek Credit Facility matures on September 27, 2016. Interest on the Quail Creek Credit Facility accrues on the principal balance thereof at an annual rate of 4.75% plus the current one-month LIBOR rate (but in no event shall the interest rate be less than 5.75% ). The Quail Creek Credit Facility is secured by: (i) a first mortgage on the real property and improvements constituting the Quail Creek Facility; (ii) a first priority interest on all furnishings, fixtures and equipment associated with the Quail Creek Facility; and (iii) an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Quail Creek Facility. The Company has unconditionally guaranteed all amounts owing under the Quail Creek Credit Facility.

The Quail Creek Credit Facility contains customary events of default, including material breach of representations and warranties, failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. Upon the occurrence of an event of default, HHCF may terminate the Quail Creek Credit Facility and all amounts under the Quail Creek Credit Facility will become immediately due and payable.

In connection with entering into the Quail Creek Credit Facility, certain affiliates of the Company and QC, as applicable, entered into environmental indemnities, pledge and security agreements, subordination and attornment agreements and subordination of management fee agreements, each containing customary terms and conditions.

Revolving Credit Facilities and Lines of Credit

PrivateBank Credit Facility

On January 25, 2013, the Company entered into a Memorandum of Agreement with The PrivateBank and Trust Company (“PrivateBank”). Pursuant to the memorandum, three of the Company’s subsidiaries and their collateral, which comprise the three skilled nursing facilities located in Arkansas known as the Aviv facilities, were released from liability under that certain Loan and Security Agreement, dated October 26, 2012 and as so amended, between PrivateBank and the Company (the “PrivateBank Credit Facility”). In exchange for the release from liability under the loan agreement, the Company made a payment in the amount of $0.7 million on December 28, 2012. The memorandum did not change the maximum amount that may be borrowed under the loan agreement by the Company, which remains $10.6 million .

On September 30, 2013, certain wholly-owned subsidiaries of the Company entered into a Third Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 20, 2012, between such subsidiaries and PrivateBank. Pursuant to the modification: (i) a wholly-owned subsidiary of the Company was added as a borrower to the PrivateBank Credit Facility; and (ii) three of the subsidiaries and their collateral were released from their obligations under the PrivateBank Credit Facility because such entities no longer operate skilled nursing facilities.

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As of September 30, 2013 , $6.2 million was outstanding of the maximum borrowing amount of $10.6 million under the PrivateBank Credit Facility, subject to borrowing base limitations. There were also $2.5 million of outstanding letters of credit that are pledged as collateral of the borrowing capacity on this revolver.

Gemino Northwest Credit Facility

On May 30, 2013, NW 61 ^st Nursing, LLC (“Northwest”), a wholly-owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC (“Gemino”). The Northwest Credit Facility provides for a $1.0 million principal amount senior-secured revolving credit facility.

The Northwest Credit Facility matures on January 31, 2015 and interest accrues on the principal balance thereof at an annual rate of 4.75% plus the current LIBOR rate. Northwest shall also pay to Gemino: (i) a collateral monitoring fee equal to 1.0% per annum of the daily outstanding balance of the Northwest Credit Facility; and (ii) a fee equal to 0.5% per annum of the unused portion of the Northwest Credit Facility. In the event the Northwest Credit Facility is terminated prior to January 31, 2015, Northwest shall also be required to pay a fee to Gemino in an amount equal to 1.0% of the Northwest Credit Facility. The Northwest Credit Facility is secured by a security interest in, without limitation, the accounts receivable and the collections and proceeds thereof relating to the Company’s skilled nursing facility located in Oklahoma City, Oklahoma known as the Northwest Nursing Center. The Company has unconditionally guaranteed all amounts owing under the Northwest Credit Facility.

The Northwest Credit Facility contains customary events of default, including material breach of representations and warranties, failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. Upon the occurrence of an event of default, Gemino may terminate the Northwest Credit Facility.

In connection with entering into the Northwest Credit Facility, certain affiliates of the Company and Northwest, as applicable, also entered into an intercreditor and subordination agreement, governmental depository agreement and subordination of management fee agreement, each containing customary terms and conditions.

On June 25, 2013, Northwest entered into a First Amendment to the Credit Agreement which amended the Northwest Credit Facility. The amendment, among other things: (i) amends certain financial covenants regarding fixed charge coverage ratio and minimum EBITDA; and (ii) amends the credit facility to include the Bonterra Credit Facility (discussed below) as an affiliated credit agreement in determining whether certain financial covenants are being met.

On June 28, 2013, Georgetown HC&R Nursing, LLC and Sumter N&R, LLC, both wholly-owned subsidiaries of the Company, entered into a Joinder Agreement, Second Amendment and Supplement to Credit Agreement with Northwest and Gemino pursuant to which such subsidiaries became additional borrowers under the Northwest Credit Facility. Pursuant to the joinder, the borrowers granted a continuing security interest in, among other things, their accounts receivables, payment intangibles, chattel paper, general intangibles, collateral relating to any accounts or payment intangibles, commercial lockboxes and cash, as additional collateral under the Northwest Credit Facility. In connection with the execution of the joinder, the borrowers issued an amended and restated revolving promissory note in favor of Gemino in the amount of $1.5 million .

As of September 30, 2013 , $1.5 million was outstanding of the maximum borrowing amount of $1.5 million under the Northwest Credit Facility.

Gemino Bonterra Credit Facility

On May 30, 2013, the ADK Bonterra/Parkview, LLC, a wholly-owned subsidiary of the Company (“Bonterra”), entered into a Fourth Amendment to Credit Agreement with Gemino, which amended that certain Credit Agreement dated April 27, 2011 between Bonterra and Gemino (as amended, the “Bonterra Credit Facility”). The amendment, among other things: (i) extends the term of the Bonterra Credit Facility from January 31, 2014 to January 31, 2015; (ii) amends certain financial covenants regarding Bonterra’s fixed charge coverage ratio and maximum loan turn days; and (iii) amends the Gemino-Bonterra credit facility to include the Northwest Credit Facility as an affiliated credit agreement in determining whether certain financial covenants are being met.

As of September 30, 2013 , $1.4 million was outstanding of the maximum borrowing amount of $2.0 million under the Bonterra Credit Facility.

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KeyBank Credit Facility

On May 31, 2013, certain subsidiaries of the Company entered into a First Amendment to Secured Loan Agreement and Payment Guaranty (the “KeyBank Amendment”) with KeyBank National Association (“KeyBank”) which amended that certain Secured Loan Agreement, dated December 28, 2012, between the Company and KeyBank (the “KeyBank Credit Facility”). Pursuant to the KeyBank Amendment, KeyBank waives any default or events of default that may exist relating to the Company’s: (i) failure to timely file with the SEC its Annual Report on Form 10-K for the year ended December 31, 2012; (ii) process of restating its previously issued financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012; and (iii) non-compliance with the continued listing standards of the NYSE MKT LLC, as well as certain other events. The KeyBank Amendment, among other things: (1) establishes a special account under the sole dominion and control of KeyBank pursuant to which certain subsidiaries of the Company shall deposit certain funds, on a monthly basis, to be held as collateral; (2) amends certain financial covenants regarding such subsidiaries implied debt service coverage and furnishing of certain financial information; and (3) amends certain financial covenants provided for in a guaranty made by the Company for the benefit of KeyBank relating to the KeyBank Credit Facility. In addition, as a condition precedent for KeyBank to enter into the KeyBank Amendment, the Company granted a first-priority security interest in the real property and improvements, leases and rents, revenues and accounts receivables relating to the 32 unit assisted-living facility located in Mountain View, Arkansas known as the Stone County Residential Care Center. The KeyBank Amendment also requires the Company to pledge to KeyBank, as additional collateral, that certain secured promissory note dated December 28, 2012, issued by CHP Acquisition Company, LLC (“CHP”) to the Company in the amount of $3.6 million (as amended, the “CHP Note”); provided, however, that the Company shall be entitled to any excess payments of principal or prepayments over $2.0 million made by CHP on the CHP Note (see Note 11 — Discontinued Operations ).

On June 27, 2013, the Company entered into a Second Amendment to Secured Loan Agreement and Payment Guaranty with KeyBank, which amended the KeyBank Credit Facility. Pursuant to the amendment: (i) KeyBank waives the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio and implied debt service coverage such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; and (ii) KeyBank and the Company agreed to amend certain financial covenants regarding the Company’s fixed charge ratio.

As of September 30, 2013 , $15.4 million was outstanding under the KeyBank Credit Facility.

Convertible Debt

Subordinated Convertible Promissory Notes Issued in 2010

During the nine months ended September 30, 2013 , there were conversions of approximately $2.3 million of convertible promissory notes and accrued interest, which were part of the October 26, 2010 note offering, at a price of $3.73 per share. The schedule below summarizes the note conversions and number of shares of common stock issued for each conversion.



Month of conversion	Debt and Interest Converted (000's)		Shares of Common Stock Issued
February	$	25	6,635
March	$	25	6,635
April	$	250	67,024
August	$	1,063	284,878
September	$	919	246,264
Total	$	2,282	611,436

Subordinated Convertible Promissory Notes Issued in 2011

In April 2013, there was a conversion of a $0.05 million convertible promissory note, which was part of the March 31, 2011 note offering, at a price of $4.80 per share and resulted in the issuance of 10,438 shares of common stock.

Other Debt

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During March 2013, the Company obtained financing from AON Premium Finance, LLC and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2013 and maturing on December 31, 2013. The total amount financed was approximately $2.4 million requiring monthly payments of $0.2 million with interest ranging from 2.87% to 4.79% . The outstanding amount was approximately $0.6 million at September 30, 2013 .

On June 11, 2013, the Company completed the sale of its former Springfield, Ohio corporate office building which was sold for the approximate net book value. The Company used the proceeds to pay the principal balance of the mortgage note with respect to the building of approximately $0.1 million .

NOTE 10. ACQUISITIONS

On February 15, 2013, the Company entered into a Purchase and Sale Agreement with Avalon Health Care, LLC (“Avalon”)

to acquire certain land, buildings, improvements, furniture, vehicles, contracts, fixtures and equipment comprising: (i) a 180 -bed skilled nursing facility known as Bethany Health and Rehab; and (ii) a 240 -bed skilled nursing facility known as Trevecca Health and Rehab, both located in Nashville, Tennessee. The Company deposited $0.4 million of earnest money escrow deposits in February 2013. On June 1, 2013, the Purchase and Sale Agreement was terminated due to the failure of the transaction to close by May 31, 2013. In connection with the termination of the Purchase and Sale Agreement, the Company was seeking the return of $0.4 million previously deposited earnest money escrow deposits. On August 1, 2013, the Company entered into a settlement agreement regarding the return of the $0.4 million previously deposited earnest money escrow deposits. Pursuant to the agreement, the previously deposited earnest money escrow deposits were released and distributed, $0.3 million to the Company and $0.1 million to Avalon, respectively.

The Company incurred acquisition costs of approximately $0.03 million and $0.6 million during the three and nine months ended September 30, 2013 , and $0.3 million and $1.2 million during the three and nine months ended September 30, 2012 , respectively. Acquisition costs are recorded in “Other Income (Expense)” section of the Consolidated Statements of Operations.

During the nine months ended September 30, 2012 , the Company acquired a total of eight skilled nursing facilities and one assisted living facility.

Unaudited Pro forma Financial Information

Acquisitions have been included in the consolidated financial statements since the dates of the acquisition. The following table represents pro forma results of consolidated operations as if all of the 2012 acquisitions had occurred at the beginning of the earliest fiscal year being presented, after giving effect to certain adjustments.



(Amounts in 000s)	Three Months Ended September 30, 2012
Pro forma revenue	$	58,061
Pro forma operating expenses	$	56,463
Pro forma (loss) income from operations	$	1,598



(Amounts in 000s)	Nine Months Ended September 30, 2012
Pro forma revenue	$	171,551
Pro forma operating expenses	$	165,935
Pro forma (loss) income from operations	$	5,616

The forgoing pro forma information is not indicative of what the results of operations would have been if the acquisitions had actually occurred at the beginning of the periods presented and is not intended as a projection of future results or trends.

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NOTE 11. DISCONTINUED OPERATIONS

As part of the Company’s strategy to focus on the growth of its skilled nursing segment, the Company decided in the fourth quarter of 2011 to exit the home health segment of the business. In the fourth quarter of 2012, the Company continued this strategy and entered into an agreement to sell six assisted living facilities located in Ohio. The Company also entered into a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia. On June 12, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia effective June 30, 2013 relating to two facilities. The results of operations and cash flows for the home health business, the six Ohio assisted living facilities, the Jeffersonville, Georgia skilled nursing facility, and the two facilities in Tybee Island, Georgia are reported as discontinued operations in 2013 and 2012.

Total revenues from discontinued operations were $0.01 million and $4.0 million for the three and nine months ended September 30, 2013 , respectively, and $5.4 million and $15.7 million for the three and nine months ended September 30, 2012 , respectively. Net loss from discontinued operations was $0.2 million and $1.4 million for the three and nine months ended September 30, 2013 , respectively, and net income of $0.1 million and $0.2 million for the three and nine months ended September 30, 2012 , respectively. Interest expense included in discontinued operations was none and $0.1 million for the three and nine months ended September 30, 2013 , respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2012 , respectively. For the nine months ended September 30, 2013 , the Company recognized an impairment loss of $0.7 million related to two facilities in Tybee Island, Georgia.

On February 28, 2013, the Company completed the sale of the facility known as Lincoln Lodge Retirement Residence and used the proceeds to pay the principal balance of the HUD mortgage note with respect to the facility of $1.9 million . The Company recognized a gain on the sale of $0.1 million and cash proceeds, net of costs and debt payoff, of $0.7 million .

On May 6, 2013, Hearth & Home of Vandalia, Inc. (the “Vandalia Seller”), a wholly owned subsidiary of the Company, sold to H & H of Vandalia LLC (the “Vandalia Purchaser”), pursuant to that certain Agreement of Sale, dated October 11, 2012 and amended December 28, 2012 (as amended, the “Ohio Sale Agreement”), between the Company and certain of its subsidiaries, including the Vandalia Seller (together, the “Ohio ALF Sellers”), on the one hand, and CHP Acquisition Company, LLC (“CHP”) on the other hand, certain land, buildings, improvements, furniture, fixtures and equipment comprising the Vandalia facility located in Vandalia, Ohio. CHP had previously assigned its rights in the Ohio Sale Agreement with respect to the Vandalia facility to the Vandalia Purchaser.

The sale price for the Vandalia facility consisted of, among other items: (i) an assumption, by the Vandalia Purchaser, of a mortgage in an aggregate amount of $3.6 million (the “Vandalia Mortgage”) that secures the Vandalia facility; and (ii) a release of the Vandalia Seller from its obligations to Red Mortgage Capital, LLC (the “Vandalia Mortgagee”) and HUD with respect to the Vandalia Mortgage, pursuant to a release and assumption agreement entered into among the Vandalia Purchaser, the Vandalia Seller, HUD and the Vandalia Mortgagee. In connection with the sale of the Vandalia facility, the Vandalia Seller and Vandalia Purchaser also entered into an assignment and assumption agreement of trust funds and service contracts, containing customary terms and conditions.

In June 2013, the Company entered into a Release Agreement with CHP amending the terms of the $3.6 million Seller Note issued in the connection with the sale of four of the six Ohio assisted living facilities sold to CHP in the fourth quarter of 2012. In exchange for a reduction in the Vandalia purchase price by $0.4 million , CHP agreed to immediately payoff the Seller Note resulting in a net payment of $3.2 million . Proceeds from the $3.2 million payment were used to fund a $2.0 million increase in collateralized restricted cash required by one of the Company’s lenders and $1.2 million was received by the Company for working capital purposes. The Company recognized a loss on the sale of Vandalia of $0.4 million .

Assets and liabilities of the disposal groups held for sale at September 30, 2013 and December 31, 2012 , which includes the Rogers, Arkansas office building held for sale in property and equipment, net, are as follows:

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(Amounts in 000’s)	September 30, 2013		December 31, 2012
Property and equipment, net	$	400	$	5,840
Other assets	—		319
Assets of disposal group held for sale	$	400	$	6,159

Other liabilities	$	93	$	—
Notes payable	—		3,662
Liabilities of disposal group held for sale	$	93	$	3,662

NOTE 12. PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Preferred Stock

On November 14, 2012, the Company closed a “best efforts” public offering of 450,000 shares of its then newly designated Series A Preferred Stock at $23.00 per share. The Company received net proceeds of approximately $9.2 million from the offering after deducting underwriting discounts and other offering-related expenses of approximately $1.2 million . The liquidation preference per share is $25.00 . Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25.00 liquidation preference per share. The dividend rate may increase under certain circumstances.

Holders of the Series A Preferred Stock generally have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, however the Company is required to redeem the Series A Preferred Stock following a “Change of Control,” as defined. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to the redemption date.

The change-in-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities , requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are outside of the issuer’s control. The assessment of whether the redemption of an equity security could occur outside of the issuer’s control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable.

Preferred Stock Dividends

On September 9, 2013, the Company declared a quarterly dividend out of capital surplus of $0.68 per share on the Series A Preferred Stock. The dividend payment is equivalent to an annualized 10.875% per share, based on the $25.00 per share stated liquidation preference, accruing from July 1, 2013. The dividend was paid on September 30, 2013 to holders of the Series A Preferred Stock of record on September 20, 2013.

On June 7, 2013, the Company declared a quarterly dividend out of capital surplus of $0.68 per share on the Series A Preferred Stock. The dividend payment is equivalent to an annualized 10.875% per share, based on the $25.00 per share stated liquidation preference, accruing from April 1, 2013. The dividend was paid on July 1, 2013 to holders of the Series A Preferred Stock of record on June 20, 2013.

On March 8, 2013, the Company declared a quarterly dividend out of capital surplus of $0.68 per share on the Series A Preferred Stock. The dividend payment is equivalent to an annualized 10.875% per share, based on the $25.00 per share stated liquidation preference, accruing from January 1, 2013. The dividend was paid on April 1, 2013 to holders of the Series A Preferred Stock of record on March 21, 2013.

Stock Dividend

On September 6, 2012, the Company’s Board of Directors declared a 5% stock dividend issued on October 22, 2012 to holders of the common stock as of October 8, 2012. As a result of the stock dividend, the number of outstanding shares of common stock increased by 0.7 million shares in 2012.

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2012 Public Common Stock Offering

In March 2012, the Company closed a firm commitment underwritten public offering of 1.1 million shares of common stock at an offering price to the public of $3.75 per share. The Company also granted the underwriter in the offering an option for 45 days to purchase up to an additional 165,000 shares of common stock to cover over-allotments, if any. In connection with the underwriter’s partial exercise of this option, the Company issued an additional 65,000 shares of common stock at an offering price to the public of $3.75 per share on May 22, 2012. The Company received net proceeds of $3.8 million after deducting underwriting discounts and other offering-related expenses of $0.6 million .

NOTE 13. STOCK BASED COMPENSATION

Stock Incentive Plans

The Company has three share-based compensation plans: the AdCare Health Systems, Inc. 2011 Stock Incentive Plan (the “2011 Plan”), the 2005 Stock Option Plan of AdCare Health Systems, Inc. (the “2005 Plan”) and the 2004 Stock Option Plan of AdCare Health Systems, Inc. (the “2004 Plan”) which provide for the granting of qualified incentive and non-qualified stock options to employees, directors, consultants and advisors. The 2011 Plan also permits the granting of restricted stock to employees, directors, consultants and advisors. The awards are subject to a vesting schedule as set forth in each individual agreement. The Company intends to use only the 2011 Plan to make future grants. The number of options under the 2004 Plan and 2005 Plan outstanding at September 30, 2013 totaled 31,528 . The maximum number of shares of common stock which can be issued under the 2011 Plan is 2,252,500 at September 30, 2013 .

The fair value of options granted by the Company is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of the Company’s common stock. The term of employee options and warrants granted is based on historical exercises of employee options and warrants. The term of non-employee warrants is based on the term of the associated contract. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term as described.

The assumptions used in calculating the fair value of employee common stock options granted during the nine months ended September 30, 2013 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:



	Nine Months Ended September 30, 2013
Expected volatility	60.0 - 63.2%
Expected life (in years)	5.2
Expected dividend yield	—
Risk-free interest rate	0.71% - 0.80%

The weighted-average grant date fair value for options granted during the nine months ended September 30, 2013 was approximately $2.41 .

The assumptions used in calculating the fair value of employee common stock warrants granted during the nine months ended September 30, 2013 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:



	Nine Months Ended September 30, 2013
Expected volatility	60.1	%
Expected life (in years)	5.2
Expected dividend yield	—
Risk-free interest rate	0.88	%

The weighted-average grant date fair value for warrants granted during the nine months ended September 30, 2013 was approximately $3.06 .

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Employee Common Stock Options

Activity with respect to employee stock options is summarized as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)
Outstanding, December 31, 2012	1,350,861		$	4.57
Granted	258,000		$	4.59
Exercised	(10,370	)	$	3.52
Unvested options forfeited or cancelled	(202,633	)	$	4.11
Vested options expired	(38,609	)	$	1.85
Outstanding, September 30, 2013	1,357,249		$	4.73	6.6	$	161
Vested or expected to vest at September 30, 2013	1,221,023		$	4.79	6.5	$	152

Total unrecognized compensation expense related to non-vested stock options at September 30, 2013 , was approximately $0.9 million and is expected to be recognized over a weighted-average period of 1.98 years.

Employee Common Stock Warrants

Activity with respect to employee common stock warrants is summarized as follows:



	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)
Outstanding, December 31, 2012	1,806,024	$	2.99
Granted	70,000	$	5.90
Exercised	—	$	—
Unvested warrants forfeited or cancelled	—	$	—
Vested warrants expired	—	$	—
Outstanding, September 30, 2013	1,876,024	$	3.09	5.1	$	2,019
Vested or expected to vest at September 30, 2013	1,850,101	$	3.06	5.0	$	2,018

Total unrecognized compensation expense related to non-vested employee stock warrants at September 30, 2013 , was approximately $0.3 million and is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock

In June 2012, the Company approved issuing, pursuant to the 2011 Plan, 270,000 shares of common stock with a three -year restriction on transfer to its nine directors. The restricted stock has all the rights of a shareholder from the date of grant, including, without limitation the right to receive dividends and the right to vote. The Company calculated the fair value of the restricted stock to be equal to the closing stock price of $3.20 on the date of grant. The related compensation expense is being recognized over the three-year restricted period.

On July 2, 2012, in connection with the issuance of the $7.5 million principal amount of 8% subordinated convertible notes, the Company granted 50,000 shares of restricted common stock with a one year restriction on transferability to the placement agent as partial consideration for its service on the offering. The Company calculated the fair value of the restricted stock to be equal to the closing stock price of $3.50 on the date of grant date. The related compensation expense is included in deferred loan costs and is being amortized as interest expense over the term of the 8% sub ordinated convertible notes. The expense for the three and nine months ended September 30, 2013 was approximately $0.02 million and $0.04 million , respectively, with unrecognized expense of approximately $0.1 million remaining at September 30, 2013 .

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Activity with respect to restricted stock is summarized as follows:



	Number of Shares	Weighted Avg. Grant Date Fair Value
Unvested at December 31, 2012	283,500	$	3.20
Granted	—	$	—
Vested	—	$	—
Forfeited	—	$	—
Unvested at September 30, 2013	283,500	$	3.20

Total unrecognized compensation expense related to non-vested restricted stock at September 30, 2013 , was approximately $0.5 million and is expected to be recognized over a weighted-average period of 1.7 years.

Nonemployee Common Stock Warrants

The Company grants common stock warrants in connection with equity share purchases by investors as an additional incentive for providing long-term equity capital to the Company and as additional compensation to consultants and advisors. The warrants are granted at negotiated prices in connection with the equity share purchases and at the market price of the common stock in other instances. The warrants have been issued for terms between two and ten years.

Activity with respect to nonemployee common stock warrants is summarized as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2012	1,961,457		$	3.78
Granted	—		$	—
Exercised	(28,825	)	$	1.05
Unvested warrants forfeited or cancelled	—		$	—
Vested warrants expired	(28,941	)	$	2.27
Outstanding, September 30, 2013	1,903,691		$	3.84	1.2	$	623
Vested or expected to vest at September 30, 2013	1,903,691		$	3.84	1.2	$	623

For the three and nine months ended September 30, 2013 and 2012, the Company recognized stock-based compensation as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
(Amounts in 000’s)	2013		2012			2013		2012
Employee compensation:
Stock options	$	81	$	135		$	423	$	357
Employee warrants	35		57			95		172
Total option and warrants compensation	$	116	$	192		$	518	$	529
Board restricted stock	70		77			219		110
Total Employee Compensation Expense	$	186	$	269		$	737	$	639

Non-employee compensation:
Warrants	$	—	$	49		$	—	$	837
Less: Deferred financing and prepaid services	—		(49		)	—		(812		)
Amortization of prepaid services	4		324			12		626
Total Nonemployee Compensation Expense	$	4	$	324		$	12	$	651

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NOTE 14. VARIABLE INTEREST ENTITIES

As further described in Note 20 to our Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 , the Company has certain variable interest entities that are required to be consolidated because AdCare has control as primary beneficiary. A “primary beneficiary” is the party in a VIE that has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

On June 22, 2013, the Company and Riverchase Village ADK, LLC (“Riverchase”), an entity owned and controlled by Christopher Brogdon (the Company’s Vice Chairman and a greater than 10% beneficial owner of the common stock), agreed to mutually terminate the five -year year management agreement, dated June 22, 2010. Riverchase owns Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama. Pursuant to the management agreement, a subsidiary of the Company supervised the management of the Riverchase Village facility for a monthly fee equal to 5% of the monthly gross revenues of the Riverchase Village facility.

On June 22, 2013, a wholly owned subsidiary of the Company and Mr. Brogdon amended the Option Agreement, dated June 22, 2010, pursuant to which the Company has the exclusive and irrevocable right to acquire from Mr. Brogdon all of the issued and outstanding membership interests in Riverchase, which owns the Riverchase Village facility. The amendment extended the option provided for thereby from June 22, 2013 to June 22, 2014.

The following summarizes the assets and liabilities of the variable interest entity included in the consolidated balance sheets:



(Amounts in 000’s)	September 30, 2013			December 31, 2012
Cash	$	(13	)	$	(38	)
Accounts receivable	82			—
Restricted investments	179			343
Property and equipment, net	5,937			5,974
Other assets	372			391
Total assets	$	6,557		$	6,670

Accounts payable	$	1,797		$	1,316
Accrued expenses	193			67
Current portion of notes payable	87			92
Notes payable, net of current portion	5,947			6,033
Non-controlling interest	(1,467		)	(838		)
Total liabilities	$	6,557		$	6,670

NOTE 15. FAIR VALUE MEASUREMENTS

The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the nine months ended September 30, 2013 , using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).



(Amounts in 000’s)	Level 1:	Level 2:	Level 3:		Total at September 30
Derivative liability - 2013	—	—	$	929	$	929
Derivative liability - 2012	—	—	$	3,630	$	3,630

Set forth below is a reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 :

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(Amounts in 000’s)	Derivative Liability
Beginning balance, December 31, 2012	$	3,630
Converted debt	(523		)
Derivative gain	(2,178		)
Ending balance, September 30, 2013	$	929

The derivative liability is the result of the Company issuing subordinated convertible notes in 2010. The notes are convertible into shares of common stock of the Company at a current conversion price of $3.73 (adjusted for various stock dividends) that is subject to future reductions if the Company issues equity instruments at a lower price. Because there is no minimum conversion price, an indeterminate number of shares may be issued in the future. Accordingly, the Company determined an embedded derivative existed that was required to be bifurcated from the subordinated convertible notes and accounted for separately as a derivative liability recorded at fair value. The Company estimates the fair value of the derivative liability using the Black-Scholes Merton option-pricing model with changes in fair value being reported in the consolidated statement of operations. This model requires certain key inputs that are significant unobservable inputs (Level 3).

The Company currently has no plans to issue equity instruments at a price lower than the conversion price of $3.73 , the current conversion price of the subordinated convertible notes issued in 2010. The derivative liability is a non-cash item. Upon conversion to common stock, the debt and derivative liability will be extinguished, the current fair market value of the common stock will be reflected as common stock and additional paid-in capital, and there may be a resulting gain or loss on the debt extinguishment. If not converted to common stock, upon settlement at the date of maturity, the debt and derivative liability will result in a gain on debt extinguishment for the remaining fair value of the derivative.

NOTE 16. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

Laws and regulations governing Federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. The Company believes that it is in compliance in all material respects with all applicable laws and regulations.

A significant portion of the Company’s revenue is derived from Medicaid and Medicare, for which reimbursement rates are subject to regulatory changes and government funding restrictions. Any significant future change to reimbursement rates could have a material effect on the Company’s operations.

Operating Leases

The Company leases certain office space and nine skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs. Facility rent expense totaled $1.8 million and $5.3 million for the three and nine months ended September 30, 2013 , respectively, and $1.8 million and $5.3 million for the three and nine months ended September 30, 2012 , respectively.

Five of the Company’s facilities are operated under a single master lease arrangement. The lease has a term of ten years ending 2020. Under the master lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicare and Medicaid provider requirements, is a default under the Company’s master lease agreement. In addition, other potential defaults related to an individual facility may cause a default of the entire master lease agreement. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The Company is not aware of any defaults and is in compliance as of September 30, 2013 .

Two of the Company’s facilities are operated under a separate lease agreement. The lease is a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has a term of 12 years into 2022 and includes covenants and restrictions. A commitment is included that requires minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities. The Company is in compliance with financial and administrative covenants of this lease agreement as of September 30, 2013 .

Legal Matters

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The skilled nursing business involves a significant risk of liability due to the age and health of the Company’s patients and residents and the services the Company provides. The Company and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, which may allege that services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare

program (such as Medicare) or payer. A violation may provide the basis for exclusion from federally funded healthcare programs. As of September 30, 2013 , the Company does not have any material loss contingencies recorded or requiring disclosure based upon the evaluation of the probability of loss from known claims, except as disclosed below.

In 2012, the Company was named as a defendant in two related lawsuits asserting breach of contract claims arising out of consulting agreements executed in 2010 in connection with the Company’s becoming the operator of certain leased facilities that were previously operated by a third-party. The same transaction was already the subject of litigation commenced by the Company in 2011 against several entities which had previously operated the leased facilities. After becoming the operator of the leased facilities, the Company incurred certain losses for pre-closing activities for which the Company was entitled to indemnification. The Company sought to enforce its rights to indemnity by filing a lawsuit against the former operators of the leased facilities for breach of contract and related tort claims, and the Company proceeded to set off its losses against payment due under the consulting agreements referenced above. The defendants filed counterclaims against the Company. In the third quarter of 2012, a settlement was reached with respect to the three lawsuits that permitted the Company to eliminate a previously accrued liability in light of the lower than expected settlement amount of $1.0 million resulting in a non-cash settlement gain of $0.4 million recognized in the third quarter of 2012. During the third quarter of 2012, $0.3 million of the settlement was paid. During the nine months ended September 30, 2013 , $0.1 million of the settlement was paid, leaving $0.1 million remaining balance to be paid during the remainder of 2013.

On June 24, 2013, South Star Services, Inc. (“SSSI”), Troy Clanton and Rose Rabon (collectively, the “Plaintiffs”) filed a complaint in the District Court of Oklahoma County, State of Oklahoma against: (i) AdCare, certain of its wholly owned subsidiaries and AdCare’s Chief Executive Officer (collectively, the “AdCare Defendants”); (ii) Christopher Brogdon, Vice Chairman of the Board of Directors, and his wife; and (iii) 5 entities controlled by Mr. and Mrs. Brogdon, which entities own 5 skilled-nursing facilities located in Oklahoma (the “Oklahoma Facilities”) that are managed by an AdCare subsidiary. The Company believes that the complaint is without merit and intends to vigorously defend itself against the claims set forth therein.

The complaint alleges, with respect to the AdCare Defendants, that: (i) the AdCare Defendants tortuously interfered with contractual relations between the Plaintiffs and Mr. Brogdon, and with Plaintiffs’ prospective economic advantage, relating to SSSI’s right to manage the Oklahoma Facilities and seven other skilled-nursing facilities located in Oklahoma (collectively, the “Facilities”), respectively; (ii) the AdCare Defendants fraudulently induced the Plaintiffs to perform work and incur expenses with respect to the Facilities; and (iii) one of the AdCare subsidiaries which is an AdCare Defendant provided false and defamatory information to an Oklahoma regulatory authority regarding SSSI’s management of one of the Oklahoma Facilities. The complaint seeks damages against the AdCare Defendants, including punitive damages, in an unspecified amount, as well as costs and expenses, including reasonable attorney fees. On July 26, 2013, the AdCare Defendants (with the other defendant parties) filed: (i) a motion to dismiss the fraud claims; and (ii) a motion to transfer the proceeding to the U.S. District Court for the Northern District of Georgia.

On October 2, 2013, the Company responded to certain letters (the "Letters") received from Georgia Department of Community Health ("GDCH") in September 2013 requesting payment of past due provider fees totaling $1.2 million for certain nursing facilities (collectively, the "Facilities") for periods prior to the Company's operation of the Facilities. The Company does not believe it is responsible for payment of these past due provider fees and has requested a final determination from GDCH confirming that it is not responsible for paying the fees described in the Letters.

Commitments

Special Termination Benefits

During the nine months ended September 30, 2013 , the Company incurred certain salary retirement and continuation costs $0.2 million related to separation agreements with certain of the Company’s former officers. The benefits include wage continuation

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and fringe benefits which are to be paid out to these former employees over various future periods ranging up to a six -month period. The remaining unpaid balance accrued as of September 30, 2013 is $0.06 million .

Commitment to Future Lease Payments

A leased skilled nursing facility has signed a security agreement associated with the lessor, Covington Realty, LLC, in conjunction with the lessor’s refinancing of the project through HUD. The commitment gives the lender the right to pursue the facility for unpaid lease payments to the lessor.

NOTE 17. RELATED PARTY TRANSACTIONS

As of September 30, 2013 , there have been no material changes to the disclosure with respect to related party transactions included in Item 13 to our Annual Report on Form 10-K for the year ended December 31, 2012 , except for the following:

Riverchase—Management Agreement Termination

On June 22, 2013, the Company and Riverchase, an entity owned and controlled by Mr. Brogdon, agreed to mutually terminate the five -year year management agreement, dated June 22, 2010. Riverchase owns Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama. Pursuant to the management agreement, a subsidiary of the Company supervised the management of the Riverchase Village facility for a monthly fee equal to 5% of the monthly gross revenues of the Riverchase Village facility.

Riverchase—Option Agreement Extension

Harrah, McLoud and Meeker—Management Agreement

On July 26, 2013, a wholly-owned subsidiary of the Company entered into management agreements with entities owned and controlled by Mr. Brogdon, which entities own the skilled-nursing facilities located in Oklahoma known as Harrah Nursing Center, McLoud Nursing Center and Mecker Nursing Center. Pursuant to the management agreements, the AdCare subsidiary has agreed to manage the operations of these facilities. The management agreements have initial terms of five years and shall renew automatically for one -year terms thereafter. Pursuant to the management agreements, the entities owned and controlled by Mr. Brogdon which own the facilities shall pay to the AdCare subsidiary a fee equal to 5% of the monthly gross revenues of the facilities. The management agreements may be terminated by the parties at any time upon 30 days ’ prior written notice.

NOTE 18. SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the SEC. The following is a summary of the material subsequent events.

On October 1, 2013, the Company entered into a letter agreement with Park City Capital, LLC and Michael J. Fox, Chief Executive Officer of Park City. Pursuant to the agreement, effective October 1, 2013, the Board of Directors of the Company increased the size of the Board from nine to ten members and appointed Mr. Fox as a director of the Company to fill the vacancy created thereby for a term that expires at the Company’s next annual meeting of shareholders, which is expected to be held in December 2013. The Company also has agreed: (i) to include Mr. Fox in its slate of nominees for election as a Class I director at the 2013 annual meeting to hold office until the Company’s 2014 annual meeting of shareholders; and (ii) to use its reasonable best efforts to cause the re-election of Mr. Fox to the Board as a Class I director at the 2013 annual meeting.

On October 17, 2013, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Ohio Secretary of State to designate 200,000 undesignated shares of the Company’s preferred stock, no par value per share, as shares of the Company’s 10.875% Series A Cumulative Redeemable Preferred Stock. As a result of the Certificate of Amendment, the Company has the authority to issue up to 950,000 shares of Series A Preferred Stock. The Certificate of Amendment does not otherwise affect the terms of the Series A Preferred Stock.

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In October 2013, the Company issued to holders of the Company’s subordinated convertible promissory notes dated October 26, 2010, an aggregate of 448,215 shares of the Company’s common stock, no par value upon conversion of $1,670,503 of the aggregate principal amount and $1,337 in interest amount thereof. Specifically, the Company issued the following amounts of shares of common stock to holders thereof on the following dates: (i) October 18, 2013, an aggregate amount of 134,048 shares; (ii) October 22, 2013, an aggregate amount of 268,097 shares; and (iii) October 25, 2013, and aggregate amount of 46,070 shares. The conversion price was $3.73 per share of common stock. The subordinated convertible promissory notes were issued, and the shares of common stock issued upon conversion thereof were issued, pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The Company relied upon such exemption based upon representations made by each such holder regarding, among other things, the holder’s status as an accredited investor (as such term is defined under the Securities Act).

On October 28, 2013, the Company closed a “best efforts” public offering of 500,000 shares of its Series A Preferred Stock at a price of $25.00 per share. The Company received net proceeds of approximately $11.2 million from the offering after deducting underwriting discounts and other offering-related expenses of approximately $1.3 million . The liquidation preference per share is $25.00 . Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25.00 liquidation preference per share. The dividend rate may increase under certain circumstances.

In October 2013, the Company settled certain alleged claims made by Anthony J. Cantone, Cantone Asset Management LLC and Cantone Research, Inc ("CRI") with respect to their prior dealings with the Company, including, among other things, the Company's offering of convertible promissory notes issued in 2012 (the "Cantone Settlement"). In connection with the Cantone Settlement, the Company issued to CRI a two -year warrant to purchase 75,000 shares of common stock and will expense the related cost of $0.08 million in the fourth quarter of 2013.

On November 8, 2013, certain wholly-owned subsidiaries of the Company entered into a Fourth Modification Agreement with PrivateBank which modified that certain Loan Agreement, dated March 30, 2012, between such subsidiaries and PrivateBank. Pursuant to the modification, among other things: (i) paid down $1.8 million of loan principal from the release of $1.4 million from certain collateral account and from the release of $0.4 million from certain sinking fund account, (ii) deposited $0.9 million into certain debt service reserve account, and (iv) modified certain financial covenants under the credit facility regarding the minimum fixed charge coverage ratio and minimum EBITDAR, of one of the subsidiaries that is the operator of the Company’s skilled nursing facility located in Little Rock, Arkansas.

On November 10, 2013, Joshua J. McClellan resigned from the Board of Directors (the “Board”) of the Company effective January 1, 2014. On November 11, 2013, each of Jeffrey L. Levine and Gary L. Wade also resigned from the Board effective January 1, 2014. The Company accepted all such resignations. Each of Messrs. Levine, McClellan and Wade’s decision to resign as a director was not due to any disagreements with the Company on any matter relating to the Company’s operations, policies or practices.

On November 12, 2013, the Compensation Committee of the Board of Directors (the “Board”) of the Company adopted a program, which also was approved by the entire Board, to replace certain cash compensation otherwise payable to the Company’s directors and officers with equity compensation, thereby reducing the amount of cash compensation payable by the Company and otherwise more closely aligning the interests of the Company’s directors and officers with those of the Company’s shareholders (the “Cash Compensation Reduction Program”). The Company’s officers who are party to employment agreements with the Company, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, have agreed to participate in the Cash Compensation Reduction Program. The Cash Compensation Reduction Program is applicable commencing with compensation payable in respect of the year ending December 31, 2014.

On November 13, 2013, the Company entered into a Third Amendment to Secured Loan Agreement and Payment Guaranty with KeyBank, which amended the KeyBank Credit Facility. Pursuant to the amendment: (i) KeyBank waives the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio and implied debt service coverage such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; and (ii) KeyBank and the Company agreed to amend certain financial covenants regarding the Company’s fixed charge ratio.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”), owns and operates skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. The Company, through wholly owned separate operating subsidiaries, as of September 30, 2013 , operates 47 facilities comprised of 43 skilled nursing facilities, three assisted living facilities and one independent living/senior housing facility totaling approximately 4,800 beds. The Company’s facilities provide a range of health care services to their patients and residents including, but not limited to, skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of September 30, 2013 , of the total 47 facilities, the Company owned and operated 26 facilities, leased and operated nine facilities, managed 11 facilities for third parties and had one consolidated variable interest entity. As part of the Company’s strategy to focus on the growth of skilled nursing facilities, the Company decided in the fourth quarter of 2011 to exit the home health business; therefore, this business is reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of the home health business in 2012. Additionally, in the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio and executed a sublease arrangement to exit the skilled nursing business in Jeffersonville, Georgia. The six Ohio assisted living facilities and the Jeffersonville, Georgia skilled nursing facility have an aggregate of 313 units in service. These seven facilities are also reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of four of the six Ohio assisted living facilities in December 2012, one in February 2013, and one in May, 2013. On June 30, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia. The two skilled nursing facilities had an aggregate of 135 units in service. These two facilities are also reported as discontinued operations (see Note 11 — Discontinued Operations ).

The Company owns and manages skilled nursing facilities (“SNF”) and assisted living facilities. The Company delivers skilled nursing and assisted living services through wholly owned separate operating subsidiaries. During the first quarter of 2013, the Company discontinued management services on one facility, and in the second quarter the Company entered into two sublease agreements and reported two additional discontinued operations, bringing our Company’s total bed count to 4,781 at September 30, 2013 . The following tables provide summary information regarding our recent acquisitions and facility composition.



		Number of Facilities at
		September 30, 2013
State	Number of Operational Beds/Units	Owned	Leased	Managed For Third Parties	VIE	Total
Alabama	408	2	—	—	1	3
Arkansas	1,041	10	—	—	—	10
Georgia	1,379	4	7	—	—	11
Missouri	80	—	1	—	—	1
North Carolina	106	1	—	—	—	1
Ohio	705	4	1	3	—	8
Oklahoma	882	3	—	8	—	11
South Carolina	180	2	—	—	—	2
Total	4,781	26	9	11	1	47

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Facility Type
Skilled Nursing	4,482	24	9	10	—	43
Assisted Living	216	2	—	—	1	3
Independent Living	83	—	—	1	—	1
Total	4,781	26	9	11	1	47

Liquidity

We anticipate that scheduled debt service (excluding approximately $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, that the Company believes will be refinanced on a longer term basis but including principal, interest, collateral and capital improvement fund or other escrow deposits) will total approximately $33.4 million and cash outlays for acquisition costs, maintenance capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $5.3 million for the 12 months ending September 30, 2014 . We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. Although we anticipate the conversion to common stock of the Company’s outstanding subordinated convertible promissory notes with a principal amount in the aggregate of $7.7 million that mature in August 2014 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.7 million that were converted into shares of common stock of the Company in October 2013 (see Note 18 - Subsequent Events), we believe that our anticipated cash flow and funding sources would allow us to pay these notes in cash. These promissory notes are convertible at the option of the holder into shares of common stock of the Company at $3.73 per share. The closing price of the common stock exceeded $3.79 per share from January 1, 2013 through November 6, 2013. We have been successful in recent years in raising new equity capital and in October 2013 the Company issued 500,000 shares of Series A Preferred Stock at $25 per share receiving proceeds of approximately $11.2 million after deducting underwriting discounts and other offering-related expenses (see Note 18 - Subsequent Events) . As discussed further below, if we are unable to refinance the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans due to our limited liquidity in such an event.

In order to satisfy these capital needs, we intend to: (i) improve our operating results by increasing facility occupancy, optimizing our payor mix by increasing the proportion of sub-acute patients within our skilled nursing facilities, continuing our cost optimization and efficiency strategies and acquiring additional long-term care facilities with existing operating cash flow; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months and provide for the continuance of our acquisition strategy. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating resultsor refinance current debt (including the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively), then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans.

Acquisitions

The Company has embarked on a strategy to grow its business through acquisitions and leases of senior care facilities.

On February 15, 2013, the Company entered into a Purchase and Sale Agreement with Avalon Health Care, LLC to acquire certain land, buildings, improvements, furniture, vehicles, contracts, fixtures and equipment comprising: (i) a 180-bed skilled nursing facility known as Bethany Health and Rehab; and (ii) a 240-bed skilled nursing facility known as Trevecca Health and Rehab, both located in Nashville, Tennessee. The Company deposited $0.4 million of earnest money escrow deposits in February 2013. On June 1, 2013, the Purchase and Sale Agreement was terminated due to the failure of the transaction to close by May 31, 2013. In connection with the termination of the Purchase and Sale Agreement, the Company is seeking the return of $0.4 million previously deposited earnest money escrow deposits. On August 1, 2013, the Company entered into a settlement agreement regarding the return of the $0.4 million previously deposited earnest money escrow deposits. Pursuant to the agreement, the previously deposited earnest money escrow deposits were released and distributed, $0.3 million to the Company and $0.1 million to Avalon, respectively.

The Company incurred acquisition costs total of approximately $0.03 million and $0.6 million during the three and nine months ended September 30, 2013 , respectively, and $0.3 million and $1.2 million during the three and nine months ended September 30, 2012 , respectively. Acquisition costs are recorded in “Other Income (Expense)” section of the consolidated statements of operations.

During the nine months ended September 30, 2012 , the Company acquired a total of eight skilled nursing facilities and one assisted living facility.

Divestitures

As part of the Company’s strategy to focus on the growth of its skilled nursing business, the Company decided in the fourth quarter of 2011 to exit the home health business. In the fourth quarter of 2012, the Company continued this strategy and entered into an agreement to sell six assisted living facilities located in Ohio. The Company also entered into a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia. On June 12, 2013, the Company executed two sublease arrangements to exit the skilled nursing business in Tybee Island, Georgia effective June 30, 2013 relating to two facilities. The results of operations and cash flows for the home health business, the six Ohio assisted living facilities, the Jeffersonville, Georgia skilled nursing facility, and the two facilities in Tybee Island, Georgia are reported as discontinued operations in 2013 and 2012.

On February 28, 2013, the Company completed the sale of the facility known as Lincoln Lodge Retirement Residence and used the proceeds to pay the principal balance of the HUD mortgage note with respect to the facility of $1.9 million. The Company recognized a gain on the sale of approximately $0.1 million and cash proceeds, net of costs and debt payoff, of $0.6 million.

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resulting in a net payment of $3.2 million. Proceeds from the $3.2 million payment were used to fund a $2.0 million increase in collateralized restricted cash required by one of the Company’s lenders and $1.2 million was received by the Company for working capital purposes. The Company recognized a loss on the sale of Vandalia of $0.4 million.

On June 11, 2013, the Company completed the sale of its former Springfield, Ohio corporate office building which was sold for the approximate net book value. The Company used the proceeds to payoff the principal balance of the mortgage note with respect to the building of approximately $0.1 million.

The following table summarizes the activity of Discontinued Operations for the three and nine months ended September 30, 2013 and 2012:



	Three Months Ended September 30,
(Amounts in 000’s)	2013			2012
Total revenues from discontinued operations	$	12		$	5,380
Net (loss) income from discontinued operations	$	(188	)	$	126
Interest expense, net from discontinued operations	$	—		$	166
Income tax (expense) benefit from discontinued operations	$	(33	)	$	1
(Loss) gain on disposal of assets from discontinued operations	$	(20	)	$	16



	Nine Months Ended September 30,
(Amounts in 000’s)	2013			2012
Total revenues from discontinued operations	$	3,954		$	15,666
Net (loss) income from discontinued operations	$	(1,402	)	$	203
Interest expense, net from discontinued operations	$	71		$	514
Income tax expense from discontinued operations	$	(33	)	$	3
(Loss) gain on disposal of assets from discontinued operations	$	(467	)	$	16

Primary Performance Indicators

The Company owns and manages skilled nursing facilities and assisted living facilities, and delivers its services through wholly owned separate operating subsidiaries.

The Company focuses on two primary indicators in evaluating its financial performance. Those indicators are facility occupancy and patient mix. Facility occupancy is critical, since higher occupancy generally leads to higher revenues. In addition, concentrating on increasing the number of Medicare covered admissions (“the patient mix”) helps in increasing revenues. The Company includes commercial insurance covered admissions that are reimbursed at the same level as those covered by Medicare in the Company’s Medicare utilization percentages and analysis. The Company also evaluates “Same Facilities” and “Recently Acquired Facilities” results. Same Facilities represent those owned and leased facilities the Company began to operate prior to January 1, 2012. Recently Acquired Facilities results represents those owned and leased facilities the Company began to operate subsequent to January 1, 2012.

Patient mix at the Company’s skilled nursing facilities for the three and nine months ended September 30, 2013 and 2012 was as follows:



	Patient Mix (SNF only)
	Three Months Ended September 30,
	Same Facilities				Recently Acquired Facilities				All Facilities
	2013		2012		2013		2012		2013		2012
Medicare	13.6	%	13.9	%	14.5	%	11.5	%	13.8	%	13.4	%
Medicaid	72.2	%	73.0	%	71.6	%	74.0	%	72.0	%	73.2	%
Other	14.2	%	13.1	%	13.9	%	14.5	%	14.2	%	13.4	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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	Patient Mix (SNF only)
	Nine Months Ended September 30,
	Same Facilities				Recently Acquired Facilities				All Facilities
	2013		2012		2013		2012		2013		2012
Medicare	15.0	%	15.0	%	16.0	%	10.4	%	15.2	%	14.5	%
Medicaid	71.2	%	72.2	%	71.4	%	75.0	%	71.3	%	72.5	%
Other	13.8	%	12.8	%	12.6	%	14.6	%	13.5	%	13.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Medicare reimburses our skilled nursing facilities under a prospective payment system (“PPS”) for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group (“RUG”) category that is based upon each patient’s acuity level. In October 2010, the number of RUG categories was expanded from 53 to 66 as part of the implementation of the RUGs IV system and the introduction of a revised and substantially expanded patient assessment tool called the Minimum Data Set, version 3.0.

On July 29, 2011, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule providing for, among other things, a net 11.1% reduction in PPS payments to skilled nursing facilities for CMS’s fiscal year 2012 (which began October 1, 2011) as compared to PPS payments in CMS’s fiscal year 2011 (which ended September 30, 2011). The 11.1% reduction is on a net basis, after the application of a 2.7% market basket increase, and reduced by a 1.0% multi-factor productivity adjustment required by the Patient Protection and Affordable Care Act of 2010 (“PPACA”). The final CMS rule also adjusted the method by which group therapy is counted for reimbursement purposes, and changed the timing in which patients who are receiving therapy must be reassessed for purposes of determining their RUG category.

The Middle Class Tax Relief and Job Creation Act of 2012 was signed into law on February 22, 2012, extending the Medicare Part B outpatient therapy cap exceptions process through December 31, 2012. The statutory Medicare Part B outpatient therapy cap for occupational therapy (“OT”) was $1,880 for 2012, and the combined cap for physical therapy (“PT”) and speech-language pathology services (“SLP”) was also $1,880 for 2012. This is the annual per beneficiary therapy cap amount determined for each calendar year. Similar to the therapy cap, Congress established a threshold of $3,700 for PT and SLP services combined and another threshold of $3,700 for OT services. All therapy services rendered above the $3,700 amount are subject to manual medical review and may be denied unless pre-approved by the provider’s Medicare Administrative Contractor. The law requires an exceptions process to the therapy cap that allows providers to receive payment from Medicare for medically necessary therapy services above the therapy cap amount. Beginning October 1, 2012, some therapy providers may submit requests for exceptions (pre-approval for up to 20 therapy treatment days for beneficiaries at or above the $3,700 threshold) to avoid denial of claims for services above the threshold amount. The $3,700 figure is the defined threshold that triggers the provision for an exception request. Prior to October 1, 2012, there was no provision for an exception request when the threshold was exceeded.

On July 27, 2012, CMS issued a final rule providing for, among other things, a net 1.8% increase in PPS payments to skilled nursing facilities for CMS’s fiscal year 2013 (which began on October 1, 2012) as compared to PPS payments to skilled nursing facilities in CMS’s fiscal year 2012 (which ended September 30, 2012). The 1.8% increase was on a net basis, reflecting the application of a 2.5% market basket increase, less a 0.7% multi-factor productivity adjustment mandated by PPACA. This increase is offset by the 2% sequestration reduction, discussed below, which became effective April 1, 2013.

On January 1, 2013 the American Taxpayer Relief Act of 2012 (the “ATRA”) extended the therapy cap exception process for one year. The ATRA also made additional changes to the Multiple Procedure Payment Reduction previously implemented in 2010. The existing discount to multiple therapy procedures performed in an outpatient environment during a single day was 25%. Effective April 1, 2013, ATRA increased the discount rate by an additional 25% to 50%. The ATRA additionally delayed the sequestration reductions of 2% to all Medicare payments until April 1, 2013.

On July 31, 2013, CMS issued its final rule outlining fiscal year 2014 Medicare payment rates for skilled nursing facilities. CMS estimates that aggregate payments to skilled nursing facilities will increase by $470 million, or 1.3% for fiscal year 2014, relative to payments in 2013. This estimated increase is attributable to a 2.3% market basket increase, reduced by the 0.5% forecast error correction and further reduced by the 0.5% multi-factor productivity adjustment (MFP) as required by PPACA. The forecast error correction is applied when the difference between the actual and projected market basket percentage change for the most recent available fiscal year exceeds the 0.5% threshold. For fiscal year 2012 (most recent availa

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ble fiscal year), the projected market basket percentage change exceeds the actual market basket percentage change by 0.51%. The 2014 Medicare payment rates for skilled nursing facilities were effective on October 1, 2013.

Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels (including as a result of automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare revenues derived from our skilled nursing facilities) could be reduced, with a corresponding adverse impact on our financial condition or results of operation.

We also derive a substantial portion of our consolidated revenue from Medicaid reimbursement, primarily through our skilled nursing business. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending nationally has increased significantly in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led both the federal government to institute measures aimed at controlling the growth of Medicaid spending and, in some instances, reducing it.

Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Average occupancy and reimbursement rates at the Company’s skilled nursing facilities for the three months ended September 30, 2013 and 2012 were as follows:



	For the Three Months Ended September 30, 2013
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Alabama	304	304	70.5	%	11.5	%	$	3,889	$	393.61	$	165.72
Arkansas	1,009	1,009	63.2	%	15.0	%	$	12,869	$	461.61	$	162.71
Georgia	1,379	1,379	88.8	%	14.5	%	$	23,781	$	452.07	$	156.57
Missouri	80	80	72.0	%	9.4	%	$	926	$	395.01	$	134.76
North Carolina	106	106	67.9	%	16.4	%	$	1,496	$	448.49	$	162.53
Ohio	293	293	83.4	%	12.5	%	$	4,931	$	422.42	$	165.95
Oklahoma	318	318	67.4	%	9.4	%	$	3,673	$	450.32	$	146.75
South Carolina	180	180	82.1	%	16.1	%	$	2,680	$	411.17	$	144.42
Total	3,669	3,669	76.7	%	13.8	%	$	54,245	$	444.92	$	157.66

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	For the Three Months Ended September 30, 2012
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Alabama	304	304	78.1	%	8.6	%	$	4,318	$	401.93	$	169.20
Arkansas	1,009	1,009	61.9	%	12.5	%	$	11,972	$	394.56	$	173.60
Georgia	1,379	1,379	89.6	%	14.0	%	$	24,970	$	453.79	$	170.19
Missouri	80	80	63.8	%	12.6	%	$	852	$	444.79	$	135.04
North Carolina	106	106	84.9	%	19.8	%	$	1,870	$	446.67	$	162.67
Ohio	293	293	85.7	%	14.9	%	$	5,386	$	465.82	$	167.02
Oklahoma	230	170	73.7	%	13.5	%	$	2,166	$	434.15	$	131.55
South Carolina	—	—	n/a		n/a		—		n/a		n/a
Total	3,401	3,341	78.3	%	13.4	%	$	51,534	$	437.38	$	168.17

(1) Excludes managed beds which are not consolidated.

(2) ADC is the Average Daily Census.

(3) PPD is the Per Patient Day equivalent.

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Average occupancy and reimbursement rates at the Company’s skilled nursing facilities for the nine months ended September 30, 2013 and 2012 were as follows:



	For the Nine Months Ended September 30, 2013
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Alabama	304	304	72.1	%	11.2	%	$	11,570	$	392.61	$	166.33
Arkansas	1,009	1,009	61.8	%	17.0	%	$	38,400	$	444.21	$	169.55
Georgia	1,379	1,379	88.7	%	15.6	%	$	71,130	$	449.79	$	156.93
Missouri	80	80	73.7	%	14.3	%	$	2,978	$	417.23	$	134.52
North Carolina	106	106	73.7	%	15.9	%	$	4,816	$	453.74	$	163.74
Ohio	293	293	84.2	%	15.3	%	$	15,565	$	438.51	$	166.70
Oklahoma	318	318	67.8	%	12.6	%	$	11,154	$	440.42	$	140.90
South Carolina	180	180	81.8	%	14.1	%	$	8,062	$	402.72	$	157.27
Total	3,669	3,669	76.7	%	15.2	%	$	163,675	$	440.75	$	159.78



	For the Nine Months Ended September 30, 2012
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Alabama	304	304	81.4	%	10.9	%	$	14,183	$	385.42	$	181.45
Arkansas	1,009	822	63.4	%	12.0	%	$	29,262	$	383.90	$	172.28
Georgia	1,379	1,290	89.6	%	15.7	%	$	67,656	$	456.11	$	156.56
Missouri	80	80	62.7	%	17.5	%	$	2,587	$	410.87	$	132.37
North Carolina	106	106	84.5	%	18.6	%	$	5,483	$	453.95	$	160.27
Ohio	293	293	84.4	%	16.2	%	$	15,943	$	465.11	$	161.70
Oklahoma	230	57	73.7	%	13.5	%	$	2,166	$	434.15	$	131.55
South Carolina	—	—	n/a		n/a		—		n/a		n/a
Total	3,401	2,952	79.7	%	14.5	%	$	137,280	$	436.77	$	162.67

(1) Excludes managed beds which are not consolidated.

(2) ADC is the Average Daily Census.

(3) PPD is the Per Patient Day equivalent.

Critical Accounting Policies

The Company prepares financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. The Company bases estimates on historical experience, business knowledge and on various other assumptions that the Company believes to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change.

There have been no significant changes during the nine months ended September 30, 2013 to the items that the Company disclosed as its critical accounting policies and use of estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 .

Results of Operations

Same and Recently Acquired Facility Occupancy and Revenue Analysis:



	Average Occupancy
	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Same Facilities	79.8	%	82.5	%	80.1	%	82.4	%
Recently Acquired Facilities	68.0	%	62.8	%	67.4	%	58.5	%
All Facilities	76.3	%	78.0	%	76.4	%	79.2	%



	Total Revenues
	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in 000’s)	2013		2012		2013		2012
Same Facilities	$	39,865	$	43,090	$	121,451	$	126,789
Recently Acquired Facilities	15,479		9,543		45,535		13,733
All Facilities	$	55,344	$	52,633	$	166,986	$	140,522

Comparison for the three months ended September 30, 2013 and 2012

The table below summarizes the operating results for the three months ended September 30, 2013 and 2012:



	Three Months Ended September 30,
(Amounts in 000’s)	2013			2012			Change			Percent Change
Revenues:
Patient care revenues	$	55,344		$	52,633		$	2,711		5	%
Management revenues	521			588			(67		)	(11	)%
Total revenues	55,865			53,221			2,644			5	%
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)	46,102			44,475			1,627			4	%
General and administrative expense	4,583			3,957			626			16	%
Audit committee investigation expense	302			—			302			—	%
Facility rent expense	1,761			1,775			(14		)	(1	)%
Depreciation and amortization	1,888			1,760			128			7	%
Salary retirement and continuation costs	5			38			(33		)	(87	)%
Total expenses	54,641			52,005			2,636			5	%

Income from Operations	1,224			1,216			8			1	%
Other Income (Expense):
Interest expense, net	(3,462		)	(3,695		)	233			(6	)%
Acquisition costs, net of gains	(33		)	(342		)	309			(90	)%
Derivative gain (loss)	1,989			(2,105		)	4,094			(194	)%
(Loss) gain on extinguishment of debt	(6		)	500			(506		)	(101	)%
Loss on disposal of assets	(6		)	—			(6		)	—	%
Other income (expense)	15			(229		)	244			(107	)%
Total other expense, net	(1,503		)	(5,871		)	4,368			(74	)%

Loss from Continuing Operations Before Income Taxes	(279		)	(4,655		)	4,376			(94	)%
Income tax benefit (expense)	54			(111		)	165			(149	)%
Loss from Continuing Operations	$	(225	)	$	(4,766	)	$	4,541		(95	)%

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Patient Care Revenues —Total patient care revenues increased by $2.7 million , or 5% for the three months ended September 30, 2013 as compared to the same period in 2012. The increase was primarily the result of the eleven skilled nursing facilities and one assisted living facility acquired in 2012, as well as the improvement in patient mix and average Medicare reimbursement rate per patient day, partially offset by reductions in average Medicaid reimbursement rates per patient day and facility occupancy.

Management Revenues— Management revenues (net of eliminations) decreased by $0.07 million , or 11% for the three months ended September 30, 2013 , as compared to the same period in 2012. The decrease was primarily due to the discontinuance of one management contract in February 2013.

Cost of Services— Cost of services increased by $1.6 million , or 4% , during the three months ended September 30, 2013 , as compared to the same period in 2012. The increase was primarily due to the eleven skilled nursing facilities and one assisted living facility acquired during 2012 partially offset by a decrease of approximately $1.2 million in employee benefits expense. Cost of services as a percentage of patient care revenue decreased from 84.5% at September 30, 2012 to 83.3% at September 30, 2013 . The decrease in cost of services as a percentage of patient care revenue is primarily due to the progress the Company has made in its cost reduction optimization strategy in the operations of certain 2012 acquired facilities.

General and Administrative— General and administrative costs increased by $0.6 million to $ 4.6 million for the three months ended September 30, 2013 , compared to $ 4.0 million for the same period in 2012. The increase is primarily due to the following: (i) increase of approximately $0.3 million in expense due to a new data center agreement, (ii) increase of approximately $0.3 million in salaries, wage and employee benefits expense, (iii) increase of approximately $0.2 million in accounting and audit expense, (iv) increase of approximately $0.1 million in recruiting costs, partially offset by (v) increase of approximately $0.2 million in purchasing rebates, and (vi) decrease of approximately $0.1 million in investor relations costs. As a percentage of revenue, general and administrative costs increased to 8.2% for the three months ended September 30, 2013 , compared to 7.4% for the same period in 2012.

Audit Committee Investigation Expense— As previously disclosed, the Audit Committee, in consultation with management, concluded that: (i) the Company’s previously issued financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 (the “Relevant Financial Statements”) should no longer be relied upon due to errors in the Relevant Financial Statements identified in connection with the audit of the Company’s financial statements for the year ended December 31, 2012; and (ii) the Company would restate the Relevant Financial Statements. The Audit Committee initiated a further review of, and inquiry with respect to, the accounting and financial issues related to these and other potential errors and engaged counsel to assist the Audit Committee with such matters. The Audit Committee completed its inquiry and, in connection therewith, assisted in the correction of certain errors relating to accounting and financial matters and identified certain material weaknesses in the Company’s internal control over financial reporting, including weakness in the Company’s ability to appropriately account for complex or non-routine transactions and in the quality and sufficiency of the Company’s finance and accounting resources. On July 8, 2013, the Company restated the Relevant Financial Statements by filing with the SEC amendments to its Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012.

In connection with the restatement process and the Audit Committee’s review and inquiry, the Company has incurred significant professional services costs and other expenses which have been recognized as a special charge for approximately $ 0.3 million for the three months ended September 30, 2013 .

Depreciation and Amortization— Depreciation and amortization for the three months ended September 30, 2013 increased by $0.1 million to $ 1.9 million , compared to $ 1.8 million for the same period in 2012. The depreciation increase is directly related to the 2012 acquisition activity.

Interest Expense, net— Interest expense, net decreased by $0.2 million , or 6% , to $ 3.5 million for the three months ended September 30, 2013 , compared to $ 3.7 million for the same period in 2012. The Company has entered into numerous debt instruments in relation to the Company’s growth strategy for the acquisition of the facilities which began in the third quarter of 2010.

Acquisition Costs, net of Gains— For the three months ended September 30, 2013 , acquisition costs were $ 0.03 million compared to $ 0.3 million for the same period in 2012. The decrease was a result of less acquisition activity during the three months ended September 30, 2013 compared to the same period in 2012.

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Derivative Gain/Loss— For the three months ended September 30, 2013 , the derivative gain was $ 2.0 million , compared to a loss of $ 2.1 million for the same period in 2012. The increase of 194% was due to the decrease of the Company’s stock price during the third quarter of 2013 compared to an increase of the Company's stock price during the third quarter 2012. The derivative is a product of subordinated convertible promissory notes entered into during the third quarter of 2010. The expense associated with the derivative is subject to volatility based on a number of factors including increases or decreases in our stock price. Increases in our stock price generally result in increases in expense. Conversely, a decrease in our stock price generally results in the recognition of a gain in our statements of operations. The expense or gain recognized in a period is based on the fair value of the derivative instrument at the end of the period in comparison to the beginning of the period. The fair value of the derivative instrument was $ 0.9 million at September 30, 2013 compared to $ 3.6 million at December 31, 2012 .

Comparison for the nine months ended September 30, 2013 and 2012

The table below summarizes the operating results for the nine months ended September 30, 2013 and 2012:



	Nine Months Ended September 30,
(Amounts in 000’s)	2013			2012		Change		Percent Change
Revenues:
Patient care revenues	166,986			140,522		26,464		19	%
Management revenues	1,529			1,637		(108	)	(7	)%
Total revenues	168,515			142,159		26,356		19	%
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)	141,219			115,645		25,574		22	%
General and administrative expense	14,017			12,204		1,813		15	%
Audit committee investigation expense	2,284			—		2,284		—
Facility rent expense	5,256			5,278		(22	)	—	%
Depreciation and amortization	5,558			4,730		828		18	%
Salary retirement and continuation costs	154			38		116		305	%
Total expense	168,488			137,895		30,593		22	%
Income from Operations	27			4,264		(4,237	)	(99	)%
Other Income (Expense):
Interest expense, net	(10,253		)	(9,475	)	(778	)	8	%
Acquisition costs, net of gains	(607		)	(1,160	)	553		(48	)%
Derivative gain (loss)	2,178			(1,342	)	3,520		(262	)%
(Loss) gain on extinguishment of debt	(33		)	500		(533	)	(107	)%
(Loss) gain on disposal of assets	(10		)	2		(12	)	(600	)%
Other income (expense)	15			(258	)	273		(106	)%
Total other expense, net	(8,710		)	(11,733	)	3,023		(26	)%
Loss from Continuing Operations Before Income Taxes	(8,683		)	(7,469	)	(1,214	)	16	%
Income tax expense	(24		)	(132	)	108		(82	)%
Loss from Continuing Operations	$	(8,707	)	(7,601	)	(1,106	)	15	%

Patient Care Revenues —Total patient care revenues increased by $ 26.5 million , or 19% for the nine months ended September 30, 2013 as compared to the same period in 2012. The increase was primarily the result of the eleven skilled nursing facilities and one assisted living facility acquired in 2012, as well as the improvement in patient mix and average Medicare reimbursement rate per patient day, partially offset by reductions in average Medicaid reimbursement rates per patient day and facility occupancy.

Management Revenues— Management revenues (net of eliminations) decreased by $ 0.1 million , or 7% for the nine months ended September 30, 2013 , as compared to the same period in 2012. The decrease was primarily due to the discontinuance of one management contract in February 2013.

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Cost of Services— Cost of services increased by $ 25.6 million , or 22% , during the nine months ended September 30, 2013 , as compared to the same period in 2012. The increase was primarily due to the eleven skilled nursing facilities and one assisted living facility acquired during 2012. Cost of services as a percentage of patient care revenue increased from 82.3% at September 30, 2012 to 84.6% at September 30, 2013 . The increase in cost of services as a percentage of patient care revenue is primarily due to the effect in 2013 from the operations of certain 2012 acquired facilities prior to the Company achieving completion of its cost reduction optimization strategy for acquired facilities. In addition, in 2012, the Company limited the ability for employees to accumulate earned but unused vacation beyond the current calendar year. As a result, the vacation time previously accumulated must be used by the employee by the end of the calendar year or it will be forfeited; therefore, the vacation accrual and expense were adjusted accordingly.

General and Administrative— General and administrative costs increased by $ 1.8 million to $ 14.0 million for the nine months ended September 30, 2013 , compared to $ 12.2 million for the same period in 2012. The increase is primarily due to the following: (i) increases in salaries, wage and employee benefits expense of approximately $0.8 million due to the Company’s increased corporate overhead structure in response to the growth needs and the opening of an accounting service center located in Roswell, Georgia, (ii) increase of approximately $0.6 million in accounting and auditing expense, (iii) increase of approximately $0.3 million in expense due to a new data center agreement, (iv) increase of approximately $0.2 million in contract services expense, (v) increase of approximately $0.2 million in non-employee stock compensation amortization expense, (vi) increase of approximately $0.1 million in repair and maintenance expense, (vii) increase of approximately $0.1 million in recruiting cost, partially offset by (viii) increase of approximately $0.3 million in purchasing rebates, (ix) decrease of approximately $0.1 million in investor relations expense, and a (x) decrease of approximately $0.1 million in insurance expense. As a percentage of revenue, general and administrative costs declined to 8.3% for the nine months ended September 30, 2013 , compared to 8.6% for the same period in 2012, reflecting increased leverage of the Company’s fixed costs over the scale of expanding operations from acquisitions.

In connection with the restatement process and the Audit Committee’s review and inquiry, the Company has incurred significant professional services costs and other expenses which have been recognized as a special charge for approximately $ 2.3 million for the nine months ended September 30, 2013 .

Depreciation and Amortization— Depreciation and amortization for the nine months ended September 30, 2013 increased by $ 0.8 million to $ 5.6 million , compared to $ 4.7 million for the same period in 2012. The depreciation increase is directly related to the 2012 acquisition activity.

Salary Retirement and Continuation Costs— For the nine months ended September 30, 2013 , salary retirement and continuation costs were $ 0.2 million relating to separation agreements with certain of the Company’s former officers. The costs include wage continuation and fringe benefits which are to be paid out to these former employees through December 2013.

Interest Expense, net— Interest expense, net increased by $ 0.8 million , or 8% , to $ 10.3 million for the nine months ended September 30, 2013 , compared to $ 9.5 million for the same period in 2012. The Company has entered into numerous debt instruments in relation to the Company’s growth strategy for the acquisition of the facilities which began in the third quarter of 2010.

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Acquisition Costs, net of Gains— For the nine months ended September 30, 2013 , acquisition costs decreased by $ 0.6 million , or 48% , to $ 0.6 million , compared to $ 1.2 million for the same period in 2012. The decrease was a result of less acquisition activity during the nine months ended September 30, 2013 compared to the same period in 2012.

Derivative Gain/Loss— For the nine months ended September 30, 2013 , the derivative gain was $ 2.2 million , compared to the derivative loss of $ 1.3 million for the same period in 2012. The increase of 262% was due to the decrease of the Company’s stock price during the second quarter of 2013 compared to the increase in the Company's stock price during the second quarter of 2012. The derivative is a product of subordinated convertible promissory notes entered into during the third quarter of 2010. The expense associated with the derivative is subject to volatility based on a number of factors including increases or decreases in our stock price. Increases in our stock price generally result in increases in expense. Conversely, a decrease in our stock price generally results in the recognition of a gain in our statements of operations. The expense or gain recognized in a period is based on the fair value of the derivative instrument at the end of the period in comparison to the beginning of the period. The fair value of the derivative instrument was $ 0.9 million at September 30, 2013 compared to $ 3.6 million at December 31, 2012 .

Income Tax Expense— The Company recognized an income tax expense for the nine months ended September 30, 2013 , of $ 0.02 million , compared to an income tax expense of $ 0.1 million for the same period in 2012. Income tax expense for the Company is related to state and local taxes.

Liquidity and Capital Resources

We anticipate that scheduled debt service (excluding approximately $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, that the Company believes will be refinanced on a longer term basis but including principal, interest, collateral and capital improvement fund or other escrow deposits) will total approximately $33.4 million and cash outlays for acquisition costs, maintenance capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $5.3 million for the 12 months ending September 30, 2014 . We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. Although we anticipate the conversion to common stock of the Company’s outstanding subordinated convertible promissory notes with a principal amount in the aggregate of $7.7 million that mature in August 2014 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.7 million that were converted into shares of common stock of the Company in October 2013 (see Note 18 - Subsequent Events), we believe that our anticipated cash flow and funding sources would allow us to pay these notes in cash. These promissory notes are convertible at the option of the holder into shares of common stock of the Company at $3.73 per share. The closing price of the common stock exceeded $3.79 per share from January 1, 2013 through November 6, 2013. We have been successful in recent years in raising new equity capital and in October 2013 the Company issued 500,000 shares of Series A Preferred Stock at $25 per share receiving proceeds of approximately $11.2 million after deducting underwriting discounts and other offering-related expenses (see Note 18 - Subsequent Events) . As discussed further below, if we are unable to refinance the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans due to our limited liquidity in such an event.

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cost optimization and efficiency strategies and acquiring additional long-term care facilities with existing operating cash flow; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months and provide for the continuance of our acquisition strategy. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating resultsor refinance current debt (including the $7.0 million and $6.5 million of bullet maturities due February 2014 and July 2014, respectively), then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, as well as delay, modify, or abandon its expansion plans.

The following table presents selected data from the Company’s consolidated statement of cash flows for the periods presented:



	Nine Months Ended September 30,
(Amounts in 000’s)	2013			2012
Net cash provided by operating activities - continuing operations	$	2,383		$	2,673
Net cash provided by operating activities - discontinued operations	213			797
Net cash used in investing activities - continuing operations	(6,043		)	(56,965		)
Net cash provided by (used in) investing activities - discontinued operations	1,580			(293		)
Net cash flows provided by financing activities - continuing operations	801			56,467
Net cash flows used in financing activities - discontinued operations	(2,147		)	(170		)
Net change in cash and cash equivalents	(3,213		)	2,509
Cash and cash equivalents at beginning of period	15,937			7,364
Cash decrease due to deconsolidation of variable interest entities	—			(180		)
Cash and cash equivalents at end of period	$	12,724		$	9,693

Nine Months Ended September 30, 2013

Net cash provided by operating activities—continuing operations for the nine months ended September 30, 2013 , was approximately $ 2.4 million , consisting primarily of the Company’s loss from operations, non cash charges and changes in working capital, including increased accounts payable and accrued expenses of $4.3 million, offset by increased accounts receivable of $2.7 million and increased prepaid expenses of $1.0 million.

Net cash used in investing activities—continuing operations for the nine months ended September 30, 2013 , was approximately $ 6.0 million . This is primarily the result of proceeds received of $3.2 million from notes receivable, offset by capital expenditures and the increase in restricted cash and investments and escrow deposits for acquisitions. The net cash provided by investing activities—discontinued operations was approximately $ 1.6 million for the nine months ended September 30, 2013 , related to proceedsfrom the sale of two additional assisted living facilities.

Net cash provided by financing activities—continuing operations was approximately $ 0.8 million for the nine months ended September 30, 2013 . This is primarily the result of proceeds received of $2.4 million under the Company’s insurance premium financing, $5.0 million received under the refinanced debt , offset by repayment of $5.4 million on notes payable, $0.4 million in debt issuance costs and payment of preferred stock dividends of $0.9 million. Net cash used in financing activities—discontinued operations was approximately $ 2.1 million consisting of repayments of existing debt obligations related to the sale of the Lincoln Lodge Retirement Residence facility.

Nine Months Ended September 30, 2012

Net cash provided by operating activities—continuing operations for the nine months ended September 30, 2012 , was $ 2.7 million , consisting primarily of the Company’s loss from operations, non cash charges and changes in working capital, including increased accounts payable and accrued expenses of $9.9 million, offset by increased accounts receivable of $10.7 million and increased prepaid expenses of $0.1 million.

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Net cash used in investing activities—continuing operations for the nine months ended September 30, 2012 , was approximately $ 57.0 million . This is primarily the result of funding the Company’s acquisitions, including escrow deposits as well as capital expenditures.

Net cash provided by financing activities—continuing operations was approximately $ 56.5 million for the nine months ended September 30, 2012 . This is primarily the result of cash proceeds received from debt financings to fund the Company’s acquisitions, proceeds from convertible debt, and the public stock offering, partially offset by repayments of existing debt obligations and debt issuance costs.

Notes Payable and Other Debt

Total notes payable and other debt obligations as of September 30, 2013 and December 31, 2012 were as follows:



(Amounts in 000’s)	September 30, 2013		December 31, 2012
Senior debt - guaranteed by HUD (a)	$	4,093	$	9,699
Senior debt - guaranteed by USDA	27,914		28,370
Senior debt - guaranteed by SBA	6,013		6,189
Senior debt - bonds, net of discount (b)	16,123		16,265
Senior debt - other mortgage indebtedness	78,361		75,188
Revolving credit facilities and lines of credit	9,278		9,204
Convertible debt issued in 2010, net of discount	9,344		10,948
Convertible debt issued in 2011	4,459		4,509
Convertible debt issued in 2012	7,500		7,500
Other debt	3,617		4,004
Total	$	166,702	$	171,876
Less: current portion	38,548		19,387
Less: portion included in liabilities of disposal group held for sale	—		3,662
Notes payable and other debt, net of current portion	$	128,154	$	148,827


(a)	The senior debt - guaranteed by the U.S. Department of Housing and Urban Development (“HUD”) includes $3.6 million related to the Vandalia HUD mortgage note classified as liabilities of disposal group held for sale at December 31, 2012, that was assumed by the buyer of the Hearth & Home of Vandalia assisted living facility that the Company sold in a transaction that closed in May 2013.


(b)	The senior debt - bonds, net of discount includes $3.1 million related to the outstanding bonds that were assumed by the Company upon its acquisition of the Quail Creek skilled nursing facility in July 2012, which pursuant to the applicable loan agreement, will be prepaid on March 1, 2014.

Scheduled Maturities

The schedule below summarizes the scheduled maturities as of September 30, 2013 for each of the next five years and thereafter.



	(Amounts in 000’s)
2014	$	38,314
2015	36,115
2016	17,558
2017	19,715
2018	3,728
Thereafter	51,457
Subtotal	166,887
Less: unamortized discounts ($57 classified as current)	(476		)
Plus: unamortized premiums ($291 classified as current)	291
Total notes and other debt	$	166,702

Debt Covenant Compliance

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As of September 30, 2013 , the Company (including its consolidated variable interest entity) has more than forty credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on subsidiary level (i.e.; facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial measurements). Some covenants are based on annual financial metric measurements whereas others are based on monthly or quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of September 30, 2013 , the Company has not been in compliance with certain financial and administrative covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including as necessary modifications to future covenant requirements or the elimination of certain requirements in future periods.

The following table includes financial covenant requirements as of the last measurement date as of or prior to September 30, 2013 in instances where the Company was not in compliance with the financial covenant or it achieved compliance with the covenant requirement by a margin of 10% or less. The table also identifies the related credit facility, outstanding balance at September 30, 2013 and the next applicable future financial covenant requirement inclusive of adjustments to covenant requirements resulting from amendments executed subsequent to September 30, 2013 .



Credit Facility	September 30, 2013 (000's)		Consolidated or Subsidiary Level Covenant Requirement	Financial Covenant	Measurement Period	Min/Max Financial Covenant Required		Financial Covenant Metric Achieved			Future Financial Covenant Metric Required
Gemino - Line of Credit	$	1,362	Consolidated	Fixed Charge Coverage Ratio (FCCR)	Quarterly	1.10		1.20			1.10
PrivateBank - Line of Credit	$	6,167	Subsidiary	Rent and debt service coverage ratio	Quarterly	1.25		1.59			1.25
			Consolidated	Guarantor minimum debt service coverage ratio (DSCR)	Annual	1.00		1.03			1.00
			Consolidated	Guarantor maximum leverage ratio	Annual	11.00		10.97			11.00
Contemporary Healthcare Capital - Term Note and Line of Credit - Companion Care	$	5,000	Subsidiary	Minimum implied current ratio	Quarterly	1.0		1.1			1.0
			Subsidiary	Minimum liquidity (000's)	Quarterly	$250		$803			$250
	$	289	Subsidiary	DSCR	Quarterly	1.15		(1.05	)	*	1.15
			Subsidiary	Minimum Occupancy	Quarterly	70	%	69	%	*	70	%
Bank of Atlanta (USDA) - Mortgage Note - Erin Nursing	$	4,799	Subsidiary	Current Ratio	Quarterly	1.0		1.0			1.0
PrivateBank - Mortgage Note - Valley River	$	11,312	Consolidated	DSCR	Annual	1.00		1.03			1.00
PrivateBank - Mortgage Note - Valley River			Subsidiary	DSCR	Annual	1.25		1.31			1.25
Square 1 USDA - Term Note - Homestead	$	3,477	Subsidiary	Current ratio	Quarterly	1.0		1.2			1.0
			Subsidiary	Maximum debt to net worth	Quarterly	9		3			9
			Subsidiary	Tangible net worth	Quarterly	10	%	25	%		10	%
PrivateBank - Mortgage Note - West Markham	$	13,665	Subsidiary	EBITDAR (000's)	Quarterly	N/A		$194			$215
			Subsidiary	DSCR	Annual	1.10		1.18			1.10
			Consolidated	DSCR	Annual	1.00		1.03			1.00
			Consolidated	Maximum Annual Leverage	Annual	11.00		10.97			11.00

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KeyBank - Mortgage Note - Northridge - Woodland Hills - Abington	$	15,400	Subsidiary	Implied DSCR	Quarterly	1.20		0.71		*	1.20
			Consolidated	FCCR	Quarterly	1.10		1.00		*	1.15
PrivateBank - Mortgage Note - Glenvue	$	6,459	Subsidiary	DSCR	Quarterly	1.35		4.04			1.35
			Subsidiary	DSCR	Annual	1.10		1.15			1.10
			Consolidated	DSCR	Annual	1.00		1.03			1.00
			Consolidated	Maximum leverage	Annual	11.00		10.97			11.00
PrivateBank - Mortgage Note - Woodland Manor	$	4,630	Subsidiary	Minimum quarterly EBITDAR (000's)	Quarterly	$250		$240		*	$250
PrivateBank - Mortgage Note - Woodland Manor			Subsidiary	Minimum trailing twelve month FCCR	Quarterly	1.10		1.42			1.10
Medical Clinic Board of the City of Hoover - Bonds	$	6,215	VIE	DSCR	Annual	1.20		(0.04	)	*	1.20
			VIE	Days cash on hand	Annual	15		15			15
			VIE	Trade payables	Annual	10	%	9	%		10	%
City of Springfield - Bonds	$	7,230	Subsidiary	DSCR	Annual	1.10		0.81		*	1.10
			Subsidiary	Days Cash on Hand	Annual	15		20			15
			Subsidiary	Trade payables	Annual	10	%	8	%		10	%

* - Waiver or amendment for violation of covenant obtained.

Senior Debt—Guaranteed by HUD

Hearth and Home of Vandalia

In connection with the Company’s January 2012 refinancing of the assisted living facility known as Hearth and Home of Vandalia (“Vandalia”), owned by a wholly owned subsidiary of AdCare, the Company issued a note, insured by HUD, to a financial institution for a total amount of $3.7 million that matures in 2041. The HUD note requires monthly principal and interest payments with a fixed interest rate of 3.74%. The Company incurred deferred financing costs on the note of approximately $0.2 million, which are being amortized to interest expense over the life of the note. The HUD note has a prepayment penalty of 8% starting in 2014 declining by 1% each year through 2022. This note was assumed by the buyer in the closing of the sale of this facility that occurred in May 2013 pursuant to the terms of the sale agreement related to the sale of six of the Company’s assisted living facilities located in Ohio.

Senior Debt - Other Mortgage Indebtedness

Little Rock

Quail Creek Credit Facility

On September 27, 2013, QC Property Holdings, LLC (“QC”), a wholly owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Quail Creek Credit Facility”), with Housing & Healthcare Funding, LLC (“HHCF”). The Quail Creek Credit Facility provides for a $5.0 million principal amount secured credit facility. The proceeds of the Quail Creek Credit Facility will be used primarily to repay certain outstanding bonds that were assumed by QC upon its acquisition of the 118-bed skilled nursing facility located in Oklahoma City, Oklahoma known as the Quail Creek Nursing & Rehabilitation Center in July 2012. Pursuant to the loan agreement, the outstanding bonds will be prepaid on March 1, 2014 at par plus accrued interest to the prepayment date. The outstanding principal and accrued interest to the prepayment date in the amount

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of $3.1 million has been deposited into a restricted defeased bonds escrow account.

The Quail Creek Credit Facility matures on September 27, 2016. Interest on the Quail Creek Credit Facility accrues on the principal balance thereof at an annual rate of 4.75% plus the current one-month LIBOR rate (but in no event shall the interest rate be less than 5.75%). The Quail Creek Credit Facility is secured by: (i) a first mortgage on the real property and improvements constituting the Quail Creek Facility; (ii) a first priority interest on all furnishings, fixtures and equipment associated with the Quail Creek Facility; and (iii) an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Quail Creek Facility. The Company has unconditionally guaranteed all amounts owing under the Quail Creek Credit Facility.

Revolving Credit Facilities and Lines of Credit

PrivateBank Credit Facility

Gemino Northwest Credit Facility

On May 30, 2013, NW 61 st Nursing, LLC (“Northwest”), a wholly-owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC (“Gemino”). The Northwest Credit Facility provides for a $1.0 million principal amount senior-secured revolving credit facility.

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On June 25, 2013, the Northwest entered into a First Amendment to the Credit Agreement which amended the Northwest Credit Facility. The amendment, among other things: (i) amends certain financial covenants regarding fixed charge coverage ratio and minimum EBITDA; and (ii) amends the credit facility to include the Bonterra Credit Facility (discussed below) as an affiliated credit agreement in determining whether certain financial covenants are being met.

As of September 30, 2013 , $1.5 million was outstanding of the maximum borrowing amount of $1.5 million under the Northwest Credit Facility.

Gemino Bonterra Credit Facility

On May 30, 2013, the ADK Bonterra/Parkview, LLC, a wholly-owned subsidiary of the Company (“Bonterra”), entered into a Fourth Amendment to Credit Agreement with Gemino, which amended that certain Credit Agreement dated April 27, 2011 between Bonterra and Gemino (as amended, the “Bonterra Credit Facility”) . The amendment, among other things: (i) extends the term of the Bonterra Credit Facility from January 31, 2014 to January 31, 2015; (ii) amends certain financial covenants regarding Bonterra’s fixed charge coverage ratio and maximum loan turn days; and (iii) amends the Gemino-Bonterra credit facility to include the Northwest Credit Facility as an affiliated credit agreement in determining whether certain financial covenants are being met.

As of September 30, 2013 , $1.4 million was outstanding of the maximum borrowing amount of $2.0 million under the Bonterra Credit Facility.

KeyBank Credit Facility

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As of September 30, 2013 , $15.4 million was outstanding under the KeyBank Credit Facility.

Convertible Debt

Subordinated Convertible Promissory Notes Issued in 2010



Month of conversion	Debt and Interest Converted (000's)		Shares of Common Stock Issued
February	$	25	6,635
March	$	25	6,635
April	$	250	67,024
August	$	1,063	284,878
September	$	919	246,264
Total	$	2,282	611,436

Subordinated Convertible Promissory Notes Issued in 2011

Other Debt

During March 2013, the Company obtained financing from AON Premium Finance, LLC and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2013 and maturing on December 31, 2013. The total amount financed was approximately $2.4 million requiring monthly payments of $0.2 million with interest ranging from 2.87% to 4.79%. The outstanding amount was approximately $ 0.6 million at September 30, 2013 .

Receivables

The Company’s operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid or other third-party revenue sources. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and patient accounts receivable) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the staff at our facilities in the processing of our invoices, could adversely affect our liquidity and results of operations.

Accounts receivable attributable to patient services of continuing operations totaled $30.3 million at September 30, 2013 , compared to $27.5 million at December 31, 2012, representing approximately 49 and 50 days of revenue in accounts receivable as of September 30, 2013 and December 31, 2012, respectively. The increase in accounts receivable is primarily the result of increased revenue in 2013.

The allowance for bad debt was $5.4 million and $3.7 million at September 30, 2013 and December 31, 2012 , respectively. The Company continually evaluates the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, as well as other factors. The Company continues to evaluate and implement additional processes to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

The Company has historically derived a substantial portion of our revenue from the Medicare program. The Company also derives revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, the Company has generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. The Company may not be successful in offsetting future cost increases.

Off-Balance Sheet Arrangements

There were $2.5 million of outstanding letters of credit of September 30, 2013 that are pledged as collateral of borrowing capacity on the PrivateBank Credit Facility.

Contractual Obligations - Operating Leases

The Company leases certain office space and nine skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs. For the three months ended September 30, 2013 and 2012, facility rent expense totaled $ 1.8 million and $ 1.8 million , respectively. For the nine months ended September 30, 2013 and 2012, facility rent expense totaled $ 5.3 million and $ 5.3 million , respectively.

Five of the Company’s facilities are operated under a single master lease arrangement. The lease has a term of ten years terminating in 2020. Under the master lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicare and Medicaid provider requirements, is a default under the Company’s master lease agreement. In addition, other potential defaults related to an individual facility may cause a default of the entire master lease agreement. With an indivisible

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lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The Company is not aware of any defaults as of September 30, 2013 .

Two of the Company’s facilities are operated under a separate lease agreement. The lease is a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has a term of 12 years into 2022 and includes covenants and restrictions. A covenant is included that requires minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities. The Company has been in compliance with financial and administrative covenants of this lease agreement during the three months ended September 30, 2013 .

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations

Due to the material amount of non-cash related items included in the Company’s results of operations, the Company has developed an Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA from continuing operations”) metric which provides management with a clearer view of operational use of cash (see the table below). The Adjusted EBITDA from continuing operations for the nine months ended September 30, 2013 was $ 8.8 million compared $ 9.6 million for the nine months ended September 30, 2012 . The Company has also developed an Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“Adjusted EBITDAR from continuing operations”) metric that is used primarily in some debt covenants of the Company’s loans.

“Adjusted EBITDA from continuing operations” and “Adjusted EBITDAR from continuing operations” are measures of operating performance that are not calculated in accordance with GAAP. The Company defines: (i) “Adjusted EBITDA from continuing operations” as net income (loss) from continuing operations before interest expense, income tax expense; depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on extinguishment of debt, derivative loss or gain, other non-routine adjustments; and (ii) “Adjusted EBITDAR from continuing operations” as net income (loss) from continuing operations before interest expense; income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on extinguishment of debt, derivative loss; other non-routine adjustments. The Company has provided below for your reference, supplemental financial disclosure for these measures, including the most directly comparable GAAP measure (Net Loss) and an associated reconciliation.

The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA from continuing operations and EBITDAR from continuing operations for the three and nine months ended September 30, 2013 and 2012:

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	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in 000’s)	2013			2012			2013			2012
Condensed Consolidated Statement of Operations Data:
Net loss	$	(413	)	$	(4,640	)	$	(10,109	)	$	(7,398	)
Discontinued operations	(188		)	126			(1,402		)	203
Loss from continuing operations (Per GAAP)	(225		)	(4,766		)	(8,707		)	(7,601		)
Add back:
Interest expense, net	3,462			3,695			10,253			9,475
Income tax (benefit) expense	(54		)	111			24			132
Amortization of stock based compensation	186			269			737			639
Depreciation and amortization	1,888			1,760			5,558			4,730
Acquisition costs, net of gain	33			342			607			1,160
Loss (gain) on extinguishment of debt	6			(500		)	33			(500		)
Derivative (gain) loss	(1,989		)	2,105			(2,178		)	1,342
Loss (gain) on disposal of assets	6			—			10			(2		)
Audit committee investigation expense	302			—			2,284			—
Other (income) expense	(15		)	218			(15		)	218
Salary retirement and continuation costs	5			38			154			38
Adjusted EBITDA from continuing operations	3,605			3,272			8,760			9,631
Facility rent expense	1,761			1,775			5,256			5,278
Adjusted EBITDAR from continuing operations	$	5,366		$	5,047		$	14,016		$	14,909

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided by, or used in, operations as determined in accordance with GAAP. Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations are used by management to focus on operating performance and management without mixing in items of income and expense that relate to the financing and capitalization of the business, fixed rent or lease payments of facilities, derivative loss or gain, certain acquisition related charges and other non-routine adjustments.

The Company believes these measures are useful to investors in evaluating the Company’s performance, results of operations and financial position for the following reasons:


•	They are helpful in identifying trends in the Company’s day-to-day performance because the items excluded have little or no significance to the Company’s day-to-day operations;


•	They provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance; and


•	They provide data that assists management determine whether or not adjustments to current spending decisions are needed.

AdCare believes that the use of the measures provides a meaningful and consistent comparison of the Company’s underlying business between periods by eliminating certain items required by GAAP, which have little or no significance in the Company’s day-to-day operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Disclosure in response to Item 3. of Form 10-Q is not required to be provided by smaller reporting companies.

Item 4. Controls and Procedures.

Audit Committee Review and Inquiry

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As previously disclosed, the Audit Committee, in consultation with management, concluded in March 2013 that: (i) the Relevant Financial Statements (i.e., the Company’s previously issued financial statements for the quarters ended June 30, 2012, June 30, 2012 and September 30, 2012) should no longer be relied upon due to errors in the Relevant Financial Statements identified in connection with the audit of the Company’s consolidated financial statements for the year ended December 31, 2012; and (ii) the Company would restate the Relevant Financial Statements.

The Audit Committee initiated a further review of, and inquiry with respect to, the accounting and financial issues related to these and other potential errors and engaged counsel to assist the Audit Committee with such matters. The Audit Committee completed its inquiry and, in connection therewith, assisted in the correction of certain errors relating to accounting and financial matters and identified certain material weaknesses in the Company’s internal control over financial reporting, including weakness in the Company’s ability to appropriately account for complex or non-routine transactions and in the quality and sufficiency of the Company’s finance and accounting resources.

On July 8, 2013, the Company restated the Relevant Financial Statements by filing with the SEC amendments to its Quarterly Reports on Form 10 Q/A for the quarters ended June 30, 2012, June 30, 2012 and September 30, 2012.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting and Remediation

In response to the material weaknesses in the Company’s internal control over financial reporting identified by the Audit Committee’s review and inquiry and as identified in Management’s Report on Internal Control Over Financial Reporting included in Part II, Item 9A., “Controls and Procedures,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 , and based in part on recommendations made by the Audit Committee to the Board of Directors following the completion of the Audit Committee’s review and inquiry, we have implemented, or plan to implement, the changes to our internal control over financial reporting discussed below.


•	We hired Ronald W. Fleming to serve as Chief Financial Officer of the Company effective May 15, 2013. Mr. Fleming has relevant industry experience as well as experience with generally accepted accounting principles and SEC reporting and compliance.


•	We have empowered Mr. Fleming to hire additional accounting and finance staff to ensure adequate internal control over financial reporting and operations.


•	We hired a Vice President, Controller and Chief Accounting Officer effective July 16, 2013.


•	We have expanded the scope of our annual internal audit plan to include quarterly internal audit procedures with emphasis on the review of journal entries and non-recurring transactions.

Since January 2013, the Company has hired 11 new finance and accounting personnel, including a Vice President of Facility Accounting Operations. Our new finance and accounting leadership continue to evaluate the qualifications and sufficiency of our accounting and finance department. The expanded internal audit scope has commenced and will be completed prior to the Company filing its Quarterly Reports on Form 10-Q for each of the remaining 2013 quarterly periods.

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Due to the short time period since we commenced our efforts to remediate our material weaknesses, we have not yet been able to fully evaluate the effectiveness of such efforts. We have incurred, and will continue to incur, additional incremental costs associated with our remediation efforts, primarily due to hiring new finance and accounting personnel and external consultants and the implementation and validation of improved accounting and financial reporting procedures. If we are not successful in remediating our material weaknesses, or if we determine in future fiscal periods that we have additional material weaknesses in our internal control over financial reporting, then the reliability of our financial reports may be adversely impacted, we may be unable to file our reports with the SEC in a timely fashion and we could be required to restate our financial results. This could cause our investors to lose confidence in our financial reporting, which could adversely affect the trading price of our stock.

Other than the remediation efforts discussed above, which occurred in 2013 and have included the involvement of our new finance and accounting leadership in the preparation, review, and approval of the consolidated financial statements included in this Quarterly Report, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings.

See Item I, Part II, of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, for a description of pending material legal proceedings.

Item 1A. Risk Factors.

Disclosure in response to Item 1A of Form 10-Q is not required to be provided by smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On October 25, 2013, the Company issued to a holder of the Company’s convertible promissory notes dated October 26, 2010, an aggregate of 46,070 shares of common stock upon conversion of $170,503 of the principal amount and $1,337 in interest amount thereof. The conversion price was $3.73 per share of common stock. The convertible promissory notes were issued, and the shares of common stock issued upon conversion thereof were issued, pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The Company relied upon such exemption based upon representations made by the holder regarding, among other things, the holder’s status as an accredited investor (as such term is defined under the Securities Act).

On October 26, 2013, pursuant to the terms of the Cantone Settlement, the Company issued to CRI a two-year warrant to purchase 75,000 shares of common stock at an exercise price of $3.96 per share. The exercise price of the warrant is subject to certain anti-dilution adjustments. The warrant was issued, and the shares of common stock issued upon exercise of the warrant will be issued, pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. The Company relied upon such exemption due to the private nature of the transaction and based upon

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representations made by the holder regarding, among other things, the holder’s sophistication. For a further description of the Cantone Settlement, see Note 18 to the Consolidated Financial Statements included in this Quarterly Report.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The agreements included as exhibits to this Quarterly Report are included to provide information regarding the terms of these agreements and are not intended to provide any other factual or disclosure information about the Company, its business or the other parties to these agreements. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

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•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;


•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;


•	may apply standards of materiality in a way that is different from what may be viewed as material to investors; and


•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon by investors.

EXHIBIT INDEX



Exhibit No.	Description	Method of Filing

2.1	Purchase and Sale Agreement, dated February 15, 2013, by and among Avalon Health Care, LLC and AdCare Property Holdings, LLC	Incorporated by reference from Exhibit 2.27 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012

2.2	First Amendment to Purchase and Sale Agreement, dated March 14, 2013, by and between Avalon Health Care, LLC and AdCare Property Holdings, LLC	Incorporated by reference from Exhibit 2.28 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012

2.3	Reinstatement, Sixth Amendment and Assignment of Purchase and Sale Agreement, dated May 7, 2013, by and among First Commercial Bank, Brogdon Family, LLC and AdCare Property Holdings, LLC	Incorporated by reference from Exhibit 2.3 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

3.1	Amended and Restated Articles of Incorporation	Incorporated by reference from Exhibit 3.1 of the Registrant’s Registration Statement Form SB (Registration No. 333-131542) filed February 3, 2006

3.2	Code of Regulations	Incorporated by reference from Exhibit 3.2 of the Registrant’s Registration Statement Form SB (Registration No. 333-131542) filed February 3, 2006

3.3	Amendment to Amended and Restated Articles of Incorporation	Incorporated by reference to Exhibit 3.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011

3.4	Affidavit, dated June 28, 2012	Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on July 5, 2012

3.5	Certificate of Amendment to Amended and Restated Articles of Incorporation of AdCare Health Systems, Inc.	Incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form 8-A filed on November 7, 2012

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3.6	Amendment to Code of Regulations of AdCare Health Systems, Inc., adopted and effective as of November 16, 2007	Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on October 4, 2013

3.7	Certificate of Amendment to Amended and Restated Articles of Incorporation of AdCare Health Systems, Inc., dated October 17, 2013	Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on October 17, 2013

4.1	Warrant to Purchase 70,000 shares of Common Stock, dated May 15, 2013, issued by AdCare Health Systems, Inc. to Ronald W. Fleming	Incorporated by reference from Exhibit 4.23 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012

4.2	Warrant to Purchase 75,000 shares of Common Stock, dated October 26, 2013, issued by AdCare Health Systems, Inc. to Cantone Research, Inc.	Filed herewith

10.1	Memorandum of Agreement, dated January 25, 2013, by and between The PrivateBank and Trust Company and the subsidiaries of AdCare Health Systems, Inc. named therein	Incorporated by reference from Exhibit 10.289 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012

10.2	Amendment to Secured Promissory Note, dated February 28, 2013, by and between CHP Acquisition Company, LLC and AdCare Health Systems, Inc.	Incorporated by reference from Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.3	Assignment and Assumption of Leases, Rents and Security Deposits, dated February 28, 2013, by and among AdCare Health Systems, Inc., New Lincoln Ltd. and Lincoln Lodge Retirement Residence LLC	Incorporated by reference from Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.4	Release and Assumption Agreement, dated May 6, 2013, by and among H & H of Vandalia LLC, Hearth & Home of Vandalia, Inc., Red Mortgage Capital, LLC and the Secretary of Housing and Urban Development	Incorporated by reference from Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.5	Assignment and Assumption Agreement, dated May 6, 2013, by and between Hearth & Home of Vandalia, Inc. and H & H of Vandalia LLC	Incorporated by reference from Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.6	Fourth Amendment to Credit Agreement, dated May 30, 2013, by and between ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.7	Credit Agreement, dated May 30, 2012, by and among NW 61st Nursing, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

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10.8	Revolving Note, dated May 30, 2013, issued by NW 61st Nursing, LLC in favor of Gemino Healthcare Finance, LLC in the amount of $1,000,000	Incorporated by reference from Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.9	Subordination Agreement, dated May 30, 2013, by and between First Commercial Bank and Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.10	Guaranty Agreement, dated May 30, 2013, made by NW 61st Nursing, LLC in favor of Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.11	Guaranty Agreement, dated May 30, 2013, made by AdCare Health Systems, Inc. in favor of Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.11 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.12	First Amendment to Secured Loan Agreement and Payment Guaranty, dated May 31, 2013, by and among AdCare Health Systems, Inc., its subsidiaries named therein, AdCare Property Holdings, LLC, AdCare Operations, LLC and KeyBank National Association	Incorporated by reference from Exhibit 10.12 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.13	Mortgage, Assignment of Rents, Security Agreement and Fixture Filing, dated May 31, 2013, made by Mountain Top Property Holdings, LLC, to and for the benefit of KeyBank National Association	Incorporated by reference from Exhibit 10.13 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.14	Absolute Assignment of Leases and Rents, dated May 31, 2013, by Mountain Top Property Holdings, LLC in favor of KeyBank National Association	Incorporated by reference from Exhibit 10.14 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.15	Pledge and Security Agreement, dated May 31, 2013, between AdCare Health Systems, Inc. and KeyBank National Association	Incorporated by reference from Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.16	Separation and Release Agreement, dated May 31, 2013, by and between AdCare Health Systems, Inc. and Martin D. Brew	Incorporated by reference from Exhibit 10.16 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.17	Second Amendment to Secured Loan Agreement and Payment Guaranty, dated June 27, 2013, by and among AdCare Health Systems, Inc., its subsidiaries named therein, AdCare Property Holdings, LLC, AdCare Operations, LLC and KeyBank National Association	Incorporated by reference from Exhibit 10.17 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.18	Third Modification Agreement, dated as of June 26, 2013, by and among Little Rock HC&R Property Holdings, LLC, AdCare Health Systems, Inc., Little Rock HC&R Nursing, LLC and The PrivateBank and Trust Company	Incorporated by reference from Exhibit 10.18 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

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10.19	Joinder Agreement, Second Amendment and Supplement to Credit Agreement , dated June 28, 2013, by and among NW 61st Nursing, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference from Exhibit 10.19 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.20	Amended and Restated Revolving Note, dated June 28, 2013, issued by certain subsidiaries of AdCare Health Systems, Inc. in favor of Gemino Healthcare Finance, LLC in the amount of $1,500,000	Incorporated by reference from Exhibit 10.20 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.21	Management Fee Subordination Agreement, dated June 28, 2013, by and among Gemino Healthcare Finance, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and AdCare Administrative Services, LLC	Incorporated by reference from Exhibit 10.21 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.22	Sublease Termination Agreement, effective June 30, 2013, by and between ADK Georgia, LLC and ADK Oceanside Operator, LLC	Incorporated by reference from Exhibit 10.22 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.23	Sublease Termination Agreement, effective June 30, 2013, by and between ADK Georgia, LLC and ADK Savannah Beach Operator, LLC	Incorporated by reference from Exhibit 10.23 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.24	Sublease Agreement, effective June 30, 2013, by and between ADK Georgia, LLC and Tybee NH, LLC	Incorporated by reference from Exhibit 10.24 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.25	Sublease Agreement, effective June 30, 2013, by and between ADK Georgia, LLC and Tybee NH, LLC	Incorporated by reference from Exhibit 10.25 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013

10.26	Employment Agreement, dated July 3, 2013, by and between AdCare Health Systems, Inc. and Ronald W. Fleming	Incorporated by reference from Exhibit 10.296 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012

10.27	Management Agreement, dated July 26, 2013, by and between Harrah White Meadows Nursing, LLC and AdCare Oklahoma Management, LLC	Incorporated by reference from Exhibit 10.27 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2013

10.28	Management Agreement, dated July 26, 2013, by and between MCL Nursing, LLC and AdCare Oklahoma Management, LLC	Incorporated by reference from Exhibit 10.28 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2013

10.29	Management Agreement, dated July 26, 2013, by and between Meeker Nursing, LLC and AdCare Oklahoma Management, LLC	Incorporated by reference from Exhibit 10.29 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2013

10.30	Loan and Security Agreement, dated September 27, 2013, by and between QC Property Holdings, LLC and Housing & Healthcare Funding, LLC	Filed herewith

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10.31	Promissory Note, dated September 27, 2013, issued by QC Property Holdings, LLC to Housing & Healthcare Funding, LLC in the amount of $5,000,000	Filed herewith

10.32	Mortgage, Security Agreement Assignment of Leases and Rents and Fixture Filing, dated September 27, 2013, by QC Property Holdings, LLC to and for the benefit of Housing & Healthcare Funding, LLC	Filed herewith

10.33	Guaranty, dated September 27, 2013, by AdCare Health Systems, Inc. to and for the benefit of Housing & Healthcare Funding, LLC	Filed herewith

10.34	Assignment of Rents and Leases, dated September 27, 2013, by QC Property Holdings, LLC to and for the benefit of Housing & Healthcare Funding, LLC	Filed herewith

10.35	Third Modification Agreement, dated as of September 30, 2013, by and among The PrivateBank and Trust Company, AdCare Health Systems, Inc. and its subsidiaries named therein	Filed herewith

10.36	Letter Agreement, dated October 1, 2013, among AdCare Health Systems, Inc., Park City Capital, LLC and Michael J. Fox	Incorporated by reference from Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on October 17, 2013

10.37	Waiver, Amendment and Forbearance, dated as of October 26, 2013, by and among AdCare Health Systems, Inc., Anthony J. Cantone and Attosa Financial LLC	Incorporated by reference from Exhibit 10.1 of the Registrant’s Current Report on From 8-K filed on October 31, 2013

31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith

31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith

32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith

32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith

101	The following financial information from AdCare Health Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (ii) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, (iv) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2013 and (v) the Notes to Consolidated Financial Statements.	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.



		ADCARE HEALTH SYSTEMS, INC.
		(Registrant)

Date:	November 14, 2013	/s/ Boyd P. Gentry
		Boyd P. Gentry
		Chief Executive Officer
		(Principal Executive Officer)

Date:	November 14, 2013	/s/ Ronald W. Fleming
		Ronald W. Fleming
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit 4.2

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.

WARRANT

TO PURCHASE 75,000 SHARES OF COMMON STOCK OF ADCARE HEALTH SYSTEMS, INC.

October 26, 2013

THIS CERTIFIES THAT , for value received, CANTONE RESEARCH, INC. or its registered assigns (the "Holder") is entitled to purchase from ADCARE HEALTH SYSTEMS, INC. , an Ohio corporation (the " Company" ), at any time or from time to time after the date hereof and prior to 5:00 p.m., Atlanta, Georgia time, on October 26, 2015 (the "Expiration Date" ), at the place where the Warrant Agency (as hereinafter defined) is located, at the Exercise Price (as hereinafter defined), the number of shares of common stock, no par value (the " Common Stock" ), of the Company specified above, subject to the terms and conditions as hereinafter provided.

Capitalized terms used and not otherwise defined in this Warrant shall have the meanings set forth in Article IV hereof.

ARTICLE I

EXERCISE OF WARRANTS

1.1 Method of Exercise .

(a) To exercise this Warrant in whole or in part, the Holder shall deliver to the Company at the Warrant Agency: (i) this Warrant; (ii) a written notice, substantially in the form of the subscription notice attached hereto as Annex 1, of such Holder's election to exercise this Warrant, which notice shall specify the number of whole shares of Common Stock to be purchased, the denominations of the share certificate or certificates desired and the name or names of the Eligible Holder(s) in which such certificates are to be registered (the "Exercise Notice"); and (iii) payment of the Exercise Price with respect to such shares of Common Stock. Such payment may be made, at the option of the Holder, by cash, money order, certified or bank cashier's check or wire transfer.

(b) The Company shall, as promptly as practicable and in any event within three (3) Business Days thereafter, execute and deliver or cause to be executed and delivered, in accordance with an Exercise Notice delivered pursuant to Section 1.1(a), a certificate or certificates representing the aggregate number of shares of Common Stock specified in the Exercise Notice. The share certificate or certificates so delivered shall be in such denominations as may be specified in such Exercise Notice (or, if such Exercise Notice shall not specify denominations, one certificate shall be issued) and shall be issued in the name of the Holder or such other name or names of Eligible Holder(s) as shall be designated in such Exercise Notice . Such certificate or certificates shall be deemed to have been issued, and such Holder or any other Person so designated to be named therein shall be deemed to have exercised this Warrant and for all purposes to have become holders of record of such shares, as of the date the Exercise Notice is received by the Company. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the certificate or certificates, deliver to the Holder a new Warrant evidencing the right to purchase the remaining shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. The Company shall pay all expenses payable in connection with the preparation, issuance and delivery of share certificates and new Warrants (other than transfer or similar taxes in connection with the transfer of securities), except that, if share certificates or new Warrants shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Holder at the time of delivering the aforementioned notice or promptly upon receipt of a written request of the Company for payment.

(c) If this Warrant shall be surrendered for exercise within any period during which the transfer books for shares of the Common Stock purchasable upon the exercise of this Warrant are closed for any purpose, then the Company shall not be required to make delivery of certificates for the Common Stock purchasable upon such exercise until the date of the reopening of said transfer books.

1.2 Shares To Be Fully Paid and Nonassessable . All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable.

1.3 No Fractional Shares To Be Issued . The Company shall not be required to issue fractions of shares of Common Stock upon exercise of this Warrant. The Holder may only elect to exercise this Warrant with respect to a whole number of shares of the Common Stock.

1.4 Securities Laws; Share Legend . The Holder, by acceptance of this Warrant, agrees that this Warrant and all shares of Common Stock issuable upon exercise of this Warrant will be disposed of only in accordance with the Securities Act of 1933, as amended, and any successor Federal statue, and the rules and regulations of the Commission promulgated thereunder (the " Securities Act" ). In addition to any other legend which the Company may deem advisable under the Securities Act and applicable state securities laws, and unless the shares of Common Stock issuable upon exercise of this Warrant are registered for resale under the Securities Act, all certificates representing shares of Common Stock (as well as any other securities issued hereunder in respect of any such shares) issued upon exercise of this Warrant shall be endorsed as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHER WISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED .

Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act) shall also bear such legend unless, in the opinion of counsel (in form and substance reasonably satisfactory to the Company) selected by the Holder of such certificate and reasonably acceptable to the Company, the securities represented thereby need no longer be subject to restrictions on resale under the Securities Act.

1.5 Exercise Limitations . Notwithstanding anything herein to the contrary, the Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 1.1 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Exercise Notice, the Holder (together with such Holder's Affiliates, and any other Person or entity acting as a group together with the Holder or any of the Holder's Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation. For purposes of this Section 1.5, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act "), and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 1.5 applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be made in good faith by the Company in consultation with the Holder. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. The " Beneficial Ownership Limitation " shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The provisions of this Section 1.5 shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1.5 to correct this Section 1 . 5 (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this Section 1.5 shall apply to all Eligible Holders of this Warrant.

ARTICLE II

WARRANT AGENCY; TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANT

2.1 Warrant Agency . Until such time, if any, as an independent agency shall be appointed by the Company to perform services described herein with respect to this Warrant (the

"Warrant Agency"), the Company shall perform the obligations of the Warrant Agency provided herein at its principal office address or such other address as the Company shall specify by prior written notice to the Holder.

2.2 Ownership of Warrant . The Company may deem and treat the Person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by any Person other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article II.

2.3 Transfer of Warrant . This Warrant may only be transferred to a purchaser subject to and in accordance with this Section 2.3 and Section 1.4 hereof, and any attempted transfer which is not in accordance with this Section 2.3 and Section 1.4 hereof shall be null and void and the transferee shall not be entitled to exercise any of the rights of the Holder of this Warrant. The Company agrees to maintain at the Warrant Agency books for the registration of such transfers of Warrants, and transfer of this Warrant and all rights hereunder shall be registered, in whole or in part, on such books, upon surrender of this Warrant at the Warrant Agency in accordance with this Section 2.3, together with a written assignment of this Warrant, substantially in the form of the assignment attached hereto as Annex 2 , duly executed by the Holder or its duly authorized agent or attorney-in-fact, with signatures guaranteed by a bank or trust company or a broker or dealer registered with the Financial Industry Regulatory Authority, and funds sufficient to pay any transfer taxes payable upon such transfer. Upon surrender of this Warrant in accordance with this Section 2.3, the Company (subject to being satisfied that such transfer is in compliance with Section 1.4 hereof) shall execute and deliver a new Warrant or Warrants of like tenor and representing in the aggregate the right to purchase the same number of shares of Common Stock in the name of the assignee or assignees and in the denominations specified in the instrument of assignment, and this Warrant shall promptly be canceled. Notwithstanding the foregoing, a Warrant may be exercised by a new holder without having a new Warrant issued. The Company shall not be required to pay any Federal or state transfer tax or charge that may be payable in respect of any transfer of this Warrant or the issuance or delivery of certificates for Common Stock in a name other than that of the registered holder of this Warrant.

2.4 Divi s ion or Combination of Warrants . This Warrant may be divided or combined with other Warrants, in connection with the partial exercise of this Warrant, upon surrender hereof and of any Warrant or Warrants with which this Warrant is to be combined at the Warrant Agency, together with a written notice specifying the names and denominations in which the new Warrant or Warrants are to be issued, signed by the holders hereof and thereof or their respective duly authorized agents or attorneys-in-fact. Subject to compliance with Sections 1.4 and 2.3 hereof as to any transfer which may be involved in the division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

2.5 Loss, Theft, Destruction or Mutilation of Warrant Certificates . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security (in customary form) reasonably satisfactory to the Company, or, in the

case of any such mutilation, upon surrender and cancellation of such Warrant and upon reimbursement of the Company's reasonable incidental expenses, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock.

ARTICLE III

ADJUSTMENT PROVISIONS

3.1 Adjustments Generally . The Exercise Price and the number of shares of Common

Stock (or other securities or property) issuable upon exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as provided in this Article III.

3.2 Common Share Reorganization and Stock Dividend Payments . If the Company, at any time this Warrant is outstanding, (a) shall subdivide its outstanding shares of Common Stock into a greater number of shares or consolidate its outstanding shares of Common Stock into a smaller number of shares (any such event being called a " Common Share Reorganization" ), or (b) pay a stock dividend (except scheduled dividends paid on preferred stock which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock (any such event being called a " Stock Dividend Payment "), then (i) the Exercise Price shall be adjusted, effective immediately after the record date at which the holders of shares of Common Stock are determined for purposes of a Common Share Reorganization or at which the holders of shares of Common Stock or any other class of capital stock are determined for purposes of a Stock Dividend Payment, as the case may be, to a price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on such record date before giving effect to such Common Share Reorganization or Stock Dividend Payment, as the case may be, and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such Common Share Reorganization or Stock Dividend Payment, as the case may be, and (ii) the number of shares of Common Stock subject to purchase upon exercise of this Warrant shall be adjusted, effective at such time, to a number determined by multiplying the number of shares of Common Stock subject to purchase immediately before such Common Share Reorganization or Stock Dividend Payment, as the case may be, by a fraction, the numerator of which shall be the number of shares outstanding after giving effect to such Common Share Reorganization or Stock Dividend Payment, as the case may be, and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such Common Share Reorganization or Stock Dividend Payment, as the case may be.

3.3 Capital Reorganization . If, at any time this Warrant is outstanding, there shall be any consolidation or merger to which the Company is a party, other than a consolidation or a merger in which the Company is a continuing corporation and which does not result in any reclassification of, or change (other than a Common Share Reorganization, Stock Dividend Payment or a change in par value) in, outstanding shares of Common Stock, or any sale or conveyance of the property of the Company as an entirety or substantially as an entirety (any such event being called a "Capital Reorganization"), then, effective upon the effective date of

such Capital Reorganization, the Holder shall have the right to purchase, upon exercise of this Warrant, the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have owned or have been entitled to receive after such Capital Reorganization if this Warrant had been exercised immediately prior to such Capital Reorganization. As a condition to effecting any Capital Reorganization, the Company or the successor or surviving corporation, as the case may be, shall execute and deliver to the Holder and to the Warrant Agency an agreement as to the Holder's rights in accordance with this Section 3.3, providing for subsequent adjustments as nearly equivalent as may be practicable to the adjustments provided for in this Article III. The provisions of this Section 3.3 shall similarly apply to successive Capital Reorganizations.


3.4	Adjustment Rules .

(a) Any adjustments pursuant to this Article III shall be made successively whenever an event referred to herein shall occur.

(b) If the Company shall set a record date to determine the holders of shares of Common Stock or any other class of capital stock, as the case may be, for purposes of a Common Share Reorganization, Stock Dividend Payment or Capital Reorganization and shall legally abandon such action prior to effecting such action, then no adjustment shall be made pursuant to this Article III in respect of such action.

3.5 Notice of Adjustments . The Company shall give notice to the Holder prior to any record date or effective date, as the case may be, in respect of any Common Share Reorganization, Stock Dividend Payment or Capital Reorganization describing, in each case, such event in reasonable detail and specifying such record date or effective date, as the case may be. In addition, after the record date or effective date, as the case may be, of any Common Share Reorganization, Stock Dividend Payment or Capital Reorganization, the Company shall promptly give notice to the Holder of such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof. If the required adjustment is not determinable at the time of such notice, the Company shall give notice to the Holder of such adjustment and computation promptly after such adjustment becomes determinable.

3.6 Adjustment by Board of Directors . I f any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of this Article III are not strictly applicable or if strictly applicable would not fairly protect the rights of the holder of this Warrant in accordance with the essential intent and principles of such provisions, then the Board of Directors may make, in its discretion, an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Exercise Price or decreasing the number of shares of Common Stock into which the Warrant is exercisable as otherwise determined pursuant to any of the provisions of this Article III, except in the case of a combination of shares of a type contemplated in Section 3.2 and then in no event to an amount larger than the Exercise Price as adjusted pursuant to Section 3.2.

ARTICLE IV

DEFINITIONS

The following terms, as used in this Warrant, have the following respective meanings:

" Affiliate " means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person as such terms are used in and construed under Rule 144 under the Securities Act.

' Beneficial Ownership Limitation " has the meaning set forth in Section 1.5.

" Business Days " means each day in which banking institutions in Atlanta, Georgia are not required or authorized by law or executive order to close.

" Capital Reorganization " has the meaning set forth in Section 3.3.

" Commission " means the Securities and Exchange Commission.

" Common Share Reorganization " has the meaning set forth in Section 3.2.

" Common Stock " has the meaning set forth in the first paragraph of this Warrant.

" Company" has the meaning set forth in the first paragraph of this Warrant.

" Eligible Holder " means the Holder and any permitted transferee of the Holder pursuant to and in accordance with this Warrant.

" Exchange Act " has the meaning set forth in Section 1.5.

" Exercise Date " has the meaning set forth in the first paragraph of this Warrant.

" Exercise Price " means US $3.96 per share of Common Stock, as may be adjusted pursuant to Article III.

" Expiration Date " has the meaning set forth in the first paragraph of this Warrant.

" Exercise Notice " has the meaning set forth in Section 1.1(a).

" Holder " has the meaning set forth in the first paragraph of this Warrant.

" Person " means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

" Securities " has the meaning set forth in Section 5.1(a).

" Securities Act " has the meaning set forth in Section 1.4.

" Stock Dividend Payment " has the meaning set forth in Section 3.2.

" Warrant Agency " h as the meaning set forth in Section 2.1.

" Warrants " mean this Warrant and other warrants of like tenor issued pursuant to Section 2.3.

ARTICLE V

REPRESENTATIONS AND OTHER AGREEMENTS

5.1 Representations of Holder . The Holder hereby represents to the Company as follows:

(a) Own Account . The Holder understands that this Warrant and all shares of Common stock issuable upon exercise of this Warrant (together, the " Securities ") are "restricted securities" and have not been and will not be registered under the Securities Act or any applicable state securities law. The Holder is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other Persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law. The Holder is acquiring the Securities hereunder in the ordinary course of its business.

(b) Holder Status . At the time the Holder was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises this Warrant it will be, an "accredited investor" as defined under Rule 501 under the Securities Act.

(c) Experience of the Holder . The Holder has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.

(d) General Solicitation . The Holder is not acquiring the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.


5.2	Other Agreements .

(a) The Holder acknowledges that the Company is subject to the rules and regulations of the NYSE MKT, including, without limitation, the provisions of the NYSE MKT Company Guide. The Holder agrees that, notwithstanding anything herein to the contrary, this Warrant shall not be exercisable in whole or in part unless and until the NYSE MKT has approved the listing of the shares of Common Stock issuable upon exercise of this Warrant for quotation on the NYSE MKT, and the Company agrees to seek, and diligently pursue, such approval as soon as practicable.

(b) No later than seventy-five (75) days after the date of this Warrant, the Company shall file with the Commission a registration statement seeking to register under the Securities Act the resale by the Holder of the shares of Common Stock issuable upon exercise of this Warrant.

ARTICLE VI

MISCELLANEOUS

6.1 Governing Law . This Warrant shall be governed in all respects by the laws of the State of Ohio, without reference to its conflicts of law principles.

6.2 Covenants To Bind Successor and Assigns . All covenants, stipulations, promises and agreements contained in this Warrant by or on behalf of the Company shall bind its successors and assigns, whether or not so expressed.

6.3 Entire Agreement . This Warrant constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenant except as specifically set forth herein or therein.

6.4 Waivers and Amendments . No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Company and the Holder of this Warrant.

6.5 Notices . All notices or other communications required or permitted hereunder shall be in writing and shall be mailed by express, registered or certified mail, postage prepaid, return receipt requested, sent by facsimile (with confirmation of transmission received and followed by the posting of a "hard copy" of the notice or communication by first-class U.S. mail), or by courier service guaranteeing overnight delivery with charges prepaid, or otherwise delivered by hand or by messenger, and shall be conclusively deemed to have been received by a party hereto and to be effective on the day on which delivered or facsimile is sent to such party at its address set forth below (or at such other address as such party shall specify to the other parties hereto in writing), or, if sent by registered or certified mail, on the third business day after the day on which mailed, addressed to such party at such address.

In the case of the Holder, such notices and communications shall be addressed to its address as shown on the books maintained by the Warrant Agency, unless the Holder shall notify the Company and the Warrant Agency in writing that notices and communications should be sent to a different address, in which case such notices and communications shall be sent to the address specified by the Holder. In the case of the Company, such notices and communications shall be addressed as follows: Attention: Chief Financial Officer, AdCare Health Systems, Inc., 1145 Hembree Road, Roswell, GA 30076.

6.6 Survival of Agreements; Representations and Warranties, etc. All warranties, representations and covenants made by the Company herein shall be considered to have been relied upon by the Holder and shall survive the issuance and delivery of the Warrant, regardless of any investigation made by the Holder, and shall continue in full force and effect so long as this Warrant is outstanding.

6.7 Severability . In case any one or more of the provisions contained in this Warrant shall be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

6.8 Section Headings . The section headings used herein are for convenience of reference only, do not constitute a part of this Warrant and shall not affect the construction of or be taken into consideration in interpreting this Warrant.

6.9 No Right s as Shareholder ; No Limitations on Company Action. This Warrant shall not entitle the Holder to any rights as a shareholder of the Company. No provision of this Warrant and no right or option granted or conferred hereunder shall in any way limit, affect or abridge the exercise by the Company of any of its corporate rights or powers to recapitalize, amend its certificate of incorporation, reorganize, consolidate or merge with or into another corporation or to transfer all or any part of its property or assets, or the exercise of any other of its corporate rights or powers.

[Signature Page Follows]

IN WITNESS WHEREOF , the Company has caused this Warrant dated October 26, 2013, to be executed by its duly authorized representative.



	ADCARE HEALTH SYSTEMS, INC.

	By:	/s/ Ronald W. Fleming
	Name:	Ronald W. Fleming
	Title:	Chief Financial Officer

ACKNOWLEDGED AND AGREED TO BY: CANTONE RESEARCH, INC.



By:	/s/ Anthony J. Cantone
Name:	Anthony J. Cantone
Its:	CEO

Annex 1

EXERCISE NOTICE

TO: AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, GA 30076

Attention : Chief Financial Officer

The undersigned, pursuant to the provisions set forth in the attached Warrant , hereby irrevocably elects to purchase shares of the Common Stock covered by such Warrant.

The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $ . Such payment takes the form of$ in cash or by money order , certified or bank cashier ' s check, or by wire transfer for such amount.

The undersigned requests that the certificates for such shares be issued in the name of , and delivered to whose address is

. The undersigned also requests that the certificates for the shares be issued in the following denominations: .

The undersigned represents and warrants that (i) all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an exemption from registration under the Securities Act; and (ii) the undersigned is an accredited investor within the meaning of Regulation D under the Securities Act.



Dated:
			(Signature must conform to name of holder as specified on the face of the Warrant)
			Address:

Annex 2

Assignment

For value received, the undersigned hereby sells, assigns and transfers unto:

Name:

(Please type or print in block letters)

Address:

the right to purchase Common Stock (as defined in the attached Warrant) represented by the attached Warrant to the extent of shares as to which such right is exercisable and does hereby irrevocably constitute and appoint , attorney-in-fact, to transfer said Warrant on the books of AdCare Health Systems, Inc., with full power of substitution in the premises.

Dated:

Signature:

Note: The above signature should correspond exactly with the name on the face of the attached Warrant.

Printed Name:

Title:

Exhibit 10.30

LOAN AND SECURITY AGREEMENT

dated September 27, 2013

by and between

QC PROPERTY HOLDINGS, LLC

A GEORGIA LIMITED LIABILITY COMPANY

Borrower

and

HOUSING & HEALTHCARE FUNDING, LLC

A DELAWARE LIMITED LIABILITY COMPANY

Lender

$5,000,000.00 TERM LOAN

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (“ Agreement ”), is made and entered into as of September 27, 2013, by and between QC Property Holdings, LLC , a Georgia limited liability company (“ Borrower ”), and Housing & Healthcare Funding, LLC , a Delaware limited liability company and its successors and assigns (“ Lender ”).

R E C I T A L S :

A. Borrower has fee simple title to the real property commonly known as 13500 Brandon Place, Oklahoma City, Oklahoma County, Oklahoma, legally described in Exhibit A attached hereto (the “ Real Property ”), which is improved with a 118-bed skilled nursing home facility commonly known as “Quail Creek Nursing & Rehabilitation Center” which is operated by Operator (as hereinafter defined) (the “ Facility ”), together with any and all easements and other rights appurtenant thereto (the “ Appurtenances ”; the Land, the Facility, the Appurtenances, all other improvements presently located upon the Land, and other Collateral (hereinafter defined) are collectively referred to herein as the “ Property ”).

B. Pursuant to the terms and conditions of this Agreement, Lender has agreed to make Borrower a term loan in the original principal amount of FIVE MILLION DOLLARS ($5,000,000.00) (the “ Loan ”) pursuant to that certain Promissory Note dated as of the date hereof by Borrower to Lender (as the same may be amended and/or restated from time to time, the “ Note ”), which is secured by, among other things, the Mortgage (as hereinafter defined), and the Assignment of Rents (as hereinafter defined).

NOW, THEREFORE , in consideration of the foregoing recitals, which are hereby incorporated as if fully set forth herein, and in consideration of the mutual representations, warranties, covenants and agreements herein contained, the sufficiency of which is hereby acknowledged, the parties hereto represent and agree as follows:

ARTICLE 1

INCORPORATION AND DEFINITIONS

1.1 Incorporation and Definitions . The foregoing recitals and all exhibits hereto are hereby made a part of this Agreement. The following terms shall have the following meanings in this Agreement:

Accounting Changes : As defined in Section 1.2 hereof.

Accounts : All accounts receivable, contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired or in which a party now has or hereafter may acquire any interest.

Affiliate : For any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person and (c) with respect to Lender, any entity administered or managed by Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Unless expressly stated otherwise herein, Lender shall not be deemed an Affiliate of any Credit Party.

Assignment of Rents : That certain Assignment of Leases and Rents dated as of the date hereof by Borrower to Lender, as the same may be amended and/or restated from time to time.

Authorized Officer : With respect to Borrower, any authorized manager or member or the chief financial officer of a limited liability company, the president or chief financial officer of Borrower of a corporation, or the general partner of a partnership.

Bank Product Agreements . Those certain cash management service agreements and any other agreements entered into from time to time between Borrower and Lender or its Affiliates in connection with any Bank Products

Bank Product Obligations . All obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by Borrower to Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that Borrower is obligated to reimburse to Lender as a result of Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to Borrower pursuant to the Bank Product Agreements.

Bank Products : Any service or facility extended to Borrower by Lender or its Affiliates, including, without limitation, (a) deposit accounts, (b) cash management services, including, without limitation, controlled disbursement, lockbox, electronic funds transfers (including, without limitation, book transfers, fedwire transfers, ACH transfers), online reporting and other services relating to accounts maintained with Lender or its Affiliates, (c) debit cards and (d) Rate Management Transactions.

Borrower’s Liabilities : All obligations of any nature (monetary (including post-petition interest, allowed or not) or otherwise) of Borrower under the Note, this Agreement and all of the other Loan Documents, including principal, interest, fees, costs, expenses, reasonable attorneys’ fees of Lender, all Rate Management Obligations permitted hereunder which are owed to Lender or its Affiliates, and all other Bank Product Obligations, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due.

Business Day : Any day on which Lender is open for commercial banking business in Chicago, Illinois.

Capital Lease . With respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.

Capital Securities . With respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership, interests in a trust, interests in other unincorporated organizations or any other equivalent of such ownership interest.

Cash Equivalent Investment : At any time, (a) any evidence of debt, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by Lender or its holding company) rated at least A-l by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or P-l by Moody’s Investors Service, Inc., (c) any certificate of deposit, time deposit or banker’s acceptance, maturing not more than one year after such time, or any overnight Federal Funds transaction that is issued or sold by Lender or its holding company (or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000), (d) any repurchase agreement entered into with Lender (or commercial banking institution of the nature referred to in clause (c) ) which (i) is secured by a fully-perfected security interest in any obligation of the type described in any of clauses (a) through (c) above and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of Lender (or other commercial banking institution) thereunder, (e) money market accounts or mutual funds which invest exclusively in assets satisfying the foregoing requirements, and (f) other short term liquid investments approved in writing by Lender.

Change of Control : The occurrence of any of the following events: (a) Christopher Brogdon, or any affiliate thereof, including Brogdon Family, LLC, shall beneficially own 50% or more of the common stock of Guarantor; or (b) Borrower shall cease to, directly or indirectly, own and control 100% of each class of the outstanding equity interests of each Subsidiary of Borrower.

Closing : The closing of the loan transaction described herein which shall occur when all of the conditions set forth in Articles 4 and 5 hereof have been satisfied.

Closing Date : September 27, 2013.

CMS : Centers for Medicare and Medicaid Services.

Code : The Internal Revenue Code of 1986, as amended.

Collateral : The meaning assigned to such term in Section 8.1 hereof.

Collateral Documents : Collectively, the Mortgage and any other agreement or instrument pursuant to which Borrower, any Subsidiary or any other Person grants or purports to grant collateral to Lender or otherwise relates to such collateral.

Contingent Liability . With respect to any Person, each obligation and liability of such Person and all such obligations and liabilities of such Person incurred pursuant to any agreement, undertaking or arrangement by which such Person: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the Capital Securities of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) induces the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby.

Control : Possession by a person or an entity, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether by contract, ownership of voting securities, membership or partnership interests or otherwise.

Controlled Group : All members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with Borrower or any of its subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

Credit Parties : Collectively, Borrower, Operator, Guarantor and any other Person providing a guaranty for the Loan (including, without limitation, the Guaranty), and any of the foregoing, individually, a “Credit Party”.

Debt : For any Person, any and all obligations, liabilities and indebtedness to any other Person of any and every kind and nature, howsoever created, arising or evidenced and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due,

whether primary, secondary, direct, indirect, absolute, contingent or otherwise (including, without limitation, obligations of performance), including, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (d) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (e) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination, (f) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person (including the Letters of Credit), (g) all Rate Management Obligations of such Person, (h) all Contingent Liabilities of such Person, (i) all debt of any partnership of which such Person is a general partner, (j) all non-compete payment obligations, earn-outs and similar obligations and (k) any Capital Securities or other equity instrument, whether or not mandatorily redeemable, that under GAAP is characterized as debt, all of the foregoing whether several, joint or joint and several, and whether arising or existing under written or oral agreement or by operation of law.

Debt Service : For any period, the sum for such period of (i) all principal amounts payable with respect to that period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as principal in accordance with GAAP, plus (ii) Interest Charges.

Debt Service Coverage Ratio : With respect to Borrower, the ratio for the relevant period of (i) EBITDAR to (ii) Debt Service.

Default : Any event that, if it continues uncured, will, with the lapse of time or notice or both, constitute an Event of Default.

Default Rate : As defined in the Note.

Disbursement Request : As defined in Section 6.3 of this Agreement.

Distributions : Any loans, advances, dividends or other distributions to the members, managers, shareholders, partners, officers, directors, Affiliates or any other Person of any revenue received by or on behalf of such Person.

EBITDA : For any testing period, the sum for such period of: (a) net income (determined in accordance with GAAP and eliminating the effect of any extraordinary gains), plus (b) Interest Charges, plus (c) federal and state income taxes, plus (d) depreciation and amortization charges (determined in accordance with GAAP).

EBITDAR : For any period, the sum for such period of: (a) EBITDA plus (b) Rent Expense. For purposes of determining EBITDAR, (i) net income shall be based on the greater of (x) actual management fees paid by Operator, or (y) assumed management fees equal to 5% of net revenues,

for the applicable testing period, and (ii) the Replacement Reserve Amount required to be deposited with Lender for such period pursuant to Section 11.34 of this Agreement shall be deducted in calculating EBITDAR.

Environmental Claims : All claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.

Environmental Indemnity Agreement : That certain Environmental Indemnity Agreement, dated as of the date hereof, by Borrower and Guarantor for the benefit of Lender.

Environmental Laws : As defined in the Environmental Indemnity Agreement.

ERISA : The Employee Retirement Income Security Act of 1974, as the same may be amended from time to time and, unless the context otherwise requires, the regulations promulgated thereunder and any successor statute.

Event of Default : One or more of the events or occurrences referred to in Article 14 of this Agreement.

Excluded Taxes : Taxes based upon, or measured by, Lender’s (or a branch of Lender’s) overall revenue or net income, overall net receipts, or overall net profits (including franchise or other taxes imposed in lieu of such taxes).

Facility : That certain 118-skilled nursing bed facility commonly known as “Quail Creek Nursing & Rehabilitation Center” and located at 13500 Brandon Place, Oklahoma City, OK 73142 , which is owned by Borrower, and operated by Operator pursuant to the Operating Lease.

Fixed Charge Coverage Ratio : With respect to Operator, for any testing period, the ratio for the relevant period of (i) EBITDAR to (ii) the sum of (x) Interest Charges, plus (y) Rent Expense.

GAAP : Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable to the circumstances as of the date of determination.

General Intangibles : All choses in action, causes of action and all other intangible property of Borrower of every kind and nature now owned or hereafter acquired by Borrower, including, without limitation, corporate and other business records, deposit accounts, inventions, designs, patents, patent and trademark registrations and applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, certifications, franchises, deferred tax benefits, tax refund claims, prepaid expenses, computer programs, covenants not to compete, customer lists and mailing lists, contract rights, indemnification rights, causes of action and any letters of credit, guarantee claims, security interests or other security held by or granted to Borrower.

Governmental Authorization : Any permit, license, certification, authorization, plan, directive, consent order or consent decree of or from any Federal, state or local governmental

authority, agency or court having jurisdiction over Borrower and/or the Property, and/or the continuing operations of the Facility, including, but not limited to, licensure of the Facility by OSDH as a skilled nursing care facility with respect to 118 licensed skilled nursing beds currently offered for occupancy.

Guarantor : Collectively, the parties guaranteeing the Loan pursuant to the Guaranty.

Guaranty : That certain Guaranty, dated as of even date herewith, executed by AdCare Health Systems, Inc. to Lender payment of amounts due in connection with the Loan and of obligations of Borrower pursuant to the terms of this Agreement, as the same may be amended, reaffirmed, modified or supplemented from time to time.

Hazardous Materials : As defined in the Environmental Indemnity Agreement.

Interest Charges : For any period, the sum of: (a) all interest, charges and related expenses payable with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the portion of any payments under any Capital Leases that should be treated as interest in accordance with GAAP.

Inventory : The meaning ascribed to such term in the UCC, and shall include, without limitation, all of Borrower’s goods held or being processed for sale or lease including all materials, work-in-process, finished goods, supplies and other goods customarily classified as Inventory.

Investment : With respect to any Person, any investment in another Person, whether by acquisition of any debt or capital security, by making any loan or advance, by becoming obligated with respect to a Contingent Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business) or by making an acquisition.

Land : As defined in the Recitals.

Lease(s) : Any and all leases, licenses, or agreements for use of any part of the Property, including the Operating Lease, except for those agreements with nursing home residents of the Facility.

Lien : With respect to the Property, the Collateral or any asset of Borrower, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code in effect in any jurisdiction), whether arising by contract, as a matter of law, by judicial process or otherwise.

Loan : As described and defined in the Recitals.

Loan Amount : The amount of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00).

Loan Documents : This Agreement, the Other Agreements, the documents specified in Article 4 hereof, and any other agreements, instruments or other documents evidencing, securing or guarantying obligations of any party under the Loan.

Loan Expenses : As defined in Section 6.2(c) hereof.

Loan Proceeds : All amounts advanced as part of the Loan, whether advanced directly to Borrower or otherwise.

Loan Rate : The “Loan Rate” as defined in the Note.

Manager : AdCare Oklahoma Management, LLC.

Management Agreement : Management Agreement dated as of June 25, 2012, by and between Operator and Manager.

Material Adverse Effect : (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, or properties of any of Borrower or Operator, (b) a material impairment of the ability of the Credit Parties to pay or perform any of the obligations under any Loan Document, (c) a material adverse effect upon any substantial portion of the Collateral under this Agreement or the other Loan Documents or upon the legality, validity, binding effect or enforceability against the Credit Parties of any Loan Document or (d) any change, event, action, condition or effect that impairs the fully perfected first priority status of the Liens granted in this Agreement or any Loan Document.

Maturity Date : With respect to the Loan, as defined in the Note.

Mortgage : That certain Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated as of the date hereof by Borrower as “Grantor” or “Borrower” thereunder in favor of Lender, as the same may be amended and/or restated from time to time.

Multiemployer Pension Plan : A multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which Borrower, Operator or any other member of the Controlled Group may have any liability.

Note : As defined in the Recitals.

Obligor : Any Person who is and/or may become obligated to Borrower under or on account of any of the Accounts.

OKHCA : Oklahoma Health Care Authority.

Operating Lease : That certain Facility Lease dated as of June 25, 2012, as amended by that First Amendment to Facility Lease dated as of July 1, 2012, for the lease of the Facility by and between Borrower and Operator.

Operator : QC Nursing, LLC, a Georgia limited liability company.

OSDH : Oklahoma State Department of Health.

Other Agreements : All agreements, instruments and documents, including, without limitation, guaranties, mortgages, deeds of trust, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, leases, financing statements, Bank Product Agreements, Rate Management Agreements, as well as any amendments, restatements and/or replacements of the foregoing, and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower or other Credit Party and delivered to Lender in connection with the Loan including, without limitation, the Note, the Mortgage, the Assignment of Rents, the Guaranty and the Environmental Indemnity Agreement.

Payor : any individual, corporation, limited liability company, partnership or other entity, or any governmental or quasi-governmental authority, including without limitation, CMS, any fiscal intermediary disbursing payments on behalf of CMS or the federal Medicaid program, as administered in the state of Oklahoma, that is responsible for payment of all or any portion of any Account.

PBGC : The Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

Pension Plan : A “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Pension Plan), and as to which Borrower or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.

Permitted Exceptions : The title exceptions specified in Exhibit B attached to the Mortgage.

Person : An individual, sole proprietorship, association, partnership, joint venture, corporation (whether or not for profit), limited liability company, trust, institution, unincorporated organization, government or any department or agency thereof or any other entity or organization.

Prohibited Transfer : As defined in Section 11.33 herein.

Property : As defined in the Recitals to this Agreement.

Rate Management Transaction : Any transaction including an agreement with respect thereto now or hereafter entered into by Borrower and Lender, or any of Lender’s subsidiaries or Affiliates or their successors, which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these

transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

Rate Management Agreement : Any agreement with respect to any Rate Management Transaction entered into now or hereafter by Borrower and Lender or any of Lender’s subsidiaries or Affiliates or their successors.

Rate Management Obligation . Any liability of Borrower under any Rate Management Agreement, including any and all cancellations, buy backs, reversals, terminations or assignments under any Rate Management Agreement.

Rent Expense : For any period, the amount of rent due from Operator to Borrower under the Operating Lease.

Replacement Reserve Account : As defined in Section 11.34 of this Agreement.

Replacement Reserve Amount : An amount equal to Four Hundred Dollars ($400.00) per bed annually to be used for capital improvement projects at the Facility.

Reportable Event : A reportable event as defined in Section 4043 of ERISA and the regulations issued thereunder as to which the PBGC has not waived the notification requirement of Section 4043(a), or the failure of a Pension Plan to meet the minimum funding standards of Section 412 of the Code (without regard to whether the Pension Plan is a plan described in Section 4021(a)(2) of ERISA) or under Section 302 of ERISA.

Reserves : As defined in Article 7 of this Agreement.

Subordination and Attornment Agreement : As defined in Article 4.

Subsidiary : With respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of outstanding Capital Securities as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of Borrower.

Taxes : Any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.

Termination Event : With respect to a Pension Plan that is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Borrower or any other member of the Controlled Group from such Pension Plan during a plan year in which Borrower or any other member of the Controlled Group was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Pension Plan, the filing of a notice of intent to terminate the Pension Plan or the treatment of an amendment of such Pension Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings

to terminate such Pension Plan or (e) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Pension Plan.

Title Company : First American Title Insurance Company.

Total Plan Liability : At any time, the present value of all vested and unvested accrued benefits under all Pension Plans, determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.

UCC : The Uniform Commercial Code as in effect on the date hereof and from time to time in the state of Maryland or of any other state the laws of which are required to be applied in connection with the perfection of security interests in any Collateral.

Unfunded Liability : The amount (if any) by which the present value of all vested and unvested accrued benefits under all Pension Plans exceeds the fair market value of all assets allocable to those benefits, all determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.

1.2 Certain UCC and Accounting Terms . Except as otherwise defined in this Agreement or the other Loan Documents, all words, terms and/or phrases used herein and therein shall be defined by the applicable definition therefore (if any) in the UCC. Notwithstanding the foregoing, any accounting terms used in this Agreement which are not specifically defined herein shall have the meaning customarily given to them in accordance with GAAP. All financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP, consistently applied.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

2.1 Representations and Warranties . To induce Lender to execute and perform this Agreement, Borrower hereby represents, covenants and warrants to Lender as follows:

(a) Fee Simple Title . At the Closing and at all times thereafter until the Loan is paid in full, Borrower will have good and merchantable fee simple title to the Land, subject only to the Permitted Exceptions.

(b) Organization . Borrower is a limited liability company, duly organized, validly existing and in good standing under the laws of the state of Georgia and is qualified to conduct business in the state of Oklahoma. Operator is a limited liability company, duly organized, validly existing and in good standing under the laws of the state of Georgia and is qualified to conduct business in the state of Oklahoma. Each Credit Party has full power and authority to conduct its business as presently conducted, to enter into this Agreement and to perform all of its duties and obligations under this Agreement and under the Loan Documents, and such execution and performance have been duly authorized by all necessary

manager, member, partner and/or shareholder approval. No Credit Party or any principal of any Credit Party has been convicted of a felony, and there are no proceedings or investigations being conducted involving criminal activities of any Credit Party or any principals thereof.

(c) Authority . This Agreement, the Note, the Mortgage, the Guaranty, the other Loan Documents and any other documents and instruments executed and delivered or required to be executed and delivered by any Credit Parties in connection with this Loan, when executed and delivered, will constitute the duly authorized, valid and legally binding obligations of the party required to execute the same and will be enforceable strictly in accordance with their respective terms (except to the extent that enforceability may be affected or limited by applicable bankruptcy, insolvency and other similar debtor relief laws affecting the enforcement of creditors’ rights generally); no basis presently exists for any claim against Lender under this Agreement, under the Loan Documents or with respect to the Loan; and enforcement of this Agreement and the Loan Documents are subject to no defenses of any kind.

(d) No Conflicts . The execution, delivery and performance of this Agreement, the Note, the Mortgage, the Guaranty, the other Loan Documents and any other documents or instruments, executed and delivered or to be executed and delivered by any Credit Parties pursuant to this Agreement or in connection with this Loan and the ownership, occupancy and use of the Property will not: (i) violate any provisions of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority, (ii) conflict with the provisions of the certificates of formation, articles of organization, partnership agreements, operating agreements or similar documents of the Credit Parties, as applicable, or (iii) conflict with, be inconsistent with, or result in any breach or default of any of the terms, covenants, conditions or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which any Credit Party is a party or by which any of them may be bound. No Credit Party is in default (without regard to grace or cure periods) under any contract or agreement to which it is a party, the effect of which default will adversely affect the performance by such Credit Party of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement and the other Loan Documents.

(e) Adverse Effects . No condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding or basis therefor) exists which could adversely affect the validity or priority of the liens and security interests granted to Lender under the Loan Documents, which could adversely affect the ability of Borrower or any Credit Party to perform its obligations under the Loan Documents, or which could constitute a Default or an Event of Default under any of the Loan Documents, and Borrower has no obligations to any Person other than Lender for borrowed money, nor any material guarantee obligations, Contingent Liabilities, liabilities for taxes, or unusual forward or long-term commitments, including any Rate Management Transaction, with any Person other than Lender.

(f) Use and Occupancy of the Facility . The present use and occupancy of the Land and the Property do not violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind, including, without limitation, Environmental Laws, zoning, building, land use, noise abatement, occupational health and safety or other laws, any building permit or any condition, grant, easement, covenant, condition or restriction, whether recorded or not, and if a third party is required under any covenants, conditions and restrictions of record or any other agreement to consent to the use and/or operation of the Property, Borrower or Operator has obtained such approval from such party. Each Credit Party has obtained, and maintained in good standing, all licenses, permits, authorizations, registrations and other approvals required under any Environmental Law and required for their respective ordinary course operations, and for their reasonably anticipated future operations, and each Credit Party is in compliance with all terms and conditions thereof, except where the failure to do so could not reasonably be expected to result in material liability to any Credit Party and could not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect.

(g) Environmental Compliance . The Property will not be used, and, to the knowledge of Borrower, the Property has never been used, for any activities which, directly or indirectly, involve the use, generation, treatment, storage, transportation or disposal of any Hazardous Materials, except as used in the ordinary course of the businesses of Borrower and Operator, in such quantities as customarily used and reasonably necessary for the operations of the Property, including the Facility, but in all events in accordance with all applicable Environmental Laws. No Hazardous Materials exist now, and no Hazardous Materials will hereafter exist, on or under the Property or in any surface waters or groundwaters on or under the Property, except in accordance with all applicable Environmental Laws. The Property and its existing and prior uses have at all times complied with and will comply with all Environmental Laws, and neither Borrower nor Operator has violated, or will violate, any Environmental Laws.

(h) Federal Emergency Planning and Community Right‑to‑Know Act of 1986. There are no facilities on the Property which are subject to reporting under any state of Oklahoma laws or Section 312 of the Federal Emergency Planning and Community Right‑to‑Know Act of 1986 (42 U.S.C. Section 11022), and federal regulations promulgated thereunder.

(i) Underground Storage Tanks . The Property does not contain any underground storage tanks.

(j) Financial Statements . All financial statements and other information submitted by any Credit Party to Lender in connection with this Loan are true and correct in all material respects, and fairly present the respective financial conditions and results of operations of the entities or individuals which are their subjects, and for Borrower and Operator, have been prepared in accordance with GAAP consistently applied. Since June 30, 2013, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of Borrower or Operator. Since June 30, 2013, there

has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of Guarantor.

(k) Patriot Act :

(i) As of the date of this Agreement, each Credit Party is, and during the term of this Agreement shall remain, in full compliance with all the applicable laws and regulations of the United States of America that prohibit, regulate or restrict financial transactions, including but not limited to, conducting any activity or failing to conduct any activity, if such action or inaction constitutes a money laundering crime, including any money laundering crime prohibited under the Money Laundering Control Act, 18 U.S.C. 1956, 1957, or the Bank Secrecy Act, 31 U.S.C. 5311 et seq. and any amendments or successors thereto and any applicable regulations promulgated thereunder.

(ii) Each Credit Party represents and warrants that: (a) neither it, nor any of its owners, officers, directors, managers, members, partners or employees is named as a “Specially Designated National and Blocked Person” as designated by the United States Department of the Treasury’s Office of Foreign Assets Control or as a person, group, entity or nation designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; (b) it is not owned or controlled, directly or indirectly, by the government of any country that is subject to a United States Embargo; and (c) it is not acting, directly or indirectly, for or on behalf of any person, group, entity or nation named by the United States Treasury Department as a “Specially Designated National and Blocked Person,” or for or on behalf of any person, group, entity or nation designated in Presidential Executive Order 13224 as a person who commits, threatens to commit, or supports terrorism; and that it is not engaged in this transaction directly or indirectly on behalf of, or facilitating this transaction directly or indirectly on behalf of, any such person, group, entity or nation.

(iii) Borrower acknowledges that it understands and has been advised by legal counsel on the requirements of the applicable laws referred to above, including the Money Laundering Control Act, 18 U.S.C. 1956, 1957, the Bank Secrecy Act, 31 U.S.C. 5311 et seq., the applicable regulations promulgated thereunder, and the Foreign Assets Control Regulations, 31 C.F.R. Section 500 et seq .

(iv) Lender (for itself and not on behalf of any other party) hereby notifies the Credit Parties that, pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Credit Parties, which information includes the name and address of the Credit Parties and other information that will allow Lender, as applicable, to identify the Credit Parties in accordance with the Patriot Act. No Credit Party (and, to the knowledge of each Credit Party, no joint venture or Subsidiary thereof) is in violation in any material respects of the Patriot Act.

(l) Licensure/Certification :

(i) All permits, licenses, certifications, certificates of waiver, and governmental approvals required by applicable law to use, occupy, and operate the Property, including the Facility and all personal property and equipment thereon, and to conduct all activities thereon, have been validly issued to the proper party(ies), and are in full force and effect.

(ii) Operator is licensed by the state of Oklahoma as a skilled nursing care facility with respect to 118 licensed beds currently offered for occupancy, and complies with all current requirements for continued licensure. All licensed beds at the Facility are certified for participation in the federal Medicaid program, as administered in the state of Oklahoma, and are certified for participation in the federal Medicare program, and the Facility complies with all federal, state and local laws, rules, ordinances and requirements for participation in such programs. Any and all notices of violation or deficiency concerning operation of the Facility or compliance by the Facility with all federal, state and local laws, rules and ordinances and requirements pertaining to nursing care facilities and for participation in such third party payment programs shall be fully corrected by Operator as of the Closing Date. Borrower and Operator have no notice or knowledge of any claims for overpayments, paybacks, disallowances, offsets, rate adjustments, recapture liability, or penalties or interest in connection with such claims, in connection with the Medicaid or Medicare programs in which the Facility has participated. There are no Medicaid or Medicare rate appeals now pending or unsettled with respect to the Facility. In addition to the foregoing, Operator has obtained all regulatory approvals that are required by any governmental or quasi-governmental authority in order to operate the Facility under applicable law and to bill the Medicare and Medicaid reimbursement programs for the services rendered at the Facility.

(iii) If required, the Facility has a Certificate of Need for Borrower’s and Operator’s existing use and operation of the Facility.

(m) Permits and Easements . All utility, parking, access (including curb‑cuts and highway access), operational, recreational and other permits and easements required for the use of the Property have been granted and issued.

(n) Encroachments . No portion of the Property or the Facility encroaches upon any building line, setback line, sideyard line, or any recorded or visible easement (or other easement of which Borrower or Operator is aware or has reason to believe may exist) which exists with respect to the Property.

(o) Truth in Lending Act; Usury . The Loan, including the interest rate, fees and charges as contemplated hereby, is a business loan; the Loan is an exempt transaction under the Truth In Lending Act, 15 U.S.C. Section 1601 et seq .; and the Loan does not, and when

disbursed will not, violate the provisions of the usury laws of the state of Oklahoma, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, Borrower or any property securing the Loan.

(p) Leases . Except for the Operating Lease and resident occupancy agreements, there are no Leases for use or occupancy of any part of the Property.

(q) Operating Lease . The Operating Lease is in full force and effect; no defaults have occurred thereunder; no tenant under the Operating Lease has a right of set‑off against payment of rent due thereunder; no events or circumstances exist which, with the passage of time or the giving of notice, or both, would constitute a default under the Operating Lease; and enforcement of the Operating Lease by Borrower or by Lender pursuant to an exercise of Lender’s rights under the Assignment of Rents would be subject to no defenses of any kind. At all times the Base Rent under the Operating Lease shall exceed 1.05x the principal and interest due hereunder.

(r) Broker . Borrower has not engaged any broker with respect to the Loan or the Property.

(s) True and Correct Nature of Other Representations and Warranties . The representations and warranties of Borrower in the other Loan Documents are true and correct.

(t) Labor . None of the employees of Borrower is subject to any labor or collective bargaining agreement, and there are no existing or threatened strikes, lockouts, work stoppages, election or decertification petitions or proceedings, unfair labor charges, equal employment opportunity proceedings, wage payment or material unemployment compensation proceedings, material workmen’s compensation proceedings or other material labor or employee-related controversies pending or threatened involving Borrower and any of their employees. Hours worked by, and payment made to, employees of Borrower or Operator are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.

(u) Solvency . On the Closing Date and at all times thereafter, with respect to each Borrower and Operator, individually, (a) the fair value of its assets is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated in accordance with GAAP, (b) the present fair saleable value of its assets is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, and with respect to each Credit Party, individually, (a) it is able to realize upon its assets and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (b) it does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature and (c) it is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which its property would constitute unreasonably small capital. No transfer of property is being made and no Debt is being incurred in connection with the transactions contemplated by

this Agreement with the intent to hinder, delay or defraud either present or future creditors of Borrower or any Affiliate of Borrower.

(v) Title; Assets . Borrower owns good title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except the Permitted Exceptions. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except filings for which termination statements have been delivered to Lender. Borrower owns, possesses or otherwise has rights and assets necessary for the conduct of its business.

(w) Names . Neither Borrower nor Operator has any assumed names, and neither Borrower nor Operator is doing business under any names other than its company name as set forth in the preamble to this Agreement and the name by which the Facility is commonly known, “Quail Creek Nursing & Rehabilitation Center”.

(x) Subsidiaries . Neither Borrower nor Operator has any Subsidiaries.

(y) Manager . Manager is approved by the state of Oklahoma as a third-party manager for the operation of the Facility.

(z) Options . No person, corporation, partnership, association or other entity has any option to acquire ownership of the Collateral or any portion thereof.

(aa) Investment Company . No Credit Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company,” within the meaning of the Investment Company Act of 1940.

(bb) Margin Stock . No Credit Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying “margin stock” as defined in Regulation U of the Board of Governors of the Federal Reserve System or any successor thereto.

(cc) Compliance with Applicable Laws . Each Credit Party is in compliance in all material respects with the requirements of all applicable requirements of the United States of America, the state of Oklahoma, and all applicable local governments, and their agencies and instrumentalities, and all other laws and all orders, writs, injunctions and decrees applicable to it or to its operations or properties, except in such instances in which (a) such requirement of law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(dd) Tax Returns . Borrower and Operator have each timely filed (including within any filing extensions granted) all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges due and payable with respect to such return, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. Each of Borrower and Operator has made adequate reserves on its books and records in accordance with GAAP for all taxes that have accrued but which are not yet due and payable. Neither Borrower nor Operator has participated in any transaction that relates to a year of the taxpayer (which is still open under the applicable statute of limitations) which is a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2) (irrespective of the date when the transaction was entered into).

(ee) Insurance . Borrower and Operator and its properties are adequately insured with financially sound and reputable insurance companies which are not Affiliates of Borrower or Operator in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where Borrower and Operator operate, no notice of cancellation has been received with respect to such policies, and Borrower and Operator are in compliance with all conditions contained in such policies.

(ff) Locations . Set forth on Schedule 2.1(ff) is the address of the Land. On the date hereof, Schedule 2.1(ff) sets forth (a) each place of business of Borrower (including its chief executive office), (b) all locations where all Inventory and the equipment owned by Borrower is kept and (c) whether each such Collateral location and place of business (including Borrower’s chief executive office) is owned or leased (and if leased, specifies the complete name and notice address of each lessor). No Collateral is located outside the United States or in the possession of any lessor, bailee, warehouseman or consignee, except as indicated on Schedule 2.1(ff) .

(gg) Default . No Default or Event of Default exists or would result from the incurrence by Borrower of any Debt hereunder or under any other Loan Document.

(hh) Accuracy of Information . All information heretofore or contemporaneously herewith furnished in writing by or on behalf of any Credit Party to Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all information hereafter furnished by or on behalf of any Credit Party to Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by Lender that any projections and forecasts provided by Borrower are based on good faith estimates and assumptions believed by Borrower to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results). Each

Credit Party has disclosed to Lender, in writing, all facts which any Credit Party believe might materially and adversely affect the business, credit, operations, financial condition or prospects of any Credit Party or any Affiliate of any Credit Party or which any Credit Party believes might materially and adversely affect any material portion of any Creditor Party’s properties, or Credit Party’s ability to perform their obligations under this Agreement or the other Loan Documents to which any Credit Party is a named party.

(ii) Unfunded Liability . The Unfunded Liability of all Pension Plans of Borrower and Operator does not in the aggregate exceed twenty percent of the Total Plan Liability for all such Pension Plans. Each Pension Plan complies in all material respects with all applicable requirements of law and regulations. No contribution failure under Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan has occurred with respect to any Pension Plan, sufficient to give rise to a Lien under Section 302(f) of ERISA, or otherwise to have a Material Adverse Effect. There are no pending or, to the knowledge of Borrower, threatened, claims, actions, investigations or lawsuits against any Pension Plan, any fiduciary of any Pension Plan, Borrower or Operator or any other member of the Controlled Group with respect to a Pension Plan or a Multiemployer Pension Plan which could reasonably be expected to have a Material Adverse Effect. None of Borrower, Operator, or any other member of the Controlled Group has engaged in any prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Pension Plan or Multiemployer Pension Plan which would subject that Person to any material liability. Within the past five years, none of Borrower, Operator, or any other member of the Controlled Group has engaged in a transaction which resulted in a Pension Plan with an Unfunded Liability being transferred out of the Controlled Group, which could reasonably be expected to have a Material Adverse Effect. No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan which could reasonably be expected to have a Material Adverse Effect.

(jj) Plan Contributions . All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by Borrower, Operator or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither Borrower, Operator nor any other member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan; and neither Borrower, Operator, nor any other member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.

(kk) Intellectual Property . Each of Borrower and Operator owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the businesses of Borrower or Operator, as applicable, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect.

(ll) Intentionally Omitted.

(mm) Rate Management Transactions . Borrower is not a party to any Rate Management Transactions other than in favor of Lender or its Affiliates.

(nn) Purpose . The sole business of Borrower is, and shall be, to own and lease the Property to Operator and matters incidental or directly related thereto. The sole business of Operator is, and shall be, to lease the Property, operate the Facility on the Property and matters incidental or directly related thereto.

(oo) Security Interests . The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 2.1(oo) (which, in the case of all filings and other documents referred to on Schedule 2.1(oo) , have been delivered to Lender in completed and duly executed form or have been prepared by Lender) will constitute valid perfected security interests in all of the Collateral in favor of Lender as collateral security for the Borrower’s Liabilities, enforceable in accordance with the terms hereof against all creditors of Borrower and any Persons purporting to purchase any Collateral from Borrower and (b) are prior to all other Liens on the Collateral in existence on the date hereof. The filings and other actions specified on Schedule 2.1(oo) constitute all of the filings and other actions necessary to perfect all security interests granted hereunder.

(pp) Borrower Certification . On the date hereof, Schedule 2.1(pp) sets forth (a) Borrower’s jurisdiction of organization, (b) the location of Borrower’s chief executive office, (c) Borrower’s exact legal name as it appears on its organizational documents and (d) Borrower’s organizational identification number (to the extent Borrower is organized in a jurisdiction which assigns such numbers) and federal employer identification number.

(qq) Deposit Accounts . All depositary and other accounts in the name of Borrower or Operator, other than those maintained with Lender, are described on Schedule 2.1(qq) hereto, which description includes for each such account the name of the account holder, the name, address, telephone and fax numbers of the financial institution at which such account is maintained, the account number and the account officer, if any, of such account.

(rr) Other Debt . Borrower has no other obligations for borrowed money or other Debt from any Person other than Lender or such loans as may be approved by Lender.

(ss) Capital Securities . A list of the holders of the Capital Securities of Borrower and Operator is set forth in Schedule 2.1(ss) attached hereto and incorporated herein by

reference, and no other Person has any rights and/or claim to any issued or unissued equity interest of, Borrower.

(tt) Healthcare Representations and Warranties :

(i) Operator and/or Manager have obtained all Medicare, Medicaid and related agency certifications and private organization accreditations and Governmental Authorizations necessary to operate the Facility, and currently is and has been, at all times, in material compliance with all Medicare and Medicaid statutory and regulatory requirements, including, but not limited to:

(1) the Medicare Program Integrity Requirements of 42 C.F.R. §420 et seq.;

(2) the requirements under the Conditions for Medicare Payment as described in 42 C.F.R. §424 et seq., as applicable;

(3) the requirements under the Medicare conditions for Participation for States and Long Term Care Facilities as described in 42 C.F.R. §483 et seq.;

(4) the requirements for Medicare Provider Agreements and Supplier Approval, as described in 42 C.F.R. §489 et seq.;

(5) the Medicaid Program Integrity requirements of 42 C.F.R. §455 et seq., as implemented by the state Medicaid agency in each state in which Operator conducts business; and

(6) the requirements for Medicaid provider agreements required by 42 C.F.R. §431.107 as implemented by the state Medicaid agency in each state in which Operator conducts business.

(ii) Operator and/or Manager has all Medicare, Medicaid and related agency provider number(s), supplier billing number(s) and Medicare and/or Medicaid provider and/or participation agreements necessary to submit reimbursement claims to Medicare and/or Medicaid for any healthcare activity in which it is currently engaged, and has not allowed or permitted or authorized any Person to use any such number or agreement, except on Operator’s behalf.

(iii) The Medicare and/or Medicaid certification, provider number, supplier billing number and Medicare and/or Medicaid provider and/or participation agreement(s) of Operator and/or Manager are currently in good

standing and are not now and have never been suspended, revoked, denied renewal or terminated.

(iv) Neither Operator nor Manager is currently nor has in the past been subject to:

(1) any federal, state, local governmental or private Payor civil or criminal investigations, inquiries or audits involving and/or related to any federal, state or private Payor healthcare fraud and abuse provisions or contractual prohibition of healthcare fraud and abuse; or

(2) any federal, state or private Payor inquiry, investigation, inspection or audit regarding its activities (except in the ordinary course), including without limitation, any federal, state or private Payor inquiry or investigation of any Person having "ownership, financial or control interest" in Operator (as that term is defined in 42 C.F.R. §420.201 et seq.) involving and/or related to healthcare fraud and abuse, false claims under 31 U.S.C. §§3729-3731 or any similar contractual prohibition, or any qui tam action brought pursuant to 31 U.S.C. §3729 et seq.;

(v) No Credit Party, Manager or owner, officer, manager, employee or Person with a “direct or indirect ownership interest” (as those terms are defined in 42 C.F.R. §420.201) in a Credit Party or Manager:

(1) has had a civil monetary penalty assessed against him or her pursuant to 42 U.S.C. §1320a-7a;

(2) has been excluded from participation in a Federal Health Care Program (as that term is defined in 42 U.S.C. §1320a-7b);

(3) has been convicted (as that term is defined in 42 C.F.R. §1001.2) of any of those offenses described in 42 U.S.C. §1320a-7b or 18 U.S.C. §§669, 1035, 1347, 1518, including without limitation any of the following categories of offenses:

(A) criminal offenses relating to the delivery of an item or service under any Federal Health Care Program (as that term is defined in 42 U.S.C. §1320a-7b) or healthcare benefit program (as that term is defined in 18 U.S.C. §24(b));

(B) criminal offenses under federal or state law relating to patient neglect or abuse in connection with the delivery of a healthcare item or service;

(C) criminal offenses under federal or state law relating to fraud and abuse, theft, embezzlement, false statements to third parties, money laundering, kickbacks, breach of fiduciary responsibility or other financial misconduct in connection with the delivery of a healthcare item or service or with respect to any act or omission in a program operated by or financed in whole or in part by any federal, state or local governmental agency;

(D) federal or state laws relating to the interference with or obstruction of any investigations into any criminal offenses described in (A) through (C) above; or

(E) criminal offenses under federal or state law relating to the unlawful manufacturing, distribution, prescription or dispensing of a controlled substance; or

(4) has been involved or named in a U.S. Attorney complaint made or any other action taken pursuant to the False Claims Act under 31 U.S.C. §§3729-3731 or qui tam action brought pursuant to 31 U.S.C. §3729 et seq. ;

(vi) Operator and Manager are and shall continue to be in compliance with applicable laws relating to its relationships with physicians.

(vii) Operator and Manager are and shall continue to be in compliance with all laws, rules, regulations, orders, decrees and directions of any governmental or quasi-governmental authority (including without limitation, the Social Security Act, as amended (42 U.S.C. §301 et seq. )) and the rules and regulations promulgated thereunder by CMS, OKHCA, OSDH, and all other statutes, rules and regulations applicable to skilled nursing facilities in the state of Oklahoma, and any state laws applicable to the Accounts, any contracts relating thereto or any other Collateral, or otherwise applicable to its business and properties, a violation of which could materially adversely affect its ability to collect its Accounts or repay the Borrower’s Liabilities.

(viii) Operator and/or Manager (A) has all material permits, licenses, accreditations, registrations, certifications, authorizations , approvals, consents and agreements of all Payors, accreditation agencies, providers and any other Person, necessary or required for Operator to own the assets that it now owns, to carry on its business as now conducted, to execute, deliver and perform under this Agreement and the other Loan Documents, and to receive payments on Accounts from the applicable Payors; and (B) has not been notified by any such Payor, accreditation agency, provider or any other

Person, during the 24-month period immediately preceding the date of this Agreement, that such Person has suspended, revoked or denied renewal with respect to any such permit, license, accreditation, certification, authorization, approval, consent or provider agreement or other contract granted by it to Operator or Manager or to which it and Operator and/or Manager are parties.

(ix) Any Person that provides any healthcare services for or on behalf of Operator or Manager (either as an employee or independent contractor), including without limitation, nurses, holds the required federal, state and local licenses that are necessary to legally perform such services, which are not suspended or limited in any way; and Operator and Manager are in good standing with the respective governmental, quasi-governmental and other third party Payors and regulatory agencies that now or hereafter are expected to be involved in such healthcare activities;

(x) Operator and Manager maintain in good standing all state and local licenses, permits, registrations, certifications or other approvals required to be secured by Operator and Manager in order to conduct any healthcare activity in which it is currently engaged, including without limitation, a current license to operate a nursing home in every jurisdiction in which Operator operates a long term care facility;

(xi) None of Operator’s or Manager’s state and local licenses, permits, registrations, certifications and other approvals relating to providing healthcare services and other services provided by Operator or Manager have been suspended, revoked, limited or denied renewal at any time; and

(xii) Neither Borrower, Operator, Manager, nor the Facility is subject to a Corporate Integrity Agreement with CMS, OSDH, OKHCA, or any other federal or state governmental or quasi-governmental authority.

2.2 Continuation of Representations and Warranties . Borrower hereby covenants, warrants and agrees that the representations and warranties made in Section 2.1 hereof shall be and shall remain true and correct at the Closing Date and at all times thereafter so long as any part of the Loan shall remain outstanding.

ARTICLE 3

THE LOAN

3.1 Agreement to Borrow and Lend . Borrower agrees to borrow from Lender, and Lender agrees to lend to Borrower, an amount equal to the principal amount of the Loan on the terms of and subject to the conditions of this Agreement. Any amounts borrowed under the Loan and repaid may not be re-borrowed.

3.2 Interest . Interest on funds advanced under the Loan shall:

(a) from the Closing Date until the Maturity Date, accrue at the Loan Rate; provided, however, if Lender determines:

(i) that maintenance of the Loan accruing interest based on the interest rate applicable to dollar deposits in the London Interbank market (the “ LIBOR Rate ”) would violate any applicable law, rule, regulation or directive of any government or any division, agency, body or department thereof, whether or not having the force of law,

(ii) that by reason of circumstances affecting the interbank LIBOR market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate, or

(iii) the LIBOR Rate as determined by Lender will not adequately and fairly reflect the cost to Lender of maintaining or funding the Loan at the Loan Rate accruing interest based on the LIBOR Rate has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of Lender materially affects the Loan,

then Lender shall promptly notify Borrower, and Lender shall suspend the availability of such rate option and require the Loan to be converted to an interest rate that accurately reflects the amount of interest charged under the Note;

(b) be computed upon advances of the Loan from and including the date of such advance by Lender to or for the account of Borrower (whether to an escrow or otherwise), on the basis of a three hundred sixty (360)‑day year and the actual number of days elapsed in any portion of a month in which interest is due; and

3.3 Increased Costs; Special Provisions for LIBOR . If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the Board of Governors of the Federal Reserve System (or any successor thereto), but excluding any reserve included in the determination of the Loan Rate), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender; or (ii) shall impose on Lender any other condition affecting the Loans, the Note, or Lender’s obligation to make loans which bear interest at a rate determined by reference to interest rates applicable to dollar deposits in the London Interbank market (“ LIBOR Loans ”), and the result of anything described in clauses (i) and (ii) above is to increase the cost to

(or to impose a cost on) Lender of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by Lender under this Agreement or under the Note with respect thereto, then upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), Borrower shall pay directly to Lender such additional amount as will compensate Lender for such increased cost or such reduction.

3.4 Loan Fees . Borrower shall pay the loan fees as required pursuant to Section 3.6 of the Note.

3.5 Maturity Date . Prior to the Maturity Date, principal payments and payments of accrued interest shall be made as provided in the Note. The entire principal balance of the Note and all accrued and unpaid interest thereon shall be due, if not sooner paid, on the Maturity Date.

3.6 Intentionally Omitted .

3.7 Prepayment . Borrower may prepay the principal balance of the Loan in accordance with the terms and conditions and in the manner set forth in the Note.

3.8 Taxes .

(a) All payments made by Borrower hereunder, under the Note or under any Loan Documents shall be made without set-off, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to or for the benefit of any person shall be made by Borrower free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.

(b) If Borrower makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, Borrower shall increase the payment hereunder or under any other Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 3.8(b) ), the amount paid to Lender equals the amount that was payable hereunder or under any other Loan Document without regard to this Section 3.8(b) . To the extent Borrower withholds any Taxes on payments hereunder or under any other Loan Document, Borrower shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to Lender within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to Lender) evidencing the payment of all amounts so required to be deducted or withheld from such payment.

(c) If Lender is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against Lender with respect to amounts received or receivable

hereunder or under any other Loan Document, Borrower will indemnify Lender against (i) such Tax (and any reasonable counsel fees and expenses associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 3.8(c) . A certificate prepared in good faith as to the amount of such payment by Lender shall, absent manifest error, be final, conclusive, and binding on all parties.

3.9 Right of Lender to Fund through Other Offices . Lender may, if it so elects, fulfill its commitment as to any Loan which bears interest at a rate determined by reference to interest rates applicable to dollar deposits in the London Interbank market by causing a foreign branch or Affiliate of Lender to make the Loan, provided that in such event for the purposes of this Agreement the Loan shall be deemed to have been made by Lender and the obligation of Borrower to repay the Loan shall nevertheless be to Lender and shall be deemed held by it, to the extent of the Loan, for the account of such branch or Affiliate.

3.10 Discretion of Lender as to Manner of Funding . Notwithstanding any provision of this Agreement to the contrary, Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement, all determinations hereunder shall be made as if Lender had actually funded and maintained each Loan which bears interest at a rate determined by reference to interest rates applicable to dollar deposits in the London Interbank market through the purchase of deposits bearing an interest rate equal to the “One Month Libor Rate” (as defined in the Note).

3.11 Limitation on Charges . It being the intent of the parties that the rate of interest and all other charges to Borrower be lawful, if for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Agreement would exceed the limit which Lender may lawfully charge Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the sole option of Lender either be refunded to Borrower or credited to the principal amount of the Borrower’s Liabilities (or any combination of the foregoing) so that under no circumstances shall the interest or other charges required to be paid by Borrower hereunder exceed the maximum rate allowed by applicable law, and Borrower shall not have any action against Lender for any damages arising out of the payment or collection of any such excess interest.

ARTICLE 4

LOAN DOCUMENTS

4.1 Loan Documents . As a condition precedent to the extension of the Loan pursuant to the terms of this Agreement and the Loan Documents, Borrower agrees that it will deliver this Agreement and the following Loan Documents to Lender prior to the Closing Date, all of which must be satisfactory to Lender and Lender’s counsel in form, substance and execution:

(a) Note . The Note, executed by Borrower payable to the order of Lender.

(b) Mortgage . The Mortgage, as defined in Section 1.1 .

(d) Assignment and Pledge of Account (Replacement Reserve) Assignment and Pledge of Account (Replacement Reserve), dated as of even date herewith, by Borrower in favor of Lender, as the same may be amended and/or restated from time to time.

(e) Guaranty . The Guaranty, as defined in Section 1.1 .

(f) Environmental Indemnity . The Environmental Indemnity, as defined in Section 1.1 .

(g) Subordination and Attornment Agreement . Subordination and Attornment Agreement, dated as of even date herewith, by and between Borrower, Operator and Lender (as the same may be amended and/or restated from time to time, the “ Subordination and Attornment Agreement ”).

(h) Subordination of Management Agreement . Subordination of Management Agreement, dated as of even date herewith, by and between Manager, Operator and Lender.

(i) Tenant Estoppel Certificate . Tenant Estoppel Certificate, dated as of even date herewith, from Operator in favor of Lender.

(j) Financing Statements . Uniform Commercial Code Financing Statements as required by Lender to perfect the security interests granted hereunder.

(k) Collateral Assignments . Collateral assignments of such agreements, leases, contracts and other rights or interests of Borrower with respect to the Property as Lender may reasonably request.

(l) Other Loan Documents . Such other documents and instruments as further security for the Loan as Lender may reasonably require.

ARTICLE 5

CONDITIONS TO CLOSING

5.1 Conditions to Closing . As a condition precedent to the Closing, Borrower shall furnish the following to Lender prior to the Closing Date or at such time as is set forth below, all of which must be strictly satisfactory to Lender and Lender’s counsel in form, content and execution:

(a) Title Insurance Policy . An ALTA Loan Policy for the Real Property in the amount of $5,000,000.00 insuring the Mortgage to be a valid first lien upon the fee title to the Real Property subject only to the Permitted Exceptions (the “ Title Insurance Policy ”), issued on the date hereof by the Title Insurance Company to Lender. The Title Insurance Policy must specifically insure Lender for claims and questions related to claims for mechanics’ or materialmen’s liens and contain the following endorsements: (i) ALTA Endorsement Form 3.1 endorsement (including compliance with parking requirements) which must specifically state that the use of the Facility and the Land are “permitted uses” under the governing zoning ordinance; (ii) Survey endorsement, (iii) location endorsement; (iv) usury; (v) access endorsement; (vi) one tax parcel endorsement; (vii) if the Land consists of more than one subparcel, contiguity endorsement; (viii) environmental lien endorsement; (ix) creditor’s rights endorsement; (x) unconditional Comprehensive Endorsement No. 1; and (xi) such other endorsements as Lender may require.

(b) Insurance Policies .

(i) During the term of this Agreement, Borrower shall procure, at its expense, and keep in force such insurance coverages required by Lender (including a flood insurance policy concerning the Property if required by the Flood Disaster Protection Act of 1973). All insurance shall be in form, content and amounts approved by Lender and written by an insurance company or companies licensed to do business in the state in which the Real Property is located and domiciled in the United States. The policies for such property insurance shall have attached thereto standard mortgagee clauses in favor of and permitting Lender to collect any and all proceeds payable thereunder, and the policies for such general liability insurance shall include Lender as an additional insured, and the required policies shall include a 30 day notice of cancellation clause in favor of Lender. All policies or certificates of insurance shall be delivered to and held by Lender as further security for the payment of the Note and any other obligations arising under the Loan Documents, with evidence of renewal coverage delivered to Lender at least 30 days before the expiration date of any policy.

(ii) UNLESS BORROWER PROVIDES LENDER WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, LENDER MAY PURCHASE INSURANCE AT BORROWER’S EXPENSE TO PROTECT LENDER’S INTERESTS IN THE PROPERTY AND THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT BORROWER’S INTERESTS. THE COVERAGE THAT LENDER PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST BORROWER IN CONNECTION WITH THE PROPERTY AND THE COLLATERAL. BORROWER MAY LATER CANCEL ANY INSURANCE PURCHASED BY LENDER, BUT ONLY AFTER PROVIDING LENDER WITH EVIDENCE THAT BORROWER HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF LENDER PURCHASES INSURANCE FOR THE PROPERTY AND THE

COLLATERAL, BORROWER WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE PRINCIPAL AMOUNT OF THE LOAN OWING HEREUNDER. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.

(i) All permits, licenses, certifications, certificates of waiver, and governmental approvals (“ Permits ”) required by applicable law to use, occupy, and operate the Property, including the Facility, and all personal property and equipment thereon, and to conduct all activities thereon, have been validly issued to the proper party(ies), and are in full force and effect, and in connection therewith, on or prior to the Closing Date:

(A) Operator and/or Manager shall have all Medicare, Medicaid and related agency certifications and private organization accreditations necessary to operate the Facility, and shall be in material compliance with all Medicare and Medicaid statutory and regulatory requirements;

(B) Operator and/or Manager shall have all Medicare, Medicaid and related agency provider number(s), supplier billing number(s) and Medicare and/or Medicaid provider and/or participation agreements necessary to submit reimbursement claims to Medicare and/or Medicaid in connection with the operations of the Facility; and

(C) Operator and/or Manager shall have (A) a nursing home facility license from OSDH, effective as of the Closing Date, with a licensed bed capacity equal to the number of the Facility’s nursing home beds, and (B) all other regulatory approvals that are required by any governmental or quasi-governmental authority in order to operate the Facility under applicable law and to bill the Medicare and Medicaid reimbursement programs for the services rendered at the Facility;

(ii) the storm and sanitary sewage disposal system, the water system and all mechanical systems serving the Property comply with all applicable laws, ordinances, rules and regulations, including Environmental Laws; and

(iii) all utility, parking, access (including curb‑cuts and highway access), recreational and other easements and permits required or necessary for the ownership, occupancy, and use of the Property have been granted or issued.

(d) Operating Approvals . Evidence satisfactory to Lender that Borrower and Operator have obtained all other applicable licenses, certifications, permits, approvals, regulatory consents, and Governmental Authorization for the ownership, operation, and use of the Facility and the other Property.

(e) Environmental Report . A written report (“ Environmental Report ”) prepared at Borrower’s sole cost and expense by an independent professional environmental consultant approved by Lender in its sole and absolute discretion. The Environmental Report shall be subject to Lender’s approval in its sole and absolute discretion. If the Environmental Report reveals contamination or conditions warranting further investigation in order to establish baseline data, Lender may require, in its sole and absolute discretion, a written report (also referred to herein as the “ Environmental Report ”) based on additional testing and investigation in order to define the source and extent of the contamination or to establish baseline data, as well as to provide relevant detailed information on the area’s geological and hydrogeological conditions. Any additional Environmental Report prepared pursuant to this requirement shall be subject to Lender’s approval, in its sole and absolute discretion.

(f) Appraisal . An appraisal of the Real Property, prepared at Borrower’s sole cost and expense, satisfactory and addressed to Lender prepared by a certified or licensed appraiser who is approved by Lender. The appraisal must show an appraised value of the Real Property such that the ratio of the principal amount advanced by Lender under the Note to the appraised value of the Real Property shall be no more than eighty percent (80.0%).

(g) Property Condition Report . A property condition report ordered by Borrower and prepared at Borrower’s sole cost and expense by an independent consultant approved by Lender in its sole and absolute discretion, and which shall be subject to Lender’s approval in its sole and absolute discretion.

(h) Documents of Record . Copies of all covenants, conditions, restrictions, easements and matters of record which affect the Property.

(i) Searches . A report from the appropriate filing offices of the state and county in which the Land is located, indicating that no judgments, tax or other liens, security interests, leases of personalty, financing statements or other encumbrances (other than Permitted Exceptions and liens and security interests in favor of Lender) are of record or on file encumbering any portion of the Land or any of the other Property or any of the stock or equity interests of Operator or Borrower, and that there are no judgments, tax liens, pending litigation or bankruptcy actions outstanding with respect to Borrower or Operator.

(j) Borrower’s Attorney’s Opinion . An opinion of counsel for Borrower and the other Credit Parties, and local counsel, as required by Lender, dated as of the Closing

Date, addressing such issues as Lender may request in form and substance acceptable to Lender and its counsel, including the following propositions and questions of law:

(i) that Borrower and Operator are duly organized, validly existing and in good standing to do business in the state of Georgia and qualified to do business in the state of Oklahoma;

(ii) that each Credit Party has all necessary legal right, power and authority to conduct its business and to enter into and perform its obligations under this Agreement and the Loan Documents to which it is a party;

(iii) that all necessary manager, membership, partner, officer, director or shareholder approvals, resolutions and directions of each Credit Party have been obtained for the ownership and lease of the Property and the execution of this Agreement and the Loan Documents to which it is a party;

(iv) that the execution and delivery of this Agreement and the Loan Documents, and the performance thereunder by Borrower and the other Credit Parties will comply with all applicable laws and will not violate or conflict with the instruments under which Borrower or any Credit Party is organized or any applicable contracts or agreements;

(v) that the Loan Documents and this Agreement have been duly and validly executed and delivered, are enforceable in accordance with their respective terms (subject to bankruptcy laws and laws pertaining to the exercise of creditors’ rights generally) and are subject to no defenses of any kind;

(vi) that the making of the Loan, and the charging of all interest and fees due thereunder do not violate any usury or consumer credit laws;

(vii) that if permitted by the laws of the state of Oklahoma, Borrower has effectively waived in the Mortgage any rights of redemption from a decree or order foreclosing the Mortgage on behalf of itself and all persons claiming through Borrower;

(viii) the security interests granted by Borrower in the Collateral shall be validly created and perfected so that at the Closing Date, Lender shall have a perfected first lien and security interest in the Collateral; and

(ix) such other matters as reasonably requested by Lender.

(k) Organizational/Corporate Documents . From Borrower, (i) a copy of its operating agreement, certified by a manager, as being a true and correct copy and as otherwise unmodified and in full force and effect as of the Closing Date, (ii) a Certificate of Good

Standing from the states of Georgia and Oklahoma, issued not more than 30 days before the Closing Date, (iii) a recently certified copy of the Articles of Organization, including all amendments thereto, (iv) a certificate from a manager dated as of the Closing Date, providing that no certificate of dissolution has been filed, (v) an incumbency certificate showing specimen signatures for the manager authorized to execute any Loan Documents and (vii) certified copies of resolutions from the members or managers, as applicable, authorizing execution and delivery of the Loan Documents.

From Operator: (i) a copy of its operating agreement, certified by a manager, as being a true and correct copy and as otherwise unmodified and in full force and effect as of the Closing Date, (ii) a Certificate of Good Standing from the states of Georgia and Oklahoma, issued not more than 30 days before the Closing Date, (iii) a recently certified copy of the Articles of Organization, including all amendments thereto, (iv) a certificate from a manager dated as of the Closing Date, providing that no certificate of dissolution has been filed, (v) an incumbency certificate showing specimen signatures for the manager authorized to execute any Loan Documents and (vii) certified copies of resolutions from the members or managers, as applicable, authorizing execution and delivery of the Loan Documents.

(l) Operating Lease . A certified copy of the Operating Lease and such evidence as to the validity thereof, absence of defaults thereunder, and such subordination and attornment agreement and estoppel letter from Operator, all as Lender may require.

(m) Real Estate Taxes . Copies of the most recent real estate tax bills (or other evidence satisfactory to Lender of the amount of such taxes for the most recent bills) for the Land, evidence satisfactory to Lender that there are no outstanding real estate tax bills that are unpaid beyond their due dates, and evidence satisfactory to Lender that the Land is separately assessed for real estate taxing purposes.

(n) Broker . Evidence satisfactory to Lender that all brokers’ commissions or fees due with respect to the Loan or the Property, if any, have been paid in full in cash.

(o) Payment of Fees . Evidence of payment by Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all reasonable attorneys’ costs of Lender to the extent invoiced prior to the Closing Date, plus such additional amounts of reasonable attorneys’ costs as shall constitute Lender’s reasonable estimate of attorneys’ costs incurred or to be incurred by Lender through the closing proceedings (provided that thereafter there shall be a final settling of accounts between Borrower and Lender).

(p) Reserved .

(q) Replacement Reserve . Borrower shall, or shall cause Operator to, deposit monthly an amount equal to 1/12 ^th of an amount equal to $400.00 per bed annually into the Replacement Reserve Account and an amount equal to [$3,934.00] at Closing.

(r) Additional Documents . Such other papers and documents regarding Borrower or the Property as Lender may require.

5.2 Termination of Agreement . Borrower agrees that all conditions precedent to the Closing will be complied with on or prior to the Closing Date. If all of the conditions precedent to the Closing hereunder shall not have been performed on or before the Closing Date, Lender may terminate this Agreement and all of its obligations hereunder by giving a written notice of termination to Borrower. In the event of such termination, Borrower shall pay all Loan Expenses which have accrued or been charged as of the Closing Date.

ARTICLE 6

DISBURSEMENTS

6.1 Conditions Precedent to Disbursement of Loan Proceeds . No disbursement of Loan Proceeds shall be made by Lender to Borrower at any time unless:

(a) all conditions precedent to that disbursement have been satisfied, including, without limitation, performance of all of the then-pending obligations of Borrower under this Agreement and the Loan Documents;

(b) no Event of Default has occurred under this Agreement or under any Loan Document, and no event, circumstance or condition has occurred or exists which, with the passage of time or the giving of notice, would constitute an Event of Default under this Agreement or under the Loan Documents;

(c) no litigation or proceedings are pending or threatened (including proceedings under Title 11 of the United States Code) against Borrower, Operator or the Property, which litigation or proceedings, in the sole and exclusive judgment of Lender, is material; and

(d) all representations and warranties made to Lender herein and otherwise in connection with the Loan continue to be true, accurate and complete.

6.2 Loan Disbursement . Subject to the satisfaction of the terms and conditions herein contained, the Loan Proceeds shall be disbursed as follows:

(a) The Closing shall take place at such time as all of the conditions and requirements of this Agreement required to be performed by Borrower or other parties prior to the Closing have been satisfied or performed; but in no event shall the Closing occur later than the Closing Date. At the Closing, Borrower shall provide to Lender funds necessary to pay any Loan Expenses then due, or Lender shall deduct such Loan Expenses from Borrower’s account with Lender.

(b) If any disbursement of Loan Proceeds is made by Lender into an escrow, those Loan Proceeds shall be considered to be disbursed to Borrower from the date of deposit into that escrow, and interest shall accrue on those Loan Proceeds from that date.

(c) Borrower hereby requests and authorizes Lender to make advances directly to itself, or to deduct from Borrower’s account with Lender, for payment and reimbursement of all interest, charges, costs and expenses incurred by Lender in connection with the Loan (to the extent not otherwise paid by Borrower), including, but not limited to, (i) interest due on the Loan and any points, loan fees, service charges, commitment fees or other fees due to Lender in connection with the Loan; (ii) all title examination, survey, escrow, filing, search, recording and registration fees and charges; (iii) all documentary stamp and other taxes and charges imposed by law on the issuance or recording of any of the Loan Documents; (iv) all appraisal fees; (v) all title insurance premiums; (vi) all fees and disbursements of legal counsel engaged by Lender in connection with the Loan, including, without limitation, counsel engaged in connection with the enforcement or administration of this Agreement or any of the Loan Documents; and (vii) any amounts required to be paid by Borrower under this Agreement, the Note, the Mortgage or any Loan Document after the occurrence of an Event of Default (all of which are herein referred to as “ Loan Expenses ”).

6.3 Documents Required for Disbursement . Prior to, and as a condition of, the disbursement of any Loan Proceeds of the Loan, Borrower shall furnish to Lender Borrower’s written disbursement request (“ Disbursement Request ”), which shall direct Lender to disburse such funds in accordance with this Agreement and certifies to Lender, as of the date of the applicable request for disbursement, that:

(a) no Event of Default, or condition or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, exists under this Agreement;

(b) the representations and warranties contained in Article 2 of this Agreement are true and correct; and

(c) Borrower has received no notice and has no knowledge of any liens or claims of lien either filed or threatened against the Property except the liens of Lender and those which are specifically identified in writing to Lender.

6.4 Expenses and Advances Secured by Mortgage . Any and all advances or payments made by Lender hereunder, from time to time, and any amounts expended by Lender pursuant to this Agreement, together with reasonable attorneys’ fees, if any, and all other Loan Expenses, as and when advanced or incurred, shall be deemed to have been disbursed as part of the Loan and be and become secured and guaranteed by the Loan Documents to the same extent and effect as if the terms and provisions of this Agreement were set forth therein, whether or not the aggregate of such indebtedness shall exceed the face amount of the Note.

6.5 Post-Closing Items . Borrower agrees to promptly deliver any documents, certificates or other items, if any, after the Closing Date per a post-closing letter in form and substance satisfactory to Lender, and such items shall not be deemed waived by Lender.

6.6 Lender’s Action for Lender’s Own Protection Only . The authority herein conferred upon Lender and any action taken by Lender or its agents or employees in making inspections of the Property will be taken by Lender and by its agents or employees for its own protection only, and neither Lender nor its agents or employees shall be deemed to have assumed any responsibility to any Credit Party or any other person or entity with respect to the Property.

ARTICLE 7

RESERVES

7.1 Setting Up and Adjusting Reserves . At the Closing, Lender may demand from Borrower or deduct from Borrower’s account with Lender all Loan Expenses, to the extent the same have not been previously paid. After the occurrence of an Event of Default, Lender may also designate reserves (“ Reserves ”), and thereafter from time to time in its reasonable discretion may adjust the amount of such Reserves as circumstances may require for any or all of the following purposes to cover the actual or estimated amounts required for such purposes until the Maturity Date of the Loan:

(a) All unpaid Loan Expenses and fees of Lender’s consultants and Lender’s counsel;

(b) An amount, as estimated by Lender, to provide for the payment of interest on the Loan prior to the Maturity Date;

(c) An amount, as estimated by Lender and not to exceed 1.05% of the most recent tax statement, for real estate taxes which will accrue prior to the Maturity Date and for tax deposits, if any, required by the Mortgage;

(d) An amount, as reasonably estimated by Lender, for premiums on insurance policies required to be furnished by Borrower hereunder, payable prior to the Maturity Date and for insurance deposits, if any, required by the Mortgage;

(e) Funds to pay any license fees, mortgage or lease guaranty insurance premiums, permits and other charges and fees.

7.2 Disbursement of Reserves . Provided that (i) no Event of Default hereunder has occurred and is continuing, and (ii) no event or circumstance has occurred which, with the passage of time, the giving of notice, or both, could constitute an Event of Default, Lender may, and at the request of Borrower shall, disburse the Reserves for the respective purposes for which they have

been set aside, either by payment of items for which the Reserves have been set aside, or by reimbursement to Borrower for payments so made by Borrower.

7.3 No Interest Payable on Reserves . No interest shall accrue upon Reserves held by Lender until disbursement thereof. Payments by Lender into an escrow or title indemnity or otherwise for the benefit of Borrower or to satisfy any requirements of the Title Company shall be deemed a disbursement.

7.4 Application of Reserves in Case of Event of Default . In case of an Event of Default, Lender may use and apply Reserves or any monies deposited by Borrower with Lender, regardless of the purpose for which deposited, to cure such Event of Default or to apply as a prepayment of the Loan.

7.5 Repair and Remediation Reserve .

(a) Prior to the execution of this Loan Agreement, Lender has caused the Property to be inspected and such inspection has revealed that the Property is in need of certain maintenance, repairs and/or remedial or corrective work, as more particularly described in those certain engineering reports (collectively, the “ Engineering Report ”) dated August 27, 2013 and prepared by IVI Assessment Services, Inc. (the “ Required Work ”). Borrower acknowledges it has received and reviewed the Engineering Report.

(b) Contemporaneously with the execution of this Loan Agreement, Borrower has established with Lender a reserve in the amount of $9,757.00 (the “ Repair and Remediation Reserve ”), which amount represents 110% of the estimated cost to complete the Required Work. If, at any time, Lender determines that the amount on deposit or available in the Repair and Remediation Reserve is inadequate to pay the costs of the Required Work, Borrowers shall, within 10 days after receipt of written notice thereof, deposit with Lender the full amount of any such deficiency.

(c) Borrowers shall cause the Required Work to be completed, performed, remediated and corrected to the reasonable satisfaction of Lender and as necessary to bring the Property into compliance with all applicable laws, ordinances, rules and regulations on or before 24 months from the date of this Loan Agreement, as such time period may be extended in writing by Lender in its sole discretion.

(d) So long as no Default has occurred and is continuing and no Event of Default has occurred (i) all sums in the Repair and Remediation Reserve shall be held by Lender in the Repair and Remediation Reserve to pay the costs and expenses of completing the Required Work, and (ii) Lender shall, to the extent funds are available for such purpose in the Repair and Remediation Reserve, disburse to Borrowers the amount paid or incurred by Borrowers in completing, performing, remediating or correcting the Required Work upon (A) the receipt by Lender of a written request from Borrowers for disbursement from the Repair and Remediation Reserve that shall include a certification by Borrowers that the applicable item of Required Work has been completed in accordance with the terms of this Loan Agreement, (B) delivery to Lender of invoices, receipts or other evidence satisfactory to Lender verifying the costs of the Required Work to be reimbursed,

(C) for any single Required Work item in excess of $50,000 (or for any Required Work item structural in nature) and prior to disbursement of the final $50,000, delivery to Lender of a certification from an inspecting architect, engineer or other consultant reasonably acceptable to Lender describing the completed work, verifying the completion of the work and the value of the completed work and, if applicable, certifying that such work has been completed in compliance with all applicable laws, ordinances, rules and regulations relating to the Required Work so performed, and (D) delivery to Lender of affidavits, lien waivers or other evidence reasonably satisfactory to Lender showing that all materialmen, laborers, subcontractors and any other parties who might or could claim statutory or common law liens and are furnishing or have furnished materials or labor to the Property have been paid all amounts due for such labor and materials furnished to the Property. Lender shall not be required to make disbursements from the Repair and Remediation Reserve more frequently than one time in any calendar month. In making any disbursement from the Repair and Remediation Reserve, Lender shall be entitled to rely on such request from Borrowers without any inquiry into the accuracy, validity or contestability of any such amount.

ARTICLE 8

COLLATERAL: GENERAL TERMS

8.1 Grant of Security Interest . To secure the prompt payment of Borrower’s Liabilities, the prompt, full and faithful performance by Borrower of all of the provisions to be kept, observed or performed by Borrower under this Agreement and/or the other Loan Documents, Borrower does hereby pledge, assign, transfer and deliver to Lender, and grants to Lender, a security interest in and to and a first lien (subject only to the Permitted Exceptions) on, all of Borrower’s property of any kind or description, tangible or intangible, of whatever description, whether now existing and/or owned and hereafter arising and/or acquired, wherever located, including, but not limited to, the following: (a) the Accounts, (b) liens, guaranties and other rights and privileges pertaining to the Accounts; (c) all books, records and computer records in any way relating to the Accounts; (d) all General Intangibles of Borrower (including without limitation inventions, designs, patents, patent applications, trademarks, trade names, copyrights, licenses, leasehold interests, tax refund claims, guaranty claims and security interests or other security held by Borrower); (e) all Inventory of Borrower, including without limitation finished goods, returned and repossessed goods, raw materials, and work in progress; (f) all goods, equipment, systems, devices, apparatus, vehicles, furniture and fixtures, together with accessions thereto and replacement parts therefore, and all other items of personal property now or hereafter acquired by Borrower, or in which Borrower may now or hereafter have any interest whatsoever; (g) all monies, reserves, deposits, deposit accounts and interest or dividends thereon, securities, cash, cash equivalents, and other property now or at any time or times hereafter in the possession, or under the control, of Lender or its bailee; (h) liens, guaranties and other rights and privileges pertaining to any of the foregoing; (i) all books, records and computer records in any way relating to the foregoing; (j) all other assets of Borrower whether real, personal, tangible or intangible or mixed, now existing or hereafter acquired, created, built or otherwise coming into being; (k) all licenses, permits or waivers issued by any governmental or quasi-governmental authority to or for the benefit of Borrower that are necessary or useful in connection with the ownership of the Property; (l) interests of Borrower in commercial tort claims

(as defined in the UCC), (m) all accessions, substitutions, renewals, improvements and replacements of and additions to the foregoing; (n) the Land and all improvements, furniture and fixtures now or hereafter thereon located at the Real Property, pursuant to the Mortgage; (o) the Operating Lease; and (p) all products and proceeds of the foregoing including, without limitation, proceeds of insurance policies insuring the same (all of the foregoing personal property and real property is hereinafter sometimes individually and sometimes collectively referred to as “ Collateral ”). This Agreement shall constitute a security agreement, creating a security interest in such Collateral, as collateral, in Lender, as a secured party, and Borrower, as Debtor, all in accordance with the UCC. Borrower shall make appropriate entries upon its financial statements and books and records disclosing Lender’s security interest in the Collateral.

8.2 Perfection of Security Interests . Borrower shall execute and/or deliver to Lender, at Borrower’s expense, at any time and from time to time hereafter at the request of Lender, all agreements, instruments, financing statements, authorizations, documents and other written documents (sometimes hereinafter individually and collectively referred to as “ Supplemental Documentation ”) that Lender reasonably may request, in form and substance acceptable to Lender, to perfect and maintain as perfected Lender’s security interest in the Collateral and to consummate the transactions contemplated in or by this Agreement and the other Loan Documents. Borrower irrevocably hereby makes, constitutes and appoints Lender (and all Persons designated by Lender for that purpose) as Borrower’s true and lawful attorney and agent-in-fact to sign the names of Borrower on the Supplemental Documentation and to deliver the Supplemental Documentation to such Persons as Lender may reasonably elect in the event that Borrower shall fail promptly to provide the same upon request of Lender, and to file in any jurisdiction any initial financing statements and amendments thereto that (i) indicate the Collateral as all assets of Borrower (or words of similar effect), regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or as being of an equal or lesser scope or within greater detail, and (ii) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including whether Borrower is an organization, the type of organization, and any organization identification number issued to Borrower, and in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. Borrower agrees that a carbon, photographic or photostatic copy or other reproduction of this Agreement or of any financing statement shall be sufficient as a financing statement. Borrower hereby authorizes and acknowledges Lender’s filing of any Financing Statements prior to the date hereof.

8.3 Inspection of Collateral . Lender (by any of its officers, employees and/or agents) shall have the right, at reasonable times and upon notice to an Authorized Officer prior to the occurrence of an Event of Default, and after the occurrence of an Event of Default, at any time or times, to inspect the Property and the Collateral; and to visit any or all of Borrower’s offices to discuss its financial matters with its officers and its independent auditors (and Borrower hereby authorizes such independent auditors to discuss such financial matters with Lender or any representative thereof), and to examine (and, at the expense of Borrower, photocopy extracts from)

any of its books or other records; to perform appraisals of the tangible assets of Borrower, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other Collateral. All such inspections or audits by Lender shall be at Borrower’s expense, provided that so long as no Default or Event of Default exists, Borrower shall not be required to reimburse Lender for inspections or audits more frequently than once each fiscal year. Borrower’s obligation to pay such costs shall constitute part of Borrower’s Liabilities, payable by Borrower to Lender on demand.

8.4 First Lien and Locations of Collateral . Borrower warrants and represents to, and covenants with, Lender that: (a) as of the Closing Date, Lender’s security interest in the Collateral is, and at all times thereafter shall be, perfected and have a first priority; (b) the offices and/or locations where Borrower keeps the Collateral consisting of personal property and books and records concerning the Collateral are located solely at the Real Property and at Borrower’s office as listed in Section 16.9 hereof, and Borrower shall not remove such books and records and/or the Collateral therefrom and shall not keep any of such books and records and/or the Collateral at any other office or location without the prior written consent of Lender; and (c) as of the Closing Date, Borrower’s sole office and place of business is the Real Property and at those locations as set forth in Section 16.9 . An Authorized Officer, by written notice delivered to Lender at least thirty (30) days prior thereto, shall advise Lender of Borrower’s opening of any new office or place of business or its closing of any existing office or place of business and any new office or place of business shall be within the continental United States of America. There are no Liens on the Collateral other than the Liens of Lender pursuant hereto, and any Permitted Exceptions.

8.5 Leases . To the extent permitted by applicable law, the security interest created hereby is specifically intended to cover all Leases between Borrower or its agents as lessor, and various tenants named therein, as lessee, including all extended terms and all extensions and renewals of the terms thereof, as well as any amendments to or replacement of said Leases, together with all of the right, title and interest of Borrower, as lessor thereunder.

8.6 Ownership; Authority; Use . Borrower is and will be the true and lawful owner of the Collateral and has rights in, and the power to transfer, the Collateral, subject to no liens, charges or encumbrances other than the lien hereof, other liens and encumbrances benefiting Lender and no other party, and liens and encumbrances, if any, expressly permitted by the other Loan Documents. The Collateral is to be used by Borrower solely for business purposes.

8.7 Third Parties; Control . Borrower agrees that where Collateral is in possession of a third party, Borrower will join with Lender in notifying the third party of Lender’s interest and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of Lender. Borrower will cooperate with Lender in obtaining control with respect to Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper.

8.8 Constructive Trust . After the occurrence of an Event of Default, Borrower shall receive, as the sole and exclusive property of Lender, and as trustee for Lender, all monies, checks,

drafts and all other payment for and/or proceeds of Collateral which come into the possession or under the control of Borrower (or any of its managers, owners, partners, shareholders, directors, officers, employees, agents or those Persons acting for or in concert with Borrower) and upon Lender’s election, immediately upon receipt thereof, Borrower shall remit the same (or cause the same to be remitted), in kind, to Lender at Lender’s office listed in Section 16.9 below.

8.9 Application of Proceeds of Collateral . Upon the occurrence of an Event of Default, Lender, at any time or times in its sole and absolute discretion, may take control of, in any manner, and may endorse Borrower’s name, as appropriate, on, any of the items of payment or proceeds described in Section 8.8 above and, pursuant to the provisions of this Agreement, Lender may, in its sole and absolute discretion, apply the same to and on account of Borrower’s Liabilities. For the purposes of this Section 8.9 , Borrower hereby irrevocably makes, constitutes and appoints Lender (and all persons designated by Lender for such purpose) as Borrower’s true and lawful attorney and agent-in-fact with power, without notice to Borrower, to take any such actions.

8.10 Possession and Sale of Collateral . Upon an Event of Default hereunder, Lender shall have the remedies of a “Secured Party” under the UCC, including, without limitation, the right to take immediate and exclusive possession of the Collateral, or any part thereof, and for that purpose, so far as Borrower can give authority therefor, with or without judicial process, may enter (if this can be done without breach of the peace) upon any place on which the Collateral or any part thereof may be situated and remove the same therefrom (provided that if the Collateral is affixed to real estate, such removal shall be subject to the conditions stated in the Uniform Commercial Code); and Lender shall be entitled to hold, maintain, preserve and prepare the Collateral for sale, until disposed of, or may propose to retain the Collateral subject to Borrower’s right of redemption, if any, in satisfaction of Borrower’s obligations, as provided in the UCC. Lender may render the Collateral unusable without removal and may dispose of the Collateral on the Real Property.

8.11 Waiver; Deficiency . Borrower waives and agrees not to assert any rights or privileges which it may acquire under Section 9-626 of the UCC. Borrower shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Borrower’s Liabilities in full and the fees and disbursements of any attorneys employed by Lender to collect such deficiency.

8.12 Third Party Collateral Claims . After the occurrence of an Event of Default, Lender, in its sole and absolute discretion, without waiving or releasing any Event of Default or obligation, liability, or duty of Borrower under this Agreement or the other Loan Documents, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance, or claim asserted by any Person against the Collateral. All sums paid by Lender in respect thereof and all costs, fees and expenses, including reasonable attorneys’ fees, court costs, expenses and other charges relating thereto that are incurred by Lender on account thereof shall be part of Borrower’s Liabilities payable by Borrower to Lender on demand.

8.13 Additional Collateral . Upon the occurrence of an Event of Default, Lender may, in its sole and absolute discretion, retain as additional Collateral or release to Borrower, from time

to time, such portion of the monies, reserves and/or proceeds received by Lender with respect to the Collateral as Lender may determine. All such monies, reserves, proceeds and other property of Borrower in the possession of Lender at any time or times hereafter are hereby pledged by Borrower to Lender as additional Collateral hereunder and may be applied by Lender on account of Borrower’s Liabilities.

8.14 No Custom or Waiver . No authorization given by Lender pursuant to this Agreement or the other Loan Documents to sell any specified portion of Collateral or any items thereof, and no waiver by Lender in connection therewith shall establish a custom or constitute a waiver of the limitation contained in this Agreement against such sales, with respect to any of the Collateral or any item thereof not covered by said authorization.

8.15 Appointment as Attorney-in-Fact . Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender), upon the occurrence of an Event of Default and if Lender is exercising its rights to take possession of the Collateral, as Borrower’s true and lawful attorney and agent-in-fact, with power, without notice to Borrower and at such time or times hereafter as Lender, in its sole and absolute may determine, in Borrower’s or Lender’s name: (a) to demand or enforce payment with respect to any of the Collateral by legal proceedings or otherwise; (b) to exercise all of Borrower’s rights and remedies with respect to the Collateral; (c) to settle, adjust, compromise, extend or renew the Collateral; (d) to settle, adjust or compromise any legal proceedings brought to collect the Collateral; (e) to sell or assign the Collateral upon such terms, for such amounts, and at such time or times as Lender deems advisable; (f) to discharge and release the Collateral; (g) to take control, in any manner, of any item of payment or proceeds referred to in Section 8.8 above; (h) to prepare, file and sign Borrower’s name on any notice of lien, assignment, satisfaction of lien or similar document in connection with the Collateral; (i) to prepare, file and sign Borrower’s name on any proof of claim in bankruptcy or similar document against any Obligor; (j) to do all acts and things necessary, in Lender’s sole discretion, to fulfill all of Borrower’s obligations under this Agreement; (k) to endorse the name of Borrower upon any of the items of payment or proceeds referred to in Section 8.8 above and to deposit the same to the account of Lender on account of Borrower’s Liabilities; (l) to endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Collateral; and (m) to sign the name of Borrower to verifications of the Collateral and notices thereof to Obligors.

8.16 Duty of Lender . Lender’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as Lender deals with similar property for its own account. Neither Lender nor any of its respective officers, directors, employees or agents shall be liable for any failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Borrower or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on Lender hereunder are solely to protect Lender’s interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Borrower for any act (except to the extent

any such acts constitute gross negligence or willful misconduct on the part of Lender) or failure to act hereunder.

8.17 Releases .

(a) At such time as the Borrower’s Liabilities have been paid and performed in full, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of Lender and Borrower hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to Borrower. At the request and sole expense of Borrower following any such termination, Lender shall deliver to Borrower any Collateral held by Lender hereunder, and execute and deliver to Borrower such documents as Borrower shall reasonably request to evidence such termination.

(b) If any of the Collateral shall be sold, transferred or otherwise disposed of by Borrower in a transaction permitted by this Agreement, then Lender, at the request and sole expense of Borrower, shall execute and deliver to Borrower all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral.

ARTICLE 9

Intentionally omitted.

ARTICLE 10

Intentionally omitted.

ARTICLE 11

FURTHER AGREEMENTS OF BORROWER

11.1 Maintenance of Existence, etc . Borrower shall maintain and preserve, and cause each other Credit Party to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).

11.2 Mechanics’ Liens, Taxes and Contest Thereof . Borrower agrees that it will not suffer or permit any mechanics’ lien claims to be filed or otherwise asserted against the Property and will promptly discharge the same in case of the filing of any claims for lien or proceedings for the enforcement thereof, and will pay all special assessments which have been placed in collection and all real estate taxes and assessments of every kind (regardless of whether the same are payable

in installments) upon the Property, before the same become delinquent; provided, however, that Borrower shall have the right to contest in good faith and with reasonable diligence the validity of any such lien, claim, tax or assessment if the right to contest such matters is expressly granted in the Mortgage. If Borrower shall fail promptly either to discharge or to contest claims, taxes or assessments asserted or give security or indemnity in the manner provided in the Mortgage, or having commenced to contest the same, and having given such security or indemnity, shall fail to prosecute such contest with diligence, or to maintain such indemnity or security so required by the Mortgage, or upon the adverse conclusion of any such contest, to cause any judgment or decree to be satisfied and lien to be released, then and in any such event Lender may, at its election (but shall not be required to), procure the release and discharge of any such claim and any judgment or decree thereon and, further, in its sole discretion, effect any settlement or compromise of the same. Any amounts so expended by Lender, including premiums paid or security furnished in connection with the issuance of any surety bonds, shall be deemed to constitute disbursement of the proceeds of the Loan hereunder. In settling, compromising, discharging or providing indemnity or security for any claim for lien, tax or assessment, Lender shall not be required to inquire into the validity or amount thereof.

11.3 Fixtures and Personal Property . Subject to the rights of Lender as the holder of the first mortgage on the Property and the Permitted Exceptions, and except for the security interest granted to Lender, Borrower agrees that all of the personal property, fixtures, attachments, furnishings and equipment delivered in connection with the use, operation, ownership of the Property will be kept free and clear of all chattel mortgages, vendor’s liens, and all other liens, claims, encumbrances and security interests whatsoever, and that Borrower will be the absolute owner of said personal property, fixtures, attachments and equipment. Borrower, on request, will furnish Lender with satisfactory evidence of such ownership, and of the terms of purchase and payment therefor.

11.4 Proceedings to Enjoin or Prevent Use . If any proceedings are filed or are threatened to be filed seeking to (a) enjoin or otherwise prevent or declare invalid or unlawful the use, occupancy, maintenance or operation of the Property or any portion thereof; (b) adversely affect the validity or priority of the liens and security interests granted Lender hereby; or (c) adversely affect the financial condition of Borrower or Operator or the ability of Borrower to own, or the ability of Borrower or Operator to operate, the Property, then Borrower will immediately notify Lender of such proceedings, and within two (2) Business Days following Borrower’s notice of such proceedings, Borrower will cause such proceedings to be vigorously contested in good faith, and in the event of an adverse ruling or decision, prosecute all allowable appeals therefrom. Without limiting the generality of the foregoing, Borrower will resist the entry or seek the stay of any temporary or permanent injunction that may be entered, and use its best efforts to bring about a favorable and speedy disposition of all such proceedings.

11.5 Furnishing Information . Borrower shall:

(a) cooperate with Lender in arranging for inspections by representatives of Lender of the Property as may, from time to time, be requested;

(b) promptly supply Lender with such information concerning its assets, liabilities and affairs, and the assets, liabilities and affairs of any Credit Party or Manager, as Lender may reasonably request from time to time hereafter; which shall specifically include, without need for request from Lender, as soon as available and in no event later than 120 days after fiscal year-end, internally prepared and reviewed financial statements, prepared in accordance with GAAP of Borrower and Operator as at the end of such fiscal year and certified by an Authorized officer, beginning with financial statements for the fiscal year ending December 31, 2013, together with independent certified public accountant-prepared and reviewed financial statements, prepared in accordance with GAAP, including therein balance sheets and statements of earnings, payor mix and cash flows of Guarantor as at the end of such fiscal year, certified without adverse reference to going-concern value and without qualification by an independent certified public accountant firm of recognized standing, selected by a Credit Party and reasonably acceptable to Lender, beginning with the financial statements for the fiscal year ending December 31, 2013;

(c) promptly supply to Lender within forty-five (45) days after the end of each fiscal quarter, balance sheets of Operator and Borrower as of the end of such quarter, together with statements of earnings and payor mix (with respect to Operator), prepared in accordance with GAAP and certified by an Authorized Officer, beginning with the financial statements for the month ending September 2013;

(d) accompanying each set of annual statements delivered pursuant to Section 11.5(b) and each set of quarterly statements delivered pursuant to Section 11.5(c) , a duly completed quarterly compliance certificate in the form set forth as Exhibit B hereto, dated the date of such annual statements or such quarterly statements, which certificate shall state that (i) Borrower and Operator are in compliance in all material respects with all covenants contained in this Agreement, (ii) that no Default or Event of Default has occurred or is continuing, or, if there is any such event, describing such event, the steps, if any, that are being taken to cure it, and the time within which such cure will occur and (iii) except for actions taken as permitted by this Agreement, all representations and warranties made by Borrower herein continue to be true as of the date of such certificate, except as set forth therein, and such certificate shall be signed by an Authorized Officer and shall also contain, in a form and with such specificity as is reasonably satisfactory to Lender, a calculation of each of the financial covenants described in Sections 11.18 (a), (b) and (c) of this Agreement;

(e) (i) within 30 days after the required filing date (including all extensions) with the appropriate taxing authority or any extensions thereof, copies of all federal tax returns of Borrower and Operator;

(f) as soon as available and in no event later than fifteen (15) days after receipt by Borrower or Operator or Manager, provide Lender with a true and correct copy of (i) every annual and life safety code survey of the Facility, (ii) every complaint survey of the Facility alleging a violation with a Substandard Quality of Care, as defined by federal regulations (i.e., deficiencies under 42 CFR 483.13 or 42 CFR 483.25 with scope and severity levels of F, G, H, I, J, K or L), along with any plans of correction submitted by Operator or

Manager in connection therewith, and correct or cause to be corrected any such deficiency or violation within the time period required for cure by such agency, subject to such agency’s normal appeal process, if any such deficiency or violation is reasonably likely to adversely affect either the right to continue participation in Medicare, Medicaid or other reimbursement programs for existing patients or the right to admit new Medicare patients, Medicaid patients or other reimbursement program patients or result in the loss or suspension of any of Borrower’s or Operator’s licenses and permits to operate such Borrower’s or Operator’s business; (iii) any fines assessed by OKHCA or OSDH, (iv) any notice from the OSDH, OKHCA, the Medicaid program as administered in the state of Oklahoma, Centers for Medicare and Medicaid Services or any other federal or state governmental or quasi-governmental authority terminating or revoking or threatening to terminate or revoke the Facility’s nursing home facility license, or any other material license, certification, waiver or accreditation of Borrower or Operator or Manager; and (v) any notice from the Medicaid program, as administered in the state of Oklahoma, CMS, or any other governmental, quasi-governmental or other Payor source alleging that overpayments have been made to Operator or Manager or that Operator or Manager has overbilled such Payor source, and/or demanding repayment or recoupment of monies previously paid to Operator or Manager;

(h) if requested by Lender, within thirty (30) Business Days of the required date of filing or within thirty (30) Business Days of the date of actual filing, whichever is earlier, complete and accurate copies of any annual or interim cost reports filed with Medicaid, as administered in the state of Oklahoma, Medicare, CMS or other applicable program or any other governmental or quasi-governmental agency by or on behalf of Borrower or Operator or Manager, which reports will be prepared by an independent certified public accountant or by an experienced cost report preparer reasonably acceptable to Lender, and promptly furnish to Lender any amendments filed with respect to such reports and all responses, audit reports or inquiries with respect to such reports;

(i) as soon as available and in no event later than five business (5) days after receipt by Borrower or Operator or Manager, provide Lender with a true and correct copy of any and all notices from any governmental or quasi-governmental agency terminating, suspending, revoking or downgrading to a substandard category, or threatening termination, suspension, revocation or downgrade to a substandard category, of any Medicare or Medicaid Certification or other entitlement to payments pursuant to any program, or any license or certification relating to the Property or the Facility;

(j) promptly notify Lender of:

(i) any condition or event which constitutes (or which, with the giving of notice or lapse of time, or both, would constitute) an Event of Default, and the steps being taken by Borrower with respect thereto;

(ii) any material adverse change in the financial condition or operations of any Credit Party;

(iii) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by Borrower to Lender which has been instituted or, to the knowledge of Borrower, is threatened against Borrower or Operator or to which any of the properties of any thereof is subject which could reasonably be expected to have a Material Adverse Effect;

(iv) any cancellation in any insurance maintained by Borrower or Operator;

(v) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which could reasonably be expected to have a Material Adverse Effect;

(vi) any Lien on any of the Collateral not permitted under this Agreement or which would adversely affect the ability of Lender to exercise any of its remedies hereunder;

(vii) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan of Borrower or Operator, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that Borrower or Operator furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of Borrower or Operator with respect to any post-retirement welfare benefit plan or other employee benefit plan of Borrower or Operator or another member of the Controlled Group, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent; or

(viii) other than general market conditions beyond the reasonable control of Borrower, the occurrence of any other event which could reasonably be expected to have a Material Adverse Effect on the aggregate value of the Collateral or on the Liens created hereby.

(k) provide to Lender, as paid, evidence of timely payment of real estate taxes owed on the Real Property;

(l) maintain a standard and modern system of accounting in accordance with GAAP. Borrower expressly grants Lender the right to communicate directly with Borrower’s and Operator’s accountants and hereby authorizes such accountants to communicate directly with Lender;

(m) within ten (10) business days after notice to Borrower of the commencement thereof, notify Lender, in writing, of any action, suit, arbitration or other proceeding instituted, commenced against or affecting Borrower or the Facility with an amount in controversy in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00);

(n) subject to all applicable laws, permit Lender or any of its agents or representatives to have access to and to examine all books and records regarding the Property at any time or times hereafter during business hours; and

(o) permit Lender to copy and make abstracts from any and all of said books and records.

11.6 Excess Indebtedness . Other than accrued interest on the Loan not yet due and payable, Borrower agrees to pay to Lender on demand the amount by which the indebtedness hereunder, at any time, may exceed the Loan Amount.

11.7 Compliance with Covenants; Prohibition Against Additional Recordings . Borrower will comply with all recorded or other covenants affecting the Property. Borrower will not record or permit to be recorded any document, instrument, agreement or other writing against the Land or the Facility without the prior written consent of Lender.

11.8 Intentionally Omitted .

11.9 Distributions . During such time that any indebtedness is outstanding in connection with the Loan, Borrower nor Operator shall only make Distributions to its members, managers, partners or officers if the making of such Distributions shall not cause there to exist, a Default or Event of Default (including, without limitation, any Default or Event of Default arising from a breach of the financial covenants described in Section 11.18 ).

11.10 Further Assurances . Borrower, on request of Lender, from time to time, will execute and deliver such documents as may be necessary to perfect and maintain as perfected the liens upon the Property and the Collateral granted to Lender pursuant to this Agreement, and to fully consummate the transactions contemplated by this Agreement.

11.11 Books, Records and Inspections . Borrower will keep its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP.

11.12 Maintenance, Repair, Restoration, Prior Liens, Parking . Borrower will:

(a) promptly repair, restore or rebuild any Improvements (as defined in the Mortgage) now or hereafter on the Property which may become damaged or be destroyed to a condition substantially similar to the condition immediately prior to such damage or destruction, whether or not proceeds of insurance are available or sufficient for such purpose;

(b) keep the Property in good condition and repair, without waste;

(d) obtain and maintain in full force and effect, and abide by and satisfy the material terms and conditions of, all material permits, licenses, registrations and other authorizations with or granted by any governmental authorities that may be required from time to time with respect to the performance of its obligations under the Loan Documents;

(e) make no material alterations in the Property or demolish any portion of the Property without Lender’s prior written consent;

(f) not suffer nor permit any change in the use or general nature of the occupancy of the Property, without Lender’s prior written consent;

(g) pay when due all operating costs of the Property;

(h) not initiate or acquiesce in any zoning reclassification with respect to the Property without Lender’s prior written consent; and

(i) provide and thereafter maintain adequate parking areas within the Property as may be required by law, ordinance or regulation (whichever may be greater), together with any sidewalks, aisles, streets, driveways and sidewalk cuts and sufficient paved areas for ingress, egress and right‑of‑way to and from the adjacent public thoroughfares necessary or desirable for the use thereof.

11.13 Compliance with Laws; Payment of Taxes . Borrower shall (a) comply in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses, certifications and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; (b) without limiting clause (a) above, comply with all applicable Bank Secrecy Act (“ BSA ”) and anti-money laundering laws and regulations; (c) without limiting clause (a) above, ensure, and cause each other Credit Party to ensure, that no Credit Party, and no person who owns a controlling interest in or otherwise Controls a Credit Party is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control (“ OFAC ”), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders, and (d) pay, prior to delinquency,

all general and special taxes, assessments, water charges, sewer charges, and other fees, taxes, charges and assessments of every kind and nature whatsoever and other governmental charges against it or any of its property, whether or not assessed against Borrower, if applicable to the Property or any interest therein, or any obligation or agreement secured hereby, as well as claims of any kind which, if unpaid, could become a Lien on any of its property; provided that the foregoing shall not require Borrower to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any collateral, such contest proceedings shall stay the foreclosure of such Lien or the sale of any portion of the collateral to satisfy such claim.

11.14 Intentionally Omitted .

11.15 Environmental Matters . If any release or threatened release or other disposal of Hazardous Materials shall occur or shall have occurred on the Property or any other assets of Borrower, Borrower shall cause the prompt containment and removal of such Hazardous Materials and the remediation of such Property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such Property or other assets. Without limiting the generality of the foregoing, Borrower shall comply with any Federal or state judicial or administrative order requiring the performance at any Property of Borrower of activities in response to the release or threatened release of a Hazardous Material. To the extent that the transportation of Hazardous Materials is permitted by this Agreement, Borrower shall transport and dispose of such Hazardous Materials or of any other wastes in compliance with Environmental Laws, and only at licensed disposal facilities operating in compliance with Environmental Laws.

11.16 Use of Proceeds . No proceeds of the Loan will be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any “margin stock” as defined in Regulation U of the Board of Governors of the Federal Reserve System or any successor thereto.

11.17 Employee Benefit Plans . Borrower shall, or shall cause Operator to:

(a) Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan of Borrower and Operator in substantial compliance with all applicable requirements of law and regulations.

(b) Make, and cause each other member of the Controlled Group to make, on a timely basis, all required contributions to any Multiemployer Pension Plan.

(c) Not, and not permit any other member of the Controlled Group to (i) seek a waiver of the minimum funding standards of ERISA, (ii) terminate or withdraw from any Pension Plan of Borrower and Operator or Multiemployer Pension Plan or (iii) take any other action with respect to any Pension Plan of Borrower and Operator that could reasonably be expected to entitle the PBGC to terminate, impose liability in respect of, or cause a trustee

to be appointed to administer, any Pension Plan of Borrower and Operator, unless the actions or events described in clauses (i), (ii) and (iii) individually or in the aggregate would not have a Material Adverse Effect.

11.18 Financial Covenants .

(a) Fixed Charge Coverage Ratio . Borrower shall cause Operator to maintain a minimum Fixed Charge Coverage Ratio of 1.10:1.00, tested as of the end of each fiscal quarter, in each case for the twelve (12) months then ended.

(b) Debt Service Coverage Ratio . Borrower shall maintain a Debt Service Coverage Ratio of at least 1.45:1.00, tested annually, beginning with the fiscal year ending December 31, 2013.

(c) Minimum Census . The census level at the Facility for any rolling twelve month period shall be not less than seventy-five percent (75%) of the 118 beds at the Facility.

11.19 Reserved .

11.20 Additional Indebtedness . Borrower shall not incur any Debt from any Person other than Lender (or, with respect to Rate Management Obligations, Affiliates of Lender).

11.21 Commercial Tort Claims . If Borrower shall at any time, acquire a “commercial tort claim” (as such term is defined in the UCC) in excess of $50,000, it shall promptly notify Lender thereof in writing and supplement Schedule 11.21 , therein providing a reasonable description and summary thereof, and upon delivery thereof to Lender, Borrower shall be deemed to thereby grant to Lender a security interest and Lien in and to such commercial tort claim and all proceeds thereof, all upon the terms of and governed by this Agreement.

11.22 Real Estate Tax Escrow . Borrower shall make such Tax Deposits (as described in the Mortgage) with Lender as and to the extent required under the Mortgage.

11.23 Operator’s Continuing Operation . During the term of the Loan, Operator shall continuously lease, operate and occupy the Facility and the Property, and Borrower shall not, without Lender’s written consent (which consent may be given or denied in Lender’s sole discretion), terminate or modify the Operating Lease, nor shall Borrower consent to any assignment or transfer of the Operating Lease, or sublease agreement, license agreement or other use and occupancy agreement for the operation, use or occupancy of the Facility or of all or any other portion of the Property; provided, however that Borrower and Operator may amend the Operating Lease solely to increase the Base Rent so that amount is 1.05 times the principal and interest due hereunder.

11.24 Modification of Organizational Documents . Neither Borrower nor Operator will amend or modify the charter, partnership agreement, by-laws, operating agreement or other organizational documents of Borrower or Operator in any way which could reasonably be expected

to adversely affect the interests of Lender; nor change, or allow Borrower or Operator to change, its state of formation or its organizational form.

11.25 Transactions with Affiliates . Neither Borrower nor Operator will enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its Affiliates except upon terms that are no less favorable to Borrower or Operator than would be obtained in a comparable arm’s-length transaction with a third party who is not an Affiliate.

11.26 Unconditional Purchase Obligations . Neither Borrower nor Operator will enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services.

11.27 Inconsistent Agreements . Neither Borrower nor Operator will enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by Borrower hereunder or by the performance by Borrower or Operator of any of its obligations hereunder or under any other Loan Document, (b) prohibit Borrower from granting to Lender a Lien on any of its assets.

11.28 Business Activities; Issuance of Equity . Neither Borrower nor Operator will engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto. Neither Borrower nor Operator will issue any ownership interests or other shares in its capital other than any such issuance pursuant to any employee or director option program, benefit plan or compensation program.

11.29 Investments . Borrower will not make or permit to exist any Investment in any other Person, except the following:

(a) Cash Equivalent Investments; and

(b) bank deposits in the ordinary course of business.

11.30 Restriction of Amendments to Certain Documents . Borrower may not make any amendments to, or waiver of, any agreements to which Borrower is a party which amendments or waivers would have a material adverse effect on Borrower’s ability to perform its obligations under the Loan Documents.

11.31 Mergers, Consolidations, Sales . Borrower will not, and not permit any other Credit Party to, (a) be a party to any merger or consolidation, (b) sell, transfer, dispose of, convey or lease any of its Capital Securities, or (c) sell or assign with or without recourse any receivables.

11.32 Fiscal Year . Borrower will not change its fiscal year without thirty (30) days prior written notice to Lender.

11.33 Restrictions on Transfer .

(a) Borrower shall not, and shall cause Operator to not, without the prior written consent of Lender, effect, suffer or permit any Prohibited Transfer (as defined herein). Any conveyance, sale, assignment, transfer, lien, pledge, mortgage, security interest or other encumbrance or alienation (or any agreement to do any of the foregoing) of any of the following properties or interests shall constitute a “ Prohibited Transfer ”:

(i) The Property and the other Collateral or any part thereof or interest therein, excepting only sales or other dispositions of Collateral (herein called “ Obsolete Collateral ”) no longer useful in connection with the operation of the Property or other dispositions in the ordinary course of Borrower’s business, provided that concurrently with the sale or other disposition thereof, such Obsolete Collateral has been replaced with Collateral of at least equal value and utility which is subject to the lien hereof with the same priority as with respect to the Obsolete Collateral;

(ii) any membership interests of Borrower or Operator; or

(iii) If there shall be any change of control (by way of transfers of stock, partnership or member interests or otherwise) in any partner, member, manager or shareholder, as applicable, the effect of which shall alter the voting control of Borrower or Operator; provided that this shall not apply to a change in the ownership of AdCare Health Systems, Inc.;

in each case whether any such conveyance, sale, assignment, transfer, lien, pledge, mortgage, security interest, encumbrance or alienation is effected directly, indirectly, voluntarily or involuntarily, by operation of law or otherwise; provided, however, that the foregoing provisions of this paragraph shall not apply (i) to liens securing the indebtedness hereunder or any other existing indebtedness by Borrower to Lender, (ii) to the lien of current taxes and assessments not in default or being contested in accordance with the provisions of the Mortgage, (iii) to any transfers of the shares of stock or membership, partnership or joint venture interests, as the case may be, by or on behalf of an owner thereof who is deceased or declared judicially incompetent, to such owner’s heirs, legatees, devisees, executors, administrators, estate or personal representatives, or (iv) to Leases permitted by the terms of the Loan Documents, if any.

(a) In determining whether or not to make the Loan, Lender evaluated the background and experience of Borrower and its partners/members/officers in owning and operating property such as the Property, found it acceptable and relied and continues to rely upon same as the means of maintaining the value of the Property and the other Collateral which is Lender’s security for the Note. Borrower and its partners/members/officers are well-experienced in borrowing money and owning and operating property such as the Property, were ably represented by a licensed attorney at law in the negotiation and documentation of the Loan and bargained at arm’s-length and without duress of any kind for all of the terms and conditions of the Loan, including this provision. Borrower further

recognizes that any secondary junior financing placed upon the Property or other Collateral (a) may divert funds which would otherwise be used to pay the Note; (b) could result in acceleration and foreclosure by any such junior encumbrance which would force Lender to take measures and incur expenses to protect its security; (c) would detract from the value of the Property and other Collateral should Lender come into possession thereof with the intention of selling same; and (d) would impair Lender’s right to accept a deed in lieu of foreclosure, as a foreclosure by Lender would be necessary to clear the title to the Real Property. In accordance with the foregoing and for the purposes of (i) protecting Lender’s security, both of repayment and of value of the Property and other Collateral; (ii) giving Lender the full benefit of its bargain and contract with Borrower; and (iii) keeping the Property and other Collateral free of subordinate financing liens, Borrower agrees that if this paragraph is deemed a restraint on alienation, that it is a reasonable one.

11.34 Replacement Reserve Account . Borrower shall establish with Lender a reserve account (the “ Replacement Reserve Account ”) for the purpose of capital improvement projects at the Facility. Each month, Borrower shall deposit with Lender into the Replacement Reserve Account an amount equal to 1/12 ^th of the amount equal to $400.00 per bed per year. Borrower shall have the right to expend the funds in the Replacement Reserve Account, provided that no Default or Event of Default shall have occurred and be continuing, and provided that prior to disbursing any funds from the Replacement Reserve Account, Borrower shall have provided to Lender receipts or invoices evidencing such expenditures.

11.35 Interest Rate Protection .

(a) Any and all obligations, contingent or otherwise, whether now existing or thereafter arising, of Borrower arising under or in connection with all Rate Management Transactions shall be secured by all of the Collateral for the Loan.

(b) As additional security for the payment and performance of all of the obligations of Borrower under this Agreement and the other Loan Documents, Borrower hereby pledges and assigns to Lender, and grants to Lender a first lien on and a first priority security interest in, (i) all Rate Management Transactions from time to time entered into by Borrower with Lender or any other provider, (ii) all contracts from time to time entered into by Borrower with Lender or any other provider with respect to such Rate Management Transactions, (iii) all amounts from time to time payable to Borrower under such Rate Management Transactions and contracts and (iv) all proceeds of the foregoing.

11.36 Release of Mortgage Lien on Excess Land . Lender acknowledges that Borrower has undertaken the process of subdividing the Property into two parcels in a manner as more particularly described and shown on Exhibit C attached hereto and contained within the legal description of the Land set forth in the Mortgage and Assignment of Rents granted by Borrower in favor of Lender on the Closing Date (the “ Excess Land ”). Lender will cause the Mortgage lien solely with respect to the Excess Land to be released in connection with the subdivision of Property (“ Excess Land Release ”); provided, however , that (i) all other liens granted to Lender pursuant to

the Loan Documents shall continue in full force and effect (excluding the Excess Land Release) and (ii) each of the following conditions precedent is satisfied:

(a) Borrower shall have delivered to Lender an irrevocable written request for the Excess Land Release;

(b) No Default or Event of Default shall have occurred and be continuing as of the date of the notice set forth in clause (a) or as of the effective date of such Excess Land Release;

(c) after giving effect to such Excess Land Release, the Facility and all Credit Parties will be in compliance with all covenants set forth in this Agreement;

(d) Borrower shall have paid all costs and expenses incurred by Lender in connection with the Excess Land Release pursuant to this Section 11.36; and

(e) at Borrower’s sole cost and expense, Borrower shall provide title endorsements (including, without limitation, date down, tax, and zoning) to Lender’s title insurance policy insuring the remaining Mortgage lien granted pursuant to the Loan Documents on the Facility after taking into effect the Excess Land Release, as requested by Lender in form and substance acceptable to Lender and provide Lender with an updated ALTA survey, in form and substance satisfactory to Lender.

11.37 Maintenance of Perfected Security Interest; Further Documentation .

(a) Lender shall maintain the security interest created by this Agreement as a perfected security interest and Borrower shall defend such security interest against the claims and demands of all Persons whomsoever.

(b) Borrower will furnish to Lender from time to time statements and schedules further identifying and describing the assets and property of Borrower maintained in its ordinary course of business and such other reports in connection therewith as Lender may reasonably request, all in reasonable detail.

(c) Borrower shall not, except upon 30 days’ prior written notice to Lender and delivery to Lender of (a) all additional financing statements and other documents reasonably requested by Lender as to the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 2.1(ff) showing any additional location at which Inventory or equipment shall be kept:

(i) permit any of the Inventory or equipment to be kept at a location other than those listed on Schedule 2.1(ff) ;

(ii) change its jurisdiction of organization or the location of its chief executive office from that specified on Schedule 2.1(ff) or in any subsequent notice delivered pursuant to this Section 11.37 ; or

(iii) change its name or corporate structure from a limited liability company to some other corporate entity form.

11.38 Other Matters . Borrower authorizes Lender to, at any time and from time to time, file financing statements, continuation statements, and amendments thereto that describe the Collateral, and which contain any other information required pursuant to the UCC for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, and Borrower agrees to furnish any such information to Lender promptly upon request. Any such financing statement, continuation statement, or amendment may be signed by Lender on behalf of Borrower and may be filed at any time in any jurisdiction.

11.39 Costs; Attorneys’ Fees .

(a) Borrower will pay Lender’s reasonable out-of-pocket costs and expenses including reasonable attorneys’ fees and costs in connection with the negotiation, preparation, administration and enforcement (including perfection and protection of the Collateral and the costs of Intralinks (or other similar service), if applicable) of this Agreement and the other Loan Documents, whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including attorneys’ fees and costs) incurred by Lender after an Event of Default in connection with the collection of the Borrower’s Liabilities or the enforcement of this Agreement or the other Loan Documents or during any workout, restructuring or negotiations in respect thereof. In addition, Borrower agrees to pay, and to save Lender harmless from all liability for, any fees of Borrower’s auditors in connection with any reasonable exercise by Lender of its rights pursuant to, and to the extent provided for in, Section 8.3 . All obligations provided for in this Section 11.39 shall survive repayment of the Loan, cancellation of the Notes and termination of this Agreement. Without limiting the generality of the foregoing, if at any time or times hereafter Lender employs counsel for advice or other representation with respect to any matter concerning Borrower, this Agreement, the Property or the Loan Documents, or to protect, collect, lease, sell, take possession of, or liquidate any of the Property, or to attempt to enforce or protect any security interest or lien or other right in any of the Property or under any of the Loan Documents, or to enforce any rights of Lender or obligations of Borrower or any other person, firm or corporation which may be obligated to Lender by virtue of this Agreement or under any of the Loan Documents or any other agreement, instrument or document, heretofore or hereafter delivered to Lender in furtherance hereof, then in any such event, all of the reasonable attorneys’ fees arising from such services, and any reasonable expenses, costs and charges relating thereto, shall constitute additional indebtedness owing by Borrower to Lender payable on demand and evidenced and secured by the Loan Documents.

(b) Borrower agrees to pay, and to save Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes (other than Excluded Taxes) which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

(c) The agreements in this Section 11.39 shall survive repayment of all (and shall be) Borrower’s Liabilities (and termination of all commitments under this Agreement), any foreclosure under, or any modification, release or discharge of, any or all of the Loan Documents and termination of this Agreement.

11.40 Reinstatement . This Agreement shall remain in full force and effect and continue to be effective (i) if, prior to the Borrower’s Liabilities having been paid and performed in full, any petition is filed by or against Borrower for liquidation or reorganization, (ii) should Borrower become insolvent or make an assignment for the benefit of creditors or (iii) should a receiver or trustee be appointed for all or any significant part of Borrower’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Borrower’s Liabilities, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Borrower’s Liabilities, whether as a “voidable preference”, “fraudulent conveyance”, or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Borrower’s Liabilities shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

11.41 Further Assurances . At any time and from time to time, upon the written request of Lender, and at the sole expense of Borrower, Borrower will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including (i) filing any financing or continuation statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and (ii) in the case of any other relevant Collateral, taking any actions necessary to enable Lender to obtain “control” (within the meaning of the applicable UCC) with respect thereto.

11.42 Obligations and Liens Absolute and Unconditional . The obligations of each Credit Party under this Agreement shall be construed as continuing, absolute and unconditional without regard to (a) the validity or enforceability of any Loan Document or any other collateral security therefor or guaranty or right of offset with respect thereto at any time or from time to time held by Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Credit Party or any other Person against Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of any Credit Party) which constitutes, or might be construed to constitute, an equitable or legal discharge of any Credit Party for the Borrower’s Liabilities, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Credit Party, Lender may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against any other Credit Party or any other Person or against any collateral security or guaranty for the Borrower’s Liabilities or any right of offset with respect thereto, and any failure by Lender to make any such demand, to pursue such other rights or remedies or to collect any payments from any other Credit Party or any

other Person or to realize upon any such collateral security or guaranty or to exercise any such right of offset, or any release of any other Credit Party or any other Person or any such collateral security, guaranty or right of offset, shall not relieve any Credit Party of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of Lender against any Credit Party. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

ARTICLE 12

CASUALTIES AND CONDEMNATION

12.1 Application of Insurance Proceeds and Condemnation Awards . The proceeds of any insurance policies collected or claims as a result of any loss or damage to any portion of the Property resulting from fire, vandalism, malicious mischief or any other casualty or physical harm and any awards, judgments or claims resulting from the exercise of the power of condemnation or eminent domain shall be applied to reduce the outstanding balances of the Loan or to rebuild and restore the Property, as provided in the Mortgage. Borrower shall not settle and adjust any claims under policies of insurance without Lender’s prior written consent, except as provided in the Mortgage.

ARTICLE 13

ASSIGNMENTS, PARTICIPATIONS, SALE AND ENCUMBRANCES

13.1 Lender’s Right to Assign . Lender may at any time assign, negotiate, pledge or otherwise hypothecate this Agreement or any of its rights and security hereunder, including the Note, Mortgage, and other Loan Documents to any bank, participant, financial institution, or any other person or entity, and in case of such assignment, Borrower will accord full recognition thereto and agree that all rights and remedies of Lender in connection with the interest so assigned shall be enforceable against Borrower by such bank, participant, financial institution or any other person or entity with the same force and effect and to the same extent as the same would have been enforceable by Lender but for such assignment. From and after the date of such assignment, Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such assignment, shall be released from its rights (other than its indemnification rights) and obligations hereunder.

13.2 Lender’s Assignment of Security Interests . Lender may at any time, without prior or subsequent notice to Borrower, pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release Lender from any of its obligations hereunder or substitute any such pledgee or assignee for Lender as a party hereto.

13.3 Participations . Lender may at any time, without prior or subsequent notice to Borrower, sell to one or more Persons participating interests in the Loan or other interests hereunder (any such Person, a “ Participant ”). In the event of a sale by Lender of a participating interest to a Participant, (a) Lender’s obligations hereunder shall remain unchanged for all purposes, (b) Borrower shall continue to deal solely and directly with Lender in connection with Lender’s rights and obligations hereunder and (c) all amounts payable by Borrower shall be determined as if Lender had not sold such participation and shall be paid directly to Lender. Borrower agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with Lender, and Lender agrees to share with each Participant, on a pro rata basis. Borrower also agrees that each Participant shall be entitled to the benefits of Section 3.3 or Section 3.8 as if it were Lender ( provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Section 3.3 or Section 3.8 than would have been paid to Lender on such date if no participation had been sold and that each Participant complies with Section 3.3 or Section 3.8 as if it were a direct assignee).

13.4 Prohibition of Assignments and Encumbrances by Borrower . Neither Borrower nor any other Credit Party may assign its rights, title, interests or obligations under this Agreement or under any of the Loan Documents. Except as expressly provided in the Mortgage, Borrower, without the prior written consent of Lender, shall not create, effect, consent to, attempt, contract for, agree to make, suffer or permit any Prohibited Transfer.

13.5 Lender’s Assignment to Federal Reserve Banks . In addition to the assignments and participation permitted under the foregoing provisions of this Section 13 , Lender may assign and pledge all or any portion of the Loan and the Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank, and such Loans and Notes shall be fully transferrable as provided therein. No such assignment shall release the assigning Lender from its obligations hereunder.

ARTICLE 14

EVENTS OF DEFAULT BY BORROWER

14.1 Event of Default Defined . The occurrence of any one or more of the following shall constitute an “ Event of Default ” as said term is used herein, and any Event of Default which may occur hereunder shall constitute an Event of Default under each of the other Loan Documents:

(a) Borrower fails to pay (i) any installment of principal or interest payable pursuant to the Note on or before the date when due, or (ii) any other amount payable to Lender under the Note, this Agreement or any of the other Loan Documents within three (3) days after the date when any such payment is due in accordance with the terms hereof or thereof;

(b) Any default shall occur under the terms applicable to any Debt of either Borrower or Operator in an aggregate amount exceeding $50,000 and such default shall accelerate the maturity of such obligations or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable (or require such Credit Party to purchase or redeem such Debt or post cash collateral in respect thereof) prior to its expressed maturity;

(c) Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, any Credit Party with respect to any material purchase or lease of goods or services where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect;

(d) (i) Any Person institutes steps to terminate a Pension Plan of any Credit Party if as a result of such termination Borrower or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $25,000; (ii) a contribution failure occurs with respect to any Pension Plan of any Credit Party sufficient to give rise to a Lien under Section 302(f) of ERISA; (iii) the Unfunded Liability exceeds twenty percent of the Total Plan Liability, or (iv) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that Borrower or any member of the Controlled Group have incurred on the date of such withdrawal) exceeds $50,000;

(e) Final judgments which exceed an aggregate of $250,000 shall be rendered against Borrower and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within thirty (30) days after entry or filing of such judgments;

(f) Any Collateral Document shall cease to be in full force and effect; or any Credit Party (or any Person by, through or on behalf of any Credit Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document;

(g) (i) Borrower fails to comply with or perform any covenant or agreement set forth in Sections 5.1(c)(i), 11.1, 11.2, 11.3, 11.4, 11.5(a) through (j), 11.6, 11.7, 11.9, 11.13, 11.16, 11.20, 11.23 through 11.32, and 11.37 or (ii) Borrower fails to perform or cause to be performed any other obligation or observe any other condition, covenant, term, agreement or provision required to be performed or observed by Borrower under the Note, this Agreement or any of the other Loan Documents and not otherwise addressed in this Section 14.1 , and if such failure described in this clause (ii) by its nature can be cured, then so long as the continued operation and safety of the Property, and the priority, validity and enforceability of the liens created by the Mortgage or any of the other Loan Documents and the value of the Property are not impaired, threatened or jeopardized, then Borrower shall have a cure period of thirty (30) days after Borrower obtains knowledge of such failure or receives written notice of such failure to cure the same, and an Event of Default shall not be deemed to exist during the cure period; provided further that if Borrower commences to

cure such failure during such cure period and is diligently and in good faith attempting to effect such cure, the cure period shall be extended for thirty (30) additional days, but in no event shall such cure period be longer than sixty (60) days in the aggregate;

(h) (i) Failure of Borrower and/or Operator and/or Manager to maintain all federal, state or local permits, licenses, certifications, accreditations or other governmental or quasi-governmental authorizations that are necessary in order to own and operate the Facility (collectively “ Licenses ”), including, but not limited to, a nursing home license issued to the Facility by the OSDH, or (ii) the institution of any proceedings against Borrower and/or Operator by any governmental or quasi-governmental authority either to (A) revoke any of the Licenses, or (B) decertify the Facility from participation in the Medicare or Medicaid reimbursement programs;

(i) There shall occur with respect to Operator, Manager or the Facility any Medicare or Medicaid survey deficiencies at Level F, G, H, I, J, K, L or worse (i) which deficiencies are not cured within the amount of time permitted by the applicable reviewing agency or, if a deficiency is appealed in accordance with governing law, within the time period after an unsuccessful appeal or (ii) which result in the imposition by any government authority or the applicable state survey agency of sanctions in the form of either a program termination, temporary management, denial of payment for new admission (which, if not appealed under governing law, continues for thirty (30) days or more or beyond any time period granted after an unsuccessful appeal) or Facility closure;

(j) Any representation or warranty made by or for any Credit Party herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by any Credit Party to Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified;

(k) The occurrence of a Prohibited Transfer;

(l) The existence of any collusion, fraud, dishonesty or bad faith by or with the acquiescence of any Credit Party which in any way relates to or affects this Loan or the Property;

(m) Breach by Borrower of the financial covenants set forth in Section 11.18 herein;

(n) Intentionally omitted;

(o) Breach of the representation made in Section 2.1(tt)(xii) of this Agreement, such that Borrower, Operator or the Facility becomes subject to a Corporate Integrity Agreement;

(p) Any Credit Party becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due, or makes a general assignment for the benefit of creditors;

(q) Any Credit Party (i) files a voluntary petition in bankruptcy or is adjudicated a bankrupt or insolvent or files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal, state, or other statute or law, or (ii) seeks or consents to or acquiesces in the appointment of any trustee, receiver or similar officer of such Credit Party or of all or any substantial part of the property of such Credit Party or any of the Collateral; or all or a substantial part of the assets of such Credit Party are attached, seized, subjected to a writ or distress warrant or are levied upon unless the same is released within thirty (30) days;

(r) The commencement of any involuntary petition in bankruptcy against any Credit Party or the institution against any Credit Party of any reorganization, arrangement, composition, readjustment, dissolution, liquidation or similar proceedings under any present or future federal, state or other statute or law, or the appointment of a receiver, trustee or similar officer for all or any substantial part of the property of such Credit Party, which shall remain undismissed or undischarged for a period of sixty (60) days;

(s) A default by Borrower under any agreements relating to judgments, settlements or other resolution of litigation which will result in a Material Adverse Effect;

(t) The dissolution or termination of Borrower or Operator or the merger of Borrower or Operator into or with another entity, including a merger of Borrower and Operator, or the acquisition of Borrower or Operator by the other;

(u) The occurrence of any event having a Material Adverse Effect;

(v) The validity or enforceability of this Agreement or any of the other Loan Documents shall be contested by any Credit Party or any other party thereto, or any Credit Party or any other party thereto shall deny that it has any or further liability or obligation hereunder or thereunder;

(w) If there is any Change of Control;

(x) If the Operating Lease is modified without the prior written consent of Lender, except as permitted in Section 11.23 hereunder;

(y) If the articles of organization, operating agreement or other organizational documents of Borrower or Operator are materially modified; or

(z) The occurrence of a “Default” or an “Event of Default” under the Note, the Mortgage, Guaranty or any of the other Loan Documents.

14.2 Effect of Event of Default . If any Event of Default described in Section 14.1(p), (q) or (r) shall occur with respect to Borrower or Operator, Lender’s commitment to make the Loan hereunder shall immediately terminate and the Loan and all other of Borrower’s Liabilities hereunder shall become immediately due and payable without presentment, demand, protest or notice of any kind ( provided , however , that notwithstanding the foregoing, obligations under Rate Management Transactions shall terminate only in accordance with the terms of the relevant agreement for the Rate Management Transactions); and if any other Event of Default shall occur and be continuing, Lender may declare Lender’s commitment to make the Loan hereunder to be terminated in whole or in part and/or declare all or any part of the Loan and all other of Borrower’s Liabilities hereunder to be due and payable, whereupon Lender’s commitment to make the Loan hereunder shall immediately terminate (or be reduced, as applicable) and/or the Loan and other of Borrower’s Liabilities hereunder shall become immediately due and payable (in whole or in part, as applicable) without presentment, demand, protest or notice of any kind. Lender shall promptly advise Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration.

ARTICLE 15

LENDER’S REMEDIES UPON EVENT OF DEFAULT

15.1 Remedies Conferred upon Lender . Upon the occurrence of any Event of Default, Lender, in addition to all remedies conferred upon Lender under the UCC or any other applicable law and by the terms of this Agreement, the Note, the Mortgage and the other Loan Documents, may pursue any one or more of the following remedies concurrently or successively, it being the intent hereof that none of such remedies shall be to the exclusion of any others:

(a) Take possession of the Property and do anything required, necessary or advisable in Lender’s sole judgment to fulfill the obligations of Borrower hereunder. Without restricting the generality of the foregoing and for the purposes aforesaid, Borrower hereby appoints and constitutes Lender as Borrower’s lawful attorney‑in‑fact with full power of substitution, such appointment being irrevocable and coupled with an interest, in the premises to perform the following actions:

(i) without inquiring into and without respect to the validity thereof, to pay, settle or compromise all existing bills and claims which may be liens, or to avoid such bills and claims becoming liens, against the Property or any portion of the Property or as may be necessary or desirable for the clearance of title to the Property;

(ii) to prosecute and defend actions or proceedings in connection with the Property;

(iii) to do any and every act which Borrower might do in its own behalf with respect to the Property, it being understood and agreed that this power of attorney shall be a power coupled with an interest and cannot be revoked;

(b) Without limiting the generality of the foregoing, Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice referred to below) to or upon Borrower or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances, to the extent permitted by law, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of Lender or elsewhere upon such terms and conditions as it may deem advisable, for cash or on credit or for future delivery with assumption of any credit risk. Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales of the Collateral, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Borrower, which right or equity is hereby waived and released. Borrower further agrees, at Lender’s request, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at Borrower’s premises or elsewhere. Any such sale may be held in conjunction with any foreclosure sale of the Property pursuant to the Mortgage. If Lender so elects, the sale of the Real Property (pursuant to the Mortgage) and the other Collateral may be sold as one lot. Lender shall apply the net proceeds of any action taken by it in accordance with this Agreement, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Lender hereunder, including reasonable attorneys’ costs, to the payment in whole or in part of the Borrower’s Liabilities, in such order as Lender may elect, and only after such application and after the payment by Lender of any other amount required by any provision of law need Lender account for the surplus, if any, to Borrower. To the extent permitted by applicable law, each Credit Party waives all claims, damages and demands it may acquire against Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

(d) Declare the Note to be due and payable forthwith, including all of Borrower’s Liabilities, which includes all outstanding including fees, costs, expenses, reasonable attorneys’ fees of Lender, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived;

(e) In addition to any rights of set-off that Lender may have under applicable law, Lender, without notice of any kind to Borrower, may appropriate and apply to the payment of the Note or of any sums due under this Agreement any and all balances, deposits,

credits, accounts, certificates of deposit, instruments or money of Borrower then or thereafter in the possession of Lender; and

(f) Exercise or pursue any other remedy or cause of action permitted at law or in equity or under this Agreement or any other Loan Document, including, but not limited to, foreclosure of the Mortgage and enforcement of all Loan Documents.

To the extent permitted by applicable law, Borrower waives all claims, damages and demands it may acquire against Lender arising out of the exercise by it of any rights hereunder.

15.2 Right of Lender to Make Advances to Cure Event of Default; Obligatory Advances . If Borrower shall fail to perform any of its covenants or agreements contained herein or in any of the other Loan Documents, Lender may (but shall not be required to) perform any of such covenants and agreements, and any amounts expended by Lender in so doing, and any amounts expended by Lender pursuant to Section 11.2 or Section 15.1 hereof and any amounts advanced by Lender pursuant to this Agreement shall be deemed advanced by Lender under an obligation to do so regardless of the identity of the person or persons to whom said funds are disbursed. Amounts advanced by Lender in the exercise of its judgment that the same are needed to protect its security for the Loan are obligatory advances hereunder and shall constitute additional indebtedness payable on demand and evidenced and secured by the Loan Documents.

15.3 No Waiver . The Lender’s failure, at any time or times hereafter, to require strict performance by the Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Lender of an Event of Default under this Agreement or a default under any of the other Loan Documents shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. The granting of any waiver, indulgence or compromise by Lender shall not impair any remedy, right or power hereunder or be construed as a waiver thereof unless provided otherwise in writing and any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Loan Documents and no Event of Default under this Agreement or default under any of the other Loan Documents shall be deemed to have been suspended or waived by the Lender unless such suspension or waiver is in writing signed by an officer of the Lender, and delivered to the Borrower specifying such suspension or waiver.

15.4 Default Rate . From and after the date of any Event of Default until the date on which such Event of Default is waived, interest on funds outstanding hereunder shall accrue at the Default Rate and be payable on demand. The failure of Lender to charge interest at the Default Rate shall not be evidence of the absence of an Event of Default or waiver of an Event of Default by Lender.

ARTICLE 16

MISCELLANEOUS

16.1 Time is of the Essence . Borrower agrees that time is of the essence with respect to all of its covenants under this Agreement.

16.2 Lender’s Determination of Facts . Lender at all times shall be free to establish independently to its satisfaction and in its sole and absolute discretion the existence or nonexistence of any fact or facts, the existence or nonexistence of which is a condition of this Agreement.

16.3 Prior Agreements . This Agreement and the other Loan Documents, and any other documents or instruments executed pursuant thereto or contemplated thereby, shall represent the entire, integrated agreement between the parties hereto with respect to the Loan and shall supersede all prior negotiations, representations or agreements pertaining thereto, either oral or written. This Agreement and any provision hereof shall not be modified, amended, waived or discharged in any manner other than by a written amendment executed by all parties to this Agreement.

16.4 Disclaimer by Lender . The relationship between Borrower on the one hand and Lender on the other hand shall be solely that of borrower and lender. Lender has no fiduciary relationship with or duty to any Credit Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Credit Parties, on the one hand, and Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Lender undertakes no responsibility to any Credit Party to review or inform any Credit Party of any matter in connection with any phase of any Credit Party’s business or operations. Each Credit Party agrees that Lender shall have no liability to any Credit Party (whether sounding in tort, contract or otherwise) for losses suffered by any Credit Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NEITHER LENDER NOR ANY OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES OR AGENTS OF LENDER (EACH OF THE FOREGOING, A “LENDER PARTY”) SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR, ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Borrower acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. Lender shall not be liable for any debts or claims accruing in favor of any parties against any Credit

Party or against the Property. Each Credit Party is not, and shall not be, an agent of Lender for any purposes, and Lender is not a venture partner with any Credit Party in any manner whatsoever. Approvals granted by Lender for any matters covered under this Agreement shall be narrowly construed to cover only the parties and facts identified in any written approval.

16.5 INDEMNIFICATION BY BORROWER . TO THE FULLEST EXTENT PERMITTED BY LAW, IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT BY LENDER AND THE AGREEMENT TO EXTEND THE LOAN PROVIDED FOR HEREUNDER, BORROWER HEREBY AGREES TO INDEMNIFY LENDER AND LENDER PARTIES AND HOLD THEM FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, DAMAGES AND EXPENSES, INCLUDING REASONABLE ATTORNEY COSTS (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”), INCURRED BY LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY PURCHASE OF ASSETS TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF THE LOAN, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS MATERIALS AT ANY PROPERTY OWNED OR LEASED BY ANY CREDIT PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY CREDIT PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY CREDIT PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS MATERIALS OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. THIS INDEMNITY IS NOT INTENDED TO EXCUSE LENDER FROM PERFORMING HEREUNDER. THIS OBLIGATION ON THE PART OF BORROWER SHALL SURVIVE THE CLOSING OF THE LOAN, THE REPAYMENT THEREOF AND ANY CANCELLATION OF THIS AGREEMENT. BORROWER SHALL PAY, AND HOLD LENDER HARMLESS FROM, ANY AND ALL CLAIMS OF ANY BROKERS, FINDERS OR AGENTS CLAIMING A RIGHT TO ANY FEES IN CONNECTION WITH ARRANGING THE FINANCING CONTEMPLATED HEREBY. LENDER HEREBY REPRESENTS THAT IT HAS NOT EMPLOYED A BROKER OR OTHER FINDER IN CONNECTION WITH THE LOAN. BORROWER REPRESENTS AND WARRANTS THAT NO BROKERAGE COMMISSIONS OR FINDER’S FEES ARE TO BE PAID IN CONNECTION WITH THE LOAN. IF AND TO THE EXTENT THAT ANY OF THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, BORROWER HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS

PROVIDED FOR IN THIS SECTION 16.5 SHALL SURVIVE REPAYMENT OF THE LOAN, CANCELLATION OF THE NOTE, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE LOAN DOCUMENTS AND TERMINATION OF THIS AGREEMENT.

16.6 Captions . The captions and headings of various Articles and Sections of this Agreement and exhibits pertaining hereto are for convenience only and are not to be considered as defining or limiting in any way the scope or intent of the provisions hereof.

16.7 Inconsistent Terms and Partial Invalidity . The language used in this Agreement is the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any of the parties hereto. In the event of any inconsistency among the terms hereof (including incorporated terms), or between such terms and the terms of any other Loan Document, Lender may elect which terms shall govern and prevail. If any provision of this Agreement, or any paragraph, sentence, clause, phrase or word, or the application thereof, in any circumstances, is adjudicated by a court of competent jurisdiction to be invalid, the validity of the remainder of this Agreement shall be construed as if such invalid part were never included herein.

16.8 Gender and Number . Any word herein which is expressed in the masculine, feminine, or neuter gender shall be deemed to include the masculine, feminine and neuter genders. Any word herein which is expressed in the singular or plural number shall be deemed, whenever appropriate in the context, to include the singular and the plural.

16.9 Notices . Any notices, communications and waivers under this Agreement shall be in writing and shall be (i) delivered in person, (ii) mailed, postage prepaid, either by registered or certified mail, return receipt requested, (iii) by overnight express carrier, or (iv) by facsimile or email transmission, addressed in each case as follows:

To Lender: Housing & Healthcare Funding, LLC

2 Wisconsin Circle, Ste. 540

Chevy Chase, Maryland 20815

Attn: Michael Gehl

Email: mgehl@hhcfinance.com


With a copy to:	Gutnicki LLP 4711 Golf Road, Suite 200 Skokie, Illinois 60076 Attn: Abraham A. Gutnicki

Facsimile: 847-933-9285

Email: agutnicki@gutnicki.com


To Borrower:	QC Property Holdings, LLC

1145 Hembree Road

Roswell, Georgia 30076

Attn: Manager or CFO

Email: rfleming@adcarehealth.com


With a copy to:	Holt Ney Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, GA 30339

Attn: Ellen W. Smith

Facsimile: 770-956-1490
Email: esmith@hnzw.com

or to any other address as to any of the parties hereto as such party shall designate in a written notice to the other party hereto. All notices sent pursuant to the terms of this paragraph shall be deemed received (i) if personally delivered, then on the date of delivery, (ii) if sent by overnight express carrier, then on the next federal banking day immediately following the day sent, (iii) if sent by registered or certified mail, then on the earlier of the third federal banking day following the day sent or when actually received, or (iv) if sent by facsimile or email, as evidenced by receipt of a successful transmission report (followed by delivery by one of the other means identified in (i)-(iii)); provided, however, that if any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender unless expressly set forth in such notice.

16.10 Effect of Agreement . The submission of this Agreement and the Loan Documents to Borrower for examination does not constitute a commitment or an offer by Lender to make a commitment to lend money to Borrower. This Agreement shall become effective only upon execution and delivery hereof by Lender to Borrower.

16.11 Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the state of Maryland, without reference to the choice of law or conflicts of law principles of the state of Maryland.

16.12 Confirmations . Borrower and each holder of the Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loan then outstanding under such Note.

16.13 Computations . Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if Borrower notifies Lender that Borrower wishes to amend any covenant in Section 11.18 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if Lender notifies Borrower that Lender wishes to amend Section 11.18 (or any related definition) for such purpose), then Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to Borrower and Lender.

16.14 Consent to Jurisdiction . TO INDUCE LENDER TO ACCEPT THE NOTE, BORROWER IRREVOCABLY AGREES THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF MARYLAND OR IN THE UNITED STATES DISTRICT COURT FOR MARYLAND; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND OR IN THE UNITED STATES DISTRICT COURT FOR MARYLAND FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

16.15 Waiver of Jury Trial . BORROWER AND LENDER, BY ACCEPTANCE HEREOF, HAVING BEEN REPRESENTED BY COUNSEL, EACH KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS AGREEMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. BORROWER AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST LENDER

OR ANY OTHER PERSON INDEMNIFIED UNDER THIS AGREEMENT ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

16.16 Subsequent Amendments . Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

16.17 Reviewed by Counsel . This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to Lender, Borrower and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against Lender merely because of Lender’s involvement in their preparation.

16.18 Confidentiality . As required by federal law and Lender’s policies and practices, Lender may need to obtain, verify, and record certain customer identification information and documentation in connection with opening or maintaining accounts, or establishing or continuing to provide services. Lender agrees to use commercially reasonable efforts (equivalent to the efforts Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to it by Borrower and designated as confidential, except that Lender may disclose such information (a) to Persons employed or engaged by Lender in evaluating, approving, structuring or administering the Loan; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 16.18 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by it as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of Lender’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which Lender is a party; (f) to any nationally recognized rating agency that requires access to information about Lender’s investment portfolio in connection with ratings issued with respect to Lender; (g) to any Affiliate of Lender or any other Person that provides (or anticipates providing) Bank Products to Borrower; (h) to Lender’s independent auditors and other professional advisors as to which such information has been identified as confidential; or (i) that ceases to be confidential through no fault of Lender. Notwithstanding the foregoing, Borrower consents to the publication by Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, and Lender reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. If any provision of any confidentiality agreement, non-disclosure agreement or other similar agreement between Borrower and Lender conflicts with or contradicts this Section 16.18 with respect to the treatment of confidential information, this section shall supersede all such prior or contemporaneous agreements and understandings between the parties.

16.19 Refinancing Right of First Refusal . Borrower agrees that at such time as the Loan is refinanced, Borrower shall permit Lender to offer a proposal for such refinancing upon Lender's then‑current underwriting standards. If Borrower solicits refinancing proposals from any other bank or credit source, Borrower shall give Lender the right to offer to Borrower a proposal on similar or more favorable terms then other competing proposals; provided, however, that such right of first offer shall not apply to a loan to Borrower from HUD. Notwithstanding the foregoing, Borrower acknowledges that Lender is under no obligation whatsoever to make any proposal to Borrower on any specific terms and conditions.

16.20 Binding Effect . This Agreement and all rights and obligations hereunder shall be binding upon Borrower and its successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

16.21 Counterparts . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be

deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by Lender shall deemed to be originals.

[Signature Page Follows]

IN WITNESS WHEREOF , Borrower has caused this Loan and Security Agreement to be executed the day and year first above written.

BORROWER :

QC PROPERTY HOLDINGS, LLC

a Georgia limited liability company


By:	/s/ Ronald W. Fleming

Name: Ronald W. Fleming, Manager

Its: Manager

Housing & Healthcare Funding, LLC/QC Property Holdings, LLC

Loan and Security Agreement

Signature Page (Borrower)

IN WITNESS WHEREOF , Lender has caused this Loan and Security Agreement to be executed the day and year first above written.

LENDER :

HOUSING & HEALTHCARE FUNDING, LLC

a Delaware limited liability company


By:	/s/ Michael Gehl


Name:	Michael Gehl

Its: Chief Investment Officer

Housing & Healthcare Funding, LLC/QC Property Holdings, LLC

Loan and Security Agreement

Signature Page (Lender)

EXHIBIT A

LEGAL DESCRIPTION

A part of the Northeast Quarter (NE/4) of Section Sixteen (16), Township Thirteen (13) North, Range Four (4) West of the Indian Meridian in the City of Oklahoma City, Oklahoma County, Oklahoma, said part being more particularly described as follows:

Beginning at a point located South 00°28'33" East a distance of 503.87 feet and North 89°31 '27" East a distance of30.00 feet from the Northwest Comer of said Northeast Quarter (NE/4);

Thence from said Point of Beginning South 00°28'33" East a distance of293.65 feet to a point on a curve to the right, said curve having a central angle of 15°52'38" and a radius of

205.65 feet;

Thence along the arc of said curve in a Southwesterly direction a distance of 56.99 feet; Thence South 89°51 '09" East a distance of 722.34 feet;

Thence North 00°28'33" West a distance of350.00 feet;

Thence North 89°51 '09" West a distance of714.50 feet to the Point of Beginning.

Together with rights of ingress and egress established by the easement estate created by

Weschase Partners Limited Partnership, an Oklahoma limited partnership in favor of Weschase Land Co. Limited Partnership, an Oklahoma limited partnership, filed January 20, 1987, recorded in Book 5576, Page 1628, and more particularly described as follows:

The North 15 feet of the following described tract:

A part of the Northeast Quarter (NE/4) of Section Sixteen (16), Township Thirteen (13) North, Range Four (4) West of the Indian Meridian, in the City of Oklahoma City, Oklahoma County, Oklahoma, said part being more particularly described as follows:

Beginning at a point located on the East right-of-way line of Brandon Place, South 00°28'33" East 503.87 feet and North 89°31 '27" East 30.00 feet from the Northwest Comer of said Northeast Quarter (NE/4);

Thence from said Point of Beginning, said easement being 15.00 feet North and 15.00 feet South of the following described line;

South 89°51'09" East 584.00 feet to the point of termination.

Property Address: 13500 Brandon Place, Oklahoma City, OK

APN: 3861-14-947-1090

EXHIBIT B

COMPLIANCE CERTIFICATE

Compliance Certificate

Date:

Housing & Healthcare Funding, LLC

2 Wisconsin Circle, Ste. 540

Chevy Chase, Maryland 20815

Attn: Michael Gehl

The undersigned, QC Property Holdings, LLC, a Georgia limited liability company (“Borrower”), hereby delivers this certificate pursuant to that certain Loan and Security Agreement, dated as of [____, 2013], by and between Borrower and Housing & Healthcare Funding, LLC (the “Loan Agreement”) and certifies as of the date hereof as follows:


1.	Attached hereto are the financial statements as described in the Loan Agreement for the [calendar month / year ending _______________].


2.	Borrower is in compliance in all material respects with all covenants contained in the Loan Agreement. The calculations for each of the financial covenants described in Sections 11.18 (a), (b) and (c) of the Loan Agreement are attached hereto as “ Exhibit A ”.


3.	No Default or Event of Default has occurred or is continuing under the Loan Agreement. [Or, if incorrect, provide detail regarding the Default or Event of Default and the steps being taken to cure it and the time within which such cure will likely occur.]


4.	Except for actions taken as permitted by the Loan Agreement, all representations and warranties made by Borrower therein continue to be true as of the date of this certificate, [and if there are representations and warranties not then true, indicating, “except as follows:” and insert exceptions.]

Capitalized terms in this Compliance Certificate that are otherwise undefined shall have the meanings given them in the Loan Agreement.

QC Property Holdings, LLC

a Georgia limited liability company

Name:

Title:

Exhibit A to Compliance Certificate

To be provided separately.

Schedule 2.1(ff)

OWNED AND LEASED REAL ESTATE

COLLATERAL LOCATIONS

Facility, 13500 Brandon Place, Oklahoma City, Oklahoma County, OK

1145 Hembree Road, Roswell, Georgia 30076

Schedule 2.1(oo)

FILINGS AND PERFECTION



GRANTOR	FILING REQUIREMENT OR OTHER ACTION	FILING OFFICE
	UCC-1
	UCC-1

Schedule 2.1(pp)

BORROWER INFORMATION



BORROWER (exact legal name)	STATE OF ORGANIZATION	FEDERAL EMPLOYER IDENTIFICATION NUMBER	CHIEF EXECUTIVE OFFICE	ORGANIZATIONAL IDENTIFICATION NUMBER
QC Property Holdings, LLC	Georgia	37-1692398	1145 Hembree Road, Roswell, GA 30076	12032774

Schedule 2.1(qq)

DEPOSITARY AND OTHER DEPOSIT ACCOUNTS



Account Name	Bank	Account #	Account Description

Schedule 2.1(ss)

OWNERSHIP OF BORROWER AND OPERATOR

100% of the membership interests of Borrower are owned by AdCare Property Holdings, LLC, an Ohio limited liability company. AdCare Health Systems, Inc. owns 100% of the membership interests in AdCare Property Holdings, LLC.

100% of the membership interests of Operator are owned by AdCare Operations, LLC, a Georgia limited liability company. AdCare Health Systems, Inc. owns 100% of the membership interests in AdCare Operations, LLC.

Schedule 11.21

COMMERCIAL TORT CLAIMS

NONE.

Exhibit 10.31

PROMISSORY NOTE

(TERM NOTE)

$5,000,000.00 September 27, 2013

Chevy Chase, Maryland

1. Agreement to Pay . FOR VALUE RECEIVED, QC Property Holdings, LLC , a Georgia limited liability company (“Borrower”), hereby promises to pay to the order of Housing & Healthcare Funding, LLC, a Delaware limited liability company, its successors and assigns (“ Lender ”), the principal sum of FIVE MILLION AND 00/100 DOLLARS ($5,000,000.00) (the “ Loan ”), at the place and in the manner hereinafter provided, together with interest thereon at the rate or rates described below, and any and all other amounts which may be due and payable hereunder from time to time pursuant to and upon the terms and conditions set forth below in this Promissory Note (the “ Note ”) and in that certain Loan and Security Agreement (the “ Loan Agreement ”) of even date herewith, by and between Borrower and Lender, which has been acknowledged, on or before September 27, 2016 (the “ Maturity Date ”).

2. Interest Rate.

2.1 Interest Prior to Default . Interest shall accrue on the outstanding principal balance of this Note from the date hereof through the Maturity Date at the rate equal to the One-Month Libor Rate (as defined below) plus four and three-quarter percent (4.75%), but not less than five and three-quarter percent (5.75%) (the “ Loan Rate ”). Interest shall accrue based upon a year consisting of 360 days and charged for the actual number of days elapsed. For purposes of this Note, the date of first disbursement shall be the first date that proceeds evidenced by this Note are disbursed pursuant to the direction of the Borrower. The foregoing to the contrary notwithstanding, if the One-Month Libor Rate is not available to the Lender, then the Lender shall impose an interest rate on the principal balance of the Loan that accurately reflects the amount of interest to be charged to Borrower hereunder.

“One-Month Libor Rate ” shall mean the rate displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Lender in its sole discretion) as the interest rate applicable to dollar deposits in the London Interbank market with a maturity of one month. The Lender’s determination of the One-Month Libor Rate shall be conclusive, absent manifest error. The Loan Rate shall be set on the Closing Date (as hereinafter defined) and reset on October 1, 2013 and on the first Business Day of each calendar month thereafter (each a “ Reset Date ”), based on the One-Month Libor Rate in effect at approximately 11:00 a m. London time, two (2) Business Days preceding the Closing Date and each Reset Date. For purposes of this Note, the term “Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in Chevy Chase, Maryland are authorized or required by law to remain closed.

2.2 Interest After Default . From and after the Maturity Date or upon the occurrence and during the continuance of an Event of Default (as hereinafter defined), interest shall accrue on the balance of principal remaining unpaid during any such period at an annual rate (“ Default Rate ”) equal to five percent (5%) plus the Loan Rate; provided, however, in no event shall the Default Rate exceed the maximum rate permitted by law. The interest accruing under this paragraph shall be immediately due and payable by Borrower to the holder of this Note upon demand and shall be additional indebtedness evidenced by this Note.

3. Payment Terms.

3.1 Principal plus Interest . Payments of principal plus interest due under this Note, if not sooner declared to be due in accordance with the provisions hereof, shall be made as follows:

(a) Consecutive monthly payments of interest accrued on the outstanding principal balance of the Loan commencing on October 1, 2013 (which shall include interest on the principal balance of this Note accruing during the period commencing on the date the proceeds of the Loan are disbursed by Lender (“ Closing Date ”) and ending on the last day of the month in which the Closing Date occurs), and on the first (1 ^st ) day of each month thereafter, through and including the month in which the Maturity Date occurs, shall be due and payable.

(b) In addition to the interest payments due hereunder, Borrower shall make consecutive monthly deposits, in the amount designated on the schedule attached hereto as Exhibit A (the “ Deposits ”), due and payable commencing on October 1, 2014, and on the first (1 ^st ) day of each month thereafter, through and including the month in which the Maturity Date occurs. The Deposits required pursuant to this Section 3.1(b) shall be deposited into an account of the Borrower and pledged to the Lender in accordance with that certain Assignment and Pledge of Account – Additional Deposits of even date herewith by Borrower in favor of Lender.

(c) The unpaid principal balance of this Note, if not sooner paid or declared to be due in accordance with the terms hereof, together with all accrued and unpaid interest thereon and any other amounts due and payable hereunder or under any other Loan Document, shall be due and payable in full on the Maturity Date.

3.2 Application of Payments . Prior to the occurrence of an Event of Default, all payments and prepayments on account of the indebtedness evidenced by this Note shall be applied as follows: (a) first, to fees, expenses, costs and other similar amounts then due and payable to Lender, including, without limitation any prepayment premium, exit fee or late charges due hereunder, (b) second, to accrued and unpaid interest on the principal balance of this Note, (c) third, to the payment of principal due in the month in which the payment or prepayment is made, (d) fourth, to any escrows, impounds or other amounts

which may then be due and payable under the Loan Documents, (e) fifth, to any other amounts then due Lender hereunder or under any of the Loan Documents, and (f) last, to the unpaid principal balance of this Note in the inverse order of maturity. Any prepayment on account of the indebtedness evidenced by this Note shall not extend or postpone the due date or reduce the amount of any subsequent monthly payment of principal plus interest due hereunder. After an Event of Default has occurred and is continuing, payments may be applied by Lender to amounts owed hereunder and under the Loan Documents in such order as Lender shall determine, in its sole discretion.

3.3 Method of Payments . Borrower agrees that all payments of interest, principal payments, and any fees and expenses owed Lender from time to time will be deducted by Lender automatically on the due date from Borrower’s operating account with Lender. Borrower will maintain sufficient funds in the account on the dates Lender enters debits authorized by this Note. If there are insufficient funds in the account on the date Lender enters any debit authorized by this Note, the debit will be reversed. Notwithstanding the foregoing, the final payment due under this Note must be made by wire transfer or other final funds.

3.4 Late Charge . If any payment of interest or principal due hereunder is not made on the date such payment is due in accordance with the terms hereof, then, in addition to the payment of the amount so due, Borrower shall pay to Lender a “late charge” of five cents for each whole dollar so overdue to defray part of the cost of collection and handling such late payment. Borrower agrees that the damages to be sustained by the holder hereof for the detriment caused by any late payment are extremely difficult and impractical to ascertain, and that the amount of five cents for each one dollar due is a reasonable estimate of such damages, does not constitute interest, and is not a penalty.

3.5 Prepayment . Provided that no Event of Default then exists and subject to the exit fees defined herein, Borrower may voluntarily prepay the principal balance of this Note, in whole or in part, at any time not less than two (2) years after the Closing Date, with at least thirty (30) days prior written notice provided to Lender.

An exit fee of three percent (3%) of the outstanding principal balance of the Note shall apply to any prepayment of the Note; provided, however, that an exit fee of one percent (1%) of the outstanding principal balance of the Note shall apply to any HUD-related refinancing that is done through Lender or to any refinancing following HUD’s rejection of an application for refinance.

The payment of any partial prepayment shall not relieve the Borrower from the obligation to make subsequent scheduled monthly installments of principal plus interest due hereunder. All prepayments shall be applied to the reduction of principal in inverse order of maturity, and may not be re-borrowed .

3.6 Loan Fees . In consideration of Lender’s agreement to make the Loan, Borrower shall pay to Lender a non-refundable fee in the amount of FIFTY THOUSAND

AND 00/100 DOLLARS ($50,000.00), which shall be due and payable in full as a condition precedent to the disbursement of proceeds under this Note.

4. Security . This Note is secured by, among other things: (1) a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing of even date herewith (as amended and/or restated from time to time, the “ Mortgage ”) from Borrower in favor of Lender creating a first mortgage lien on certain real property (the “ Property ”) legally described in Exhibit A attached to the Mortgage, and (2) a Guaranty (as amended and/or restated from time to time, the “ Guaranty ”) dated as of the date hereof, jointly and severally, from QC Nursing, LLC, a Georgia limited liability company (the “ Operator ”), and AdCare Health Systems, Inc., an Ohio corporation (the “ Guarantor ”), in favor of Lender (hereinafter this Note, the Loan Agreement, the Mortgage, the Guaranty and any other document now, previously, or hereafter given to evidence or secure payment of this Note or delivered to induce Lender to disburse the proceeds of the Loan, as such documents may now or hereafter be amended, restated or replaced from time to time, are hereinafter collectively referred to as the “ Loan Documents ”). Reference is hereby made to the Loan Documents (which are incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a statement of the covenants and agreements contained therein, a statement of the rights, remedies, and security afforded thereby, and all matters therein contained.

5. Events of Default . The occurrence of any one or more of the following events shall constitute an “ Event of Default ” under this Note:

5.1 the failure by Borrower to pay (i) any installment of principal or interest payable pursuant to this Note within on or before the date when due, or (ii) any other amount payable to Lender under this Note, the Loan Agreement, the Mortgage or any of the other Loan Documents within three (3) days after the date when any such payment is due in accordance with the terms hereof or thereof; or

5.2 the occurrence of any “Event of Default” under the Loan Agreement, the Mortgage or any of the other Loan Documents; or

5.3 the occurrence of the dissolution, insolvency, termination, merger or winding up of any entity guarantor, or the death or legal incompetency of any individual guarantor, as applicable, of this Note.

6. Remedies . At the election of the holder hereof, and without notice, the principal balance remaining unpaid under this Note, and all unpaid interest accrued thereon and any other amounts due hereunder, shall be and become immediately due and payable in full upon the occurrence of any Event of Default. Failure to exercise this option shall not constitute a waiver of the right to exercise same in the event of any subsequent Event of Default. No holder hereof shall, by any act of omission or commission, be deemed to waive any of its rights, remedies or powers hereunder or otherwise unless such waiver is in writing and signed by the holder hereof, and then only to the extent specifically set forth therein. The rights, remedies and powers of the holder hereof, as provided in this Note, the Loan Agreement, the Mortgage and in all of the other Loan Documents are cumulative and concurrent, and may be pursued singly, successively or together against Borrower, Guarantor, the Property and any other security given at any time to secure the

repayment hereof, all at the sole discretion of the holder hereof. If any suit or action is instituted or attorneys are employed to collect this Note or any part hereof, Borrower promises and agrees to pay all costs of collection, including reasonable attorneys’ fees and court costs.

7. Covenants and Waivers . Borrower and all others who now or may at any time become liable for all or any part of the obligations evidenced hereby expressly agree to be jointly and severally bound, and jointly and severally: (i) waive and renounce any and all homestead, redemption and exemption rights and the benefit of all valuation and appraisement privileges against the indebtedness evidenced by this Note or by any extension or renewal hereof; (ii) waive presentment and demand for payment, notices of nonpayment and of dishonor, protest of dishonor, and notice of protest; (iii) except as expressly provided in the Loan Documents, waive any and all notices in connection with the delivery and acceptance hereof and all other notices in connection with the performance, default, or enforcement of the payment hereof or hereunder; (iv) waive any and all lack of diligence and delays in the enforcement of the payment hereof; (v) agree that the liability of each Borrower, Guarantor, endorser or obligor shall be unconditional and without regard to the liability of any other person or entity for the payment hereof, and shall not in any manner be affected by any indulgence or forbearance granted or consented to by Lender to any of them with respect hereto; (vi) consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Lender with respect to the payment or other provisions hereof, and to the release of any security at any time given for the payment hereof, or any part thereof, with or without substitution, and to the release of any person or entity liable for the payment hereof; and (vii) consent to the addition of any and all other makers, endorsers, guarantors, and other obligors for the payment hereof, and to the acceptance of any and all other security for the payment hereof, and agree that the addition of any such makers, endorsers, guarantors or other obligors, or security shall not affect the liability of Borrower, any guarantor and all others now liable for all or any part of the obligations evidenced hereby. This provision is a material inducement for Lender making the Loan to Borrower.

8. Other General Agreements .

8.1 The Loan is a business loan and is being incurred by Borrower solely for the purpose of carrying on a commercial enterprise, and not for personal, family or household purposes. Borrower agrees that the Loan evidenced by this Note is an exempted transaction under the Truth In Lending Act, 15 U.S.C., Section 1601, et seq .

8.2 Time is of the essence hereof.

8.3 This Note is governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the statutes, laws and decisions of the State of Maryland. This Note may not be changed or amended orally but only by an instrument in writing signed by the party against whom enforcement of the change or amendment is sought.

8.4 Lender shall not be construed for any purpose to be a partner, joint venturer, agent or associate of Borrower or of any lessee, operator, concessionaire or licensee of Borrower in the conduct of its business, and by the execution of this Note, and Borrower agrees to indemnify, defend, and hold Lender harmless from and against any and all damages,

costs, expenses and liability that may be incurred by Lender as a result of a claim that Lender is such partner, joint venturer, agent or associate.

8.5 This Note has been made and delivered at Chevy Chase, Maryland and all funds disbursed to or for the benefit of Borrower will be disbursed in Chevy Chase, Maryland.

8.6 If this Note is executed by more than one party, the obligations and liabilities of each Borrower under this Note shall be joint and several and shall be binding upon and enforceable against each Borrower and their respective successors and assigns. This Note shall inure to the benefit of and may be enforced by Lender and its successors and assigns.

8.7 If any provision of this Note is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any administrative agency or any court, Borrower and Lender shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of, and the validity and enforceability of, this and the remaining provisions, or portions or applications thereof, and the remaining provisions, or portions or applications thereof shall not be affected thereby and shall remain in full force and effect.

8.8 If for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Agreement would exceed the limit which the Lender may lawfully charge Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the sole option of the Lender either be refunded to Borrower or credited to the principal (or any combination of the foregoing) so that under no circumstances shall the interest or other charges required to be paid by Borrower hereunder exceed the maximum rate allowed by applicable law, and Borrower shall not have any action against Lender for any damages arising out of the payment or collection of any such excess interest. In no event shall any agreed to or actual exaction as consideration for this Loan transcend the limits imposed or provided by the law applicable to this transaction.

8.9 Lender may at any time assign its rights in this Note and the Loan Documents, or any part thereof and transfer its rights in any or all of the collateral, and Lender thereafter shall be relieved from all liability with respect to such collateral. In addition, Lender may at any time sell one or more participations in the Note. Borrower may not assign its interest in this Note, or any other agreement with Lender or any portion thereof, either voluntarily or by operation of law, without the prior written consent of Lender.

9. Notices . All notices required under this Note will be in writing and will be transmitted in the manner and to the addresses, facsimile numbers or email addresses required by the Loan Agreement, or to such other addresses, facsimile numbers or email addresses as Lender and Borrower may specify from time to time in writing.

10. Consent to Jurisdiction . TO INDUCE LENDER TO ACCEPT THIS NOTE, BORROWER IRREVOCABLY AGREES THAT, SUBJECT TO LENDER’S SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING

OUT OF OR RELATED TO THIS NOTE WILL BE LITIGATED IN COURTS HAVING SITUS IN MONTGOMERY COUNTY, MARYLAND. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN MONTGOMERY COUNTY, MARYLAND.

11. Waiver of Jury Trial . BORROWER AND LENDER (BY ACCEPTANCE OF THIS NOTE), HAVING BEEN REPRESENTED BY COUNSEL, EACH KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS NOTE OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS NOTE OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS NOTE, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. BORROWER AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST LENDER ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF , Borrower has executed and delivered this Promissory Note as of the day and year first written above.

BORROWER :

QC PROPERTY HOLDINGS, LLC,

a Georgia limited liability company

By: /s/ Ronald W. Fleming

Name: Ronald W. Fleming

Title: Manager

HHC Funding / QC Property Holdings, LLC

Promissory Note - $5,000,000

Exhibit 10.32




This instrument was prepared by and should be mailed to : Gutnicki LLP 4711 Golf Road, Suite 200 Skokie, Illinois 60076 Attn: Stacy J. Flanigan


		This space reserved for Recorder’s use only.

MORTGAGE, SECURITY AGREEMENT

ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING

QC PROPERTY HOLDINGS, LLC

a Georgia limited liability company

to and for the benefit of

HOUSING & HEALTHCARE FUNDING, LLC

a Delaware limited liability company

(Borrower Tax ID 37-1692398)

Attention to Recording Officers : This Mortgage covers goods which are, or are to become, affixed to or fixtures on the land described in Exhibit A hereto. This Mortgage is a fixture filing and is to be indexed, among other places, in the real estate records of each county of the State of Oklahoma in which said land or any portion thereof is located.

**************************************************

A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGEDPROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.

MORTGAGE, SECURITY AGREEMENT,

ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING

THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING (“ Mortgage ”) is made as of September 27, 2013 by QC Property Holdings, LLC , a Georgia limited liability company (“ Mortgagor ”), to and for the benefit of Housing & Healthcare Funding, LLC , a Delaware limited liability company, its successors and assigns (“ Mortgagee ”).

RECITALS :

(A) Pursuant to the terms and conditions of that certain Loan and Security Agreement of even date herewith (as amended, restated or replaced from time to time “ Loan Agreement ”) by and between Mortgagor and Mortgagee, Mortgagee has agreed to extend to Mortgagor a loan in the original principal amount of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) (the “ Loan ”). The Loan is evidenced by a promissory note of even date herewith made payable by Mortgagor to the order of Mortgagee in the maximum principal amount of the Loan (the “ Note ”). The Note is made by Mortgagor and payable to Mortgagee and due as provided for in the Note (the “ Maturity Date ”), except as may be accelerated pursuant to the terms hereof or of the Note, the Loan Agreement or any other Loan Documents (as defined in the Loan Agreement).

(B) A condition precedent to Mortgagee’s extension of the Loan to Mortgagor is the execution and delivery by Mortgagor of this Mortgage.

NOW, THEREFORE , in consideration of the foregoing recitals, which are hereby incorporated as if fully set forth herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor agrees as follows:

Mortgagor and by these presents does hereby irrevocably mortgage (with power of sale), give, bargain, grant, hypothecate, assign, remise, release, warrant and convey to Mortgagee, its successors and assigns, with power of sale, and grants a security interest in, the following described property, rights and interests (referred to collectively herein as the “ Premises ”), all of which property, rights and interests are hereby pledged primarily and on a parity with the Real Estate (as defined below) and not secondarily:

THE REAL ESTATE located in the State of Oklahoma and legally described on Exhibit A attached hereto and made a part hereof (“ Real Estate ”);

TOGETHER WITH all improvements of every nature whatsoever now or hereafter situated on the Real Estate, and all fixtures and personal property of every nature whatsoever now or hereafter owned by Mortgagor and on, or used in connection with, the Real Estate or the improvements thereon, or in connection with any construction thereon, including all extensions, additions, improvements, betterments, renewals, substitutions and replacements to any of the foregoing and all of the right, title and interest of Mortgagor in and to any such personal property or fixtures

together with the benefit of any deposits or payments now or hereafter made on such personal property or fixtures by Mortgagor or on its behalf (“ Improvements ”);

TOGETHER WITH all easements, rights of way, gores of real estate, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights and powers, mineral interests on or pertaining to the Real Estate not previously conveyed or reserved of record, air rights, development rights, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances whatsoever, in any way now or hereafter belonging, relating or appertaining to the Real Estate, and the reversions, remainders, rents, issues and profits thereof, and all the estate, right, title, interest, property, possession, claim and demand whatsoever, at law as well as in equity, of Mortgagor of, in and to the same;

TOGETHER WITH all rents, revenues, issues, profits, proceeds, income, royalties, “accounts” including “health-care insurance receivables”, escrows, letter-of-credit rights (each as defined in the Code, as hereinafter defined), security deposits, impounds, reserves, tax refunds and other rights to monies from the Premises and/or the businesses and operations conducted by Mortgagor thereon (collectively, the “ Rents ”), to be applied against the Indebtedness (hereinafter defined); provided, however, that Mortgagor, so long as no Event of Default (as hereinafter defined) has occurred hereunder, may collect rent, revenues, issues, profits, proceeds, and income as it becomes due, but not more than one (1) month in advance thereof;

TOGETHER WITH all interest of Mortgagor in all leases now or hereafter on the Premises, whether written or oral (“ Leases ”), together with all security therefor and all monies payable thereunder, subject, however, to the conditional permission hereinabove given to Mortgagor to collect the rentals under any such Lease;

TOGETHER WITH all fixtures and articles of personal property now or hereafter owned by Mortgagor and forming a part of or used in connection with the Real Estate or the Improvements, including, but without limitation, any and all air conditioners, antennae, appliances, apparatus, awnings, basins, bathtubs, bidets, boilers, bookcases, cabinets, carpets, coolers, curtains, dehumidifiers, disposals, doors, drapes, dryers, ducts, dynamos, elevators, engines, equipment, escalators, exercise equipment, fans, fittings, floor coverings, furnaces, furnishings, furniture, hardware, heaters, humidifiers, incinerators, lighting, machinery, motors, ovens, pipes, plumbing, pumps, radiators, ranges, recreational facilities, refrigerators, screens, security systems, shades, shelving, sinks, sprinklers, stokers, stoves, toilets, ventilators, wall coverings, washers, windows, window coverings, wiring, and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are or shall be attached to the Real Estate or the Improvements in any manner; it being mutually agreed that all of the aforesaid property owned by Mortgagor and placed on the Real Estate or the Improvements, so far as permitted by law, shall be deemed to be fixtures, a part of the Real Estate, and security for the Indebtedness; provided, however, notwithstanding the agreement hereinabove expressed that certain articles of property form a part of the Real Estate covered by this Mortgage and be appropriated to its use and deemed to be realty, to the extent that such agreement and declaration may not be effective and that any of said articles may constitute goods (as said term is used in the Uniform Commercial Code of the State of Oklahoma (the “ Code ”) in effect from time to time, provided that if by reason of mandatory provisions of law,

the perfection or the effect of perfection or non-perfection of the security interests in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, “ Code ” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy), this instrument shall constitute a security agreement, creating a security interest in such goods, as collateral, in Mortgagee, as a secured party, and Mortgagor, as Debtor, all in accordance with the Code;

TOGETHER WITH all of Mortgagor’s interests in “general intangibles” including “payment intangibles” and “software” (each as defined in the Code) now owned or hereafter acquired and related to the Premises, including, without limitation, all of Mortgagor’s right, title and interest in and to: (i) all agreements, licenses, permits and contracts to which Mortgagor is or may become a party and which relate to the Premises; (ii) all obligations and indebtedness owed to Mortgagor thereunder; (iii) all intellectual property related to the Premises; and (iv) all choses in action and causes of action relating to the Premises;

TOGETHER WITH all of Mortgagor’s accounts now owned or hereafter created or acquired, including, without limitation, all of the following now owned or hereafter created or acquired by Mortgagor: (i) accounts, contract rights, health-care insurance receivables, book debts, notes, drafts, and other obligations or indebtedness owing to Mortgagor arising from the sale, lease or exchange of goods or other property and/or the performance of services; (ii) Mortgagor’s rights in, to and under all purchase orders for goods, services or other property; (iii) Mortgagor’s rights to any goods, services or other property represented by any of the foregoing; (iv) monies due or to become due to Mortgagor under all contracts for the sale, lease or exchange of goods or other property and/or the performance of services including the right to payment of any interest or finance charges in respect thereto (whether or not yet earned by performance on the part of Mortgagor); (v) “securities“, “investment property,” “financial assets,” and “securities entitlements” (each as defined in the Code), and (vi) proceeds of any of the foregoing and all collateral security and guaranties of any kind given by any person or entity with respect to any of the foregoing; and all warranties, guarantees, permits and licenses in favor of Mortgagor with respect to the Premises; and

TOGETHER WITH all proceeds of the foregoing, including, without limitation, all judgments, awards of damages and settlements hereafter made resulting from condemnation proceeds or the taking of the Premises or any portion thereof under the power of eminent domain, any proceeds of any policies of insurance maintained with respect to the Premises or proceeds of any sale, option or contract to sell the Premises or any portion thereof.

TO HAVE AND TO HOLD the Premises, unto Mortgagee, its successors and assigns, forever, for the purposes and upon the uses herein set forth together with all right to possession of the Premises after the occurrence of any Event of Default, Mortgagor hereby RELEASING AND WAIVING all rights under and by virtue of the homestead exemption laws of the State of Oklahoma.

FOR THE PURPOSE OF SECURING: (i) the payment of the Loan and all interest, late charges, reimbursement obligations, fees and expenses for letters of credit issued by Mortgagee for the benefit of Mortgagor, if any, and other indebtedness or other amounts evidenced by or owing under the Loan Agreement, the Note, this Mortgage or any of the other Loan Documents, any interest

rate swap or hedge agreement now or hereafter entered into between Mortgagor and Mortgagee or any of Mortgagee’s affiliates, and any application for letters of credit and master letter of credit agreement, together with any extensions, modifications, renewals or refinancings of any of the foregoing; (ii) the performance and observance of the covenants, conditions, agreements, representations, warranties and other liabilities and obligations of Mortgagor or any other obligor to or benefiting Mortgagee which are evidenced or secured by or otherwise provided in the Loan Agreement, the Note, this Mortgage or any of the other Loan Documents; and (iii) the reimbursement to Mortgagee of any and all sums incurred, expended or advanced by Mortgagee pursuant to any term or provision of, or constituting additional indebtedness under or secured by, this Mortgage, any of the other Loan Documents, any interest rate swap or hedge agreement or any application for letters of credit and master letter of credit agreement, with interest thereon as provided herein or therein (collectively, the “ Indebtedness ”).

IT IS FURTHER UNDERSTOOD AND AGREED THAT :

1. Title . Mortgagor represents, warrants and covenants that (a) Mortgagor is the holder of the fee simple title to the Premises, free and clear of all liens and encumbrances, except those liens and encumbrances in favor of Mortgagee and as otherwise described on Exhibit B attached hereto (“ Permitted Exceptions ”); and (b) Mortgagor has legal power and authority to mortgage and convey the Premises.

2. Maintenance, Repair, Restoration, Prior Liens, Parking . Mortgagor covenants that, so long as any portion of the Indebtedness remains unpaid, Mortgagor will:

a. promptly repair, restore or rebuild any Improvements now or hereafter on the Premises which may become damaged or be destroyed to a condition substantially similar to the condition immediately prior to such damage or destruction, whether or not proceeds of insurance are available or sufficient for such purpose;

b. keep the Premises in good condition and repair, without waste, and free from mechanics’, materialmen’s or like liens or claims or other liens or claims for lien (subject to Mortgagor’s right to contest liens as permitted by the terms of Paragraph 30 hereof);

c. pay when due the Indebtedness in accordance with the terms of the Loan Agreement, the Note and the other Loan Documents and duly perform and observe all of the terms, covenants and conditions to be observed and performed by Mortgagor under the Loan Agreement, the Note, this Mortgage and the other Loan Documents;

d. pay when due any indebtedness which may be secured by a permitted lien or charge on the Premises on a parity with, superior to or inferior to the lien hereof, and upon request, exhibit satisfactory evidence of the discharge of such lien to Mortgagee (subject to Mortgagor’s right to contest liens as permitted by the terms of Paragraph 30 hereof);

e. complete within a reasonable time any Improvements now or at any time in the process of erection upon the Premises;

f. comply with all requirements of law, municipal ordinances or restrictions and covenants of record with respect to the Premises and the use thereof;

g. obtain and maintain in full force and effect, and abide by and satisfy the material terms and conditions of, all material permits, licenses, registrations and other authorizations with or granted by any governmental or quasi-governmental authorities that may be required from time to time with respect to the performance of its obligations under this Mortgage;

h. make no material alterations in the Premises or demolish any portion of the Premises without Mortgagee’s prior written consent, except as required by law or municipal ordinance;

i. suffer or permit no change in the use or general nature of the occupancy of the Premises, without Mortgagee’s prior written consent;

j. pay when due all operating costs of the Premises;

k. not initiate or acquiesce in any zoning reclassification with respect to the Premises, without Mortgagee’s prior written consent;

l. provide and thereafter maintain adequate parking areas within the Premises as may be required by law, ordinance or regulation (whichever may be greater), together with any sidewalks, aisles, streets, driveways and sidewalk cuts and sufficient paved areas for ingress, egress and right‑of‑way to and from the adjacent public thoroughfares necessary or desirable for the use thereof; and

m. cause the Premises at all times to be operated in compliance with all federal, state, local and municipal environmental, health and safety laws, statutes, ordinances, rules and regulations.

3. Payment of Taxes and Assessments . Mortgagor will pay when due and before any penalty attaches, all general and special taxes, assessments, water charges, sewer charges, and other fees, taxes, charges and assessments of every kind and nature whatsoever (all herein generally called “ Taxes ”), whether or not assessed against Mortgagor, if applicable to the Premises or any interest therein, or the Indebtedness, or any obligation or agreement secured hereby, subject to Mortgagor’s right to contest the same, as provided by the terms hereof; and Mortgagor will furnish to Mortgagee duplicate receipts therefor marked “paid” on or before the date on which such taxes become delinquent. Mortgagee shall pay the Oklahoma Mortgage Tax.

4. Tax Deposits . If requested by Mortgagee, Mortgagor shall deposit with Mortgagee, on the first day of each month until the Indebtedness is fully paid, a sum equal to one‑twelfth (1/12th) of 105% of the most recent ascertainable annual Taxes on the Premises. If requested by Mortgagee, Mortgagor shall also deposit with Mortgagee an amount of money which, together with the aggregate of the monthly deposits to be made pursuant to the preceding sentence as of one month prior to the date on which the next installment of annual Taxes for the current calendar year becomes due, shall be sufficient to pay in full such installment of annual Taxes, as estimated by Mortgagee. Such

deposits are to be held without any allowance of interest and are to be used for the payment of Taxes next due and payable when they become due. In the event that deposits are made in accordance with this Paragraph 4 , Mortgagee shall pay such Taxes when the same become due and payable (upon submission of appropriate bills therefor from Mortgagor) or shall release sufficient funds to Mortgagor for the payment thereof. If the funds so deposited are insufficient to pay any such Taxes for any year (or installments thereof, as applicable) when the same shall become due and payable, Mortgagor shall, within ten (10) days after receipt of written demand therefor, deposit additional funds as may be necessary to pay such Taxes in full. If the funds so deposited exceed the amount required to pay such Taxes for any year, the excess shall be applied toward subsequent deposits. Said deposits need not be kept separate and apart from any other funds of Mortgagee. Mortgagee, in making any payment hereby authorized relating to Taxes, may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof. The foregoing to the contrary notwithstanding, so long as an Event of Default has not occurred, Mortgagee shall not require Mortgagor to make deposits hereunder; provided that if an Event of Default does occur, even if the same shall be cured, Mortgagee has the right to require Mortgagor to make the deposits hereunder at any time thereafter.

5. Mortgagee’s Interest In and Use of Deposits . Upon an Event of Default, Mortgagee may, at its option, apply any monies at the time on deposit pursuant to Paragraph 4 hereof to cure an Event of Default or to pay any of the Indebtedness in such order and manner as Mortgagee may elect. If such deposits are used to cure an Event of Default or pay any of the Indebtedness, Mortgagor shall immediately, upon demand by Mortgagee, deposit with Mortgagee an amount equal to the amount expended by Mortgagor from the deposits. When the Indebtedness has been fully paid, any remaining deposits shall be returned to Mortgagor. Such deposits are hereby pledged as additional security for the Indebtedness and shall not be subject to the direction or control of Mortgagor. Mortgagee shall not be liable for any act or omission taken in good faith or pursuant to the instruction of any party.

6. Insurance .

a. Mortgagor shall at all times keep all buildings, improvements, fixtures and articles of personal property now or hereafter situated on the Premises insured against loss or damage by fire and such other hazards as may reasonably be required by Mortgagee, naming Mortgagee and its successors and assigns as mortgagee and loss payee under such insurance policies, and such other insurance as Mortgagee may from time to time reasonably require, including a public liability insurance policy naming Mortgagee and its successors and assigns as an additional insured, with such policy limits and deductibles as Mortgagee may require. Such insurance policies shall be maintained with insurance companies as approved by Mortgagee. Unless Mortgagor provides to Mortgagee evidence of the insurance coverages required hereunder, Mortgagee may purchase insurance at Mortgagor’s expense to cover Mortgagee’s interest in the Premises. The insurance may, but need not, protect Mortgagor’s interest. The coverages that Mortgagee purchases may not pay any claim that Mortgagor makes or any claim that is made against Mortgagor in connection with the Premises. Mortgagor may later cancel any insurance purchased by Mortgagee, but only

after providing Mortgagee with evidence that Mortgagor has obtained insurance as required by this Mortgage. If Mortgagee purchases insurance for the Premises, Mortgagor will be responsible for the costs of such insurance, including, without limitation, interest and any other charges which Mortgagee may impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Indebtedness. The cost of the insurance may be more than the cost of insurance Mortgagor may be able to obtain on its own.

b. Mortgagor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder unless Mortgagee is included thereon as the loss payee or an additional insured as applicable, under a standard mortgagee clause acceptable to Mortgagee and such separate insurance is otherwise acceptable to Mortgagee.

c. In the event of loss, Mortgagor shall give prompt notice thereof to Mortgagee, who, if such loss exceeds Fifty Thousand Dollars ($50,000) (“ Threshold ”), shall have the sole and absolute right to make proof of loss. If such loss exceeds the Threshold or if such loss is equal to or less than the Threshold and the conditions set forth in clauses (i), (ii) and (iii) of the immediately succeeding sentence are not satisfied, then Mortgagee, solely and directly, shall receive such payment for loss from each insurance company concerned. If and only if (i) such loss is equal to or less than the Threshold, (ii) no Event of Default or event that with the passage of time, the giving of notice or both would constitute an Event of Default then exists, and (iii) Mortgagee determines that the work required to complete the repair or restoration of the Premises necessitated by such loss can be completed no later than six (6) months prior to the Maturity Date, then Mortgagee shall endorse to Mortgagor any such payment and Mortgagor may collect such payment directly. Mortgagee shall have the right, at its option and in its sole discretion, to apply any insurance proceeds received by Mortgagee pursuant to the terms of this paragraph, after the payment of all of Mortgagee’s expenses, either (i) on account of the Indebtedness, irrespective of whether such principal balance is then due and payable, whereupon Mortgagee may declare the whole of the balance of Indebtedness to be due and payable, or (ii) to the restoration or repair of the property damaged as provided in subparagraph d below; provided, however, that Mortgagee hereby agrees to permit the application of such proceeds to the restoration or repair of the damaged property, subject to the provisions of subparagraph d below, if (i) the financial covenants set forth in Section 11.18 of the Loan Agreement shall be satisfied, (ii) Mortgagee has received satisfactory evidence that such restoration or repair shall be completed no later than the date that is six (6) months prior to the Maturity Date, and (iii) no Event of Default, or event that with the passage of time, the giving of notice or both would constitute an Event of Default, then exists. If insurance proceeds are made available to Mortgagor by Mortgagee as hereinafter provided, Mortgagor shall repair, restore or rebuild the damaged or destroyed portion of the Premises so that the condition and value of the Premises are substantially the same as the condition and value of the Premises prior to being damaged or destroyed. In the event of foreclosure of this Mortgage, all right, title and interest of Mortgagor in and to any insurance policies then in force shall pass to the purchaser at the foreclosure sale.

d. If insurance proceeds are made available by Mortgagee to Mortgagor, Mortgagor shall comply with the following conditions:

i. Before commencing to repair, restore or rebuild following damage to, or destruction of, all or a portion of the Premises, whether by fire or other casualty, Mortgagor shall obtain from Mortgagee its approval of all site and building plans and specifications pertaining to such repair, restoration or rebuilding.

ii. Prior to each payment or application of any insurance proceeds to the repair or restoration of the Improvements upon the Premises to the extent permitted in subparagraph c above (which payment or application may be made, at Mortgagee’s option, through an escrow, the terms and conditions of which are satisfactory to Mortgagee and the cost of which is to be borne by Mortgagor), Mortgagee shall be satisfied as to the following:

(a) no Event of Default or any event which, with the passage of time or giving of notice would constitute an Event of Default, has occurred;

(b) either such Improvements have been fully restored, or the expenditure of money as may be received from such insurance proceeds will be sufficient to repair, restore or rebuild the Premises, free and clear of all liens, claims and encumbrances, except the lien of this Mortgage and the Permitted Exceptions, or, if such insurance proceeds shall be insufficient to repair, restore and rebuild the Premises, Mortgagor has deposited with Mortgagee such amount of money which, together with the insurance proceeds shall be sufficient to restore, repair and rebuild the Premises; and

(c) prior to each disbursement of any such proceeds, Mortgagee shall be furnished with a statement of Mortgagee’s architect (the cost of which shall be borne by Mortgagor), certifying the extent of the repair and restoration completed to the date thereof, and that such repairs, restoration, and rebuilding have been performed to date in conformity with the plans and specifications approved by Mortgagee and with all statutes, regulations or ordinances (including building and zoning ordinances) affecting the Premises; and Mortgagee shall be furnished with appropriate evidence of payment for labor or materials furnished to the Premises, and total or partial lien waivers substantiating such payments.

iii. If Mortgagor shall fail to restore, repair or rebuild the Improvements within a time deemed satisfactory by Mortgagee, then Mortgagee, at its option, may (a) commence and perform all necessary acts to restore, repair or rebuild the said Improvements for or on behalf of Mortgagor, or (b) declare an Event of Default. If insurance proceeds shall exceed the amount necessary to complete the repair, restoration or rebuilding of the Improvements, such excess shall be applied on account of the Indebtedness irrespective of whether such Indebtedness is then due and payable without payment of any premium or penalty.

7. Condemnation . If all or any part of the Premises are damaged, taken or acquired, either temporarily or permanently, in any condemnation proceeding, or by exercise of the right of eminent domain, the amount of any award or other payment for such taking or damages made in consideration thereof, to the extent of the full amount of the remaining unpaid Indebtedness, is hereby assigned to Mortgagee, who is empowered to collect and receive the same and to give proper receipts therefor in the name of Mortgagor and the same shall be paid forthwith to Mortgagee. Such award or monies shall be applied on account of the Indebtedness, irrespective of whether such Indebtedness is then due and payable and, at any time from and after the taking, Mortgagee may declare the whole of the balance of the Indebtedness to be due and payable. Notwithstanding the provisions of this paragraph to the contrary, if any condemnation or taking of less than the entire Premises occurs, and provided that no Event of Default and no event or circumstance which with the passage of time, the giving of notice or both would constitute an Event of Default then exists, and if such partial condemnation, in the reasonable discretion of Mortgagee, has no material adverse effect on the operation or value of the Premises, then the award or payment for such taking or consideration for damages resulting therefrom may be collected and received by Mortgagor, and Mortgagee hereby agrees that in such event it shall not declare the Indebtedness to be due and payable, if it is not otherwise then due and payable.

8. Stamp Tax . If, by the laws of the United States of America, or of any state or political subdivision having jurisdiction over Mortgagor, any tax is due or becomes due in respect of the execution and delivery of this Mortgage, the Loan Agreement, the Note or any of the other Loan Documents, Mortgagor shall pay such tax in the manner required by any such law. Mortgagor further agrees to reimburse Mortgagee for any sums which Mortgagee may expend by reason of the imposition of any such tax. Notwithstanding the foregoing, Mortgagor shall not be required to pay any income or franchise taxes of Mortgagee.

9. Assignment of Leases and Rents . In order to further secure payment of the Indebtedness and the observance, performance and discharge of the obligations of Mortgagor under this Mortgage and the other Loan Documents (the “ Obligations ”), Mortgagor acknowledges that, concurrently herewith, Mortgagor is delivering to Mortgagee, as additional security for the repayment of the Loan, an Assignment of Rents and Leases (the “ Assignment ”) pursuant to which Mortgagor has assigned to Mortgagee all of its interests in the rents and income from the Premises. All of the provisions of the Assignment are hereby incorporated herein as if fully set forth at length in the text of this Mortgage. Mortgagor agrees to abide by all of the provisions of the Assignment.

10. Effect of Extensions of Time and Other Changes . If the payment of the Indebtedness or any part thereof is extended or varied, if any part of any security for the payment of the Indebtedness is released, if the rate of interest charged under the Note is changed or if the time for payment thereof is extended or varied, all persons now or at any time hereafter liable therefor, or interested in the Premises or having an interest in Mortgagor, shall be held to assent to such extension, variation, release or change, and their liability and the lien and all of the provisions hereof shall continue in full force, any right of recourse against all such persons being expressly reserved by Mortgagee, notwithstanding such extension, variation, release or change.

11. Effect of Changes in Laws Regarding Taxation . If any law is enacted after the date hereof requiring (a) the deduction of any lien on the Premises from the value thereof for the purpose of taxation or (b) the imposition upon Mortgagee of the payment of the whole or any part of the Taxes, charges or liens herein required to be paid by Mortgagor, or (c) a change in the method of taxation of mortgages or debts secured by mortgages or Mortgagee’s interest in the Premises, or the manner of collection of taxes, so as to affect this Mortgage or the Indebtedness or the holders thereof, then Mortgagor, upon demand by Mortgagee, shall pay such Taxes or charges, or reimburse Mortgagee therefor; provided, however, that Mortgagor shall not be deemed to be required to pay any income or franchise taxes of Mortgagee. Notwithstanding the foregoing, if in the opinion of counsel for Mortgagee it is or may be unlawful to require Mortgagor to make such payment or the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, then Mortgagee may declare all of the Indebtedness to be immediately due and payable.

12. Mortgagee’s Performance of Defaulted Acts and Expenses Incurred by Mortgagee . If an Event of Default has occurred, Mortgagee may, but need not, make any payment or perform any act herein required of Mortgagor in any form and manner deemed expedient by Mortgagee, and may, but need not, make full or partial payments of principal or interest on prior encumbrances, if any, and purchase, discharge, compromise or settle any tax lien or other prior lien or title or claim thereof, or redeem from any tax sale or forfeiture affecting the Premises or consent to any tax or assessment or cure any default of Mortgagor in any lease of the Premises. All monies paid for any of the purposes herein authorized and all expenses paid or incurred in connection therewith, including reasonable attorneys’ fees, and any other monies advanced by Mortgagee in regard to any tax referred to in Paragraph 8 above or to protect the Premises or the lien hereof, shall be so much additional Indebtedness, and shall become immediately due and payable by Mortgagor to Mortgagee, upon demand, and with interest thereon accruing from the date incurred until paid at the Default Rate (as defined in the Note) then in effect. In addition to the foregoing, any costs, expenses and fees, including reasonable attorneys’ fees, incurred by Mortgagee in connection with (a) sustaining the lien of this Mortgage or its priority, (b) protecting or enforcing any of Mortgagee’s rights hereunder, (c) recovering any Indebtedness, (d) any litigation or proceedings affecting the Loan Agreement, the Note, this Mortgage, any of the other Loan Documents or the Premises, including without limitation, bankruptcy and probate proceedings, or (e) preparing for the commencement, defense or participation in any threatened litigation or proceedings affecting the Loan Agreement, the Note, this Mortgage, any of the other Loan Documents or the Premises shall be so much additional Indebtedness, and shall become immediately due and payable by Mortgagor to Mortgagee, upon demand, and with interest thereon accruing from the date of such demand until paid at the Default Rate. The interest accruing under this paragraph shall be immediately due and payable by Mortgagor to Mortgagee, and shall be additional Indebtedness evidenced by the Note and secured by this Mortgage. Mortgagee’s failure to act shall never be considered as a waiver of any right accruing to Mortgagee on account of any Event of Default. Should any amount paid out or advanced by Mortgagee hereunder, or pursuant to any agreement executed by Mortgagor in connection with the Loan, be used directly or indirectly to pay off, discharge or satisfy, in whole or in part, any lien or encumbrance upon the Premises or any part thereof, then Mortgagee shall be subrogated to any and all rights, equal or superior titles, liens and equities, owned or claimed by any owner or holder of said outstanding liens, charges and indebtedness, regardless of whether said liens, charges and

indebtedness are acquired by assignment or have been released of record by the holder thereof upon payment.

13. Security Agreement . Mortgagor and Mortgagee agree that this Mortgage shall constitute a “Security Agreement” within the meaning of the Code with respect to (a) all sums at any time on deposit for the benefit of Mortgagor or held by Mortgagee (whether deposited by or on behalf of Mortgagor or anyone else) pursuant to any of the provisions of this Mortgage or the other Loan Documents, and (b) with respect to any personal property included in the granting clauses of this Mortgage, which personal property may not be deemed to be affixed to the Premises or may not constitute “fixtures” (within the meaning of Section 9-102(41) of the Code) (which property is hereinafter referred to as “ Personal Property ”), and all replacements of, substitutions for, additions to, and the proceeds thereof, and the “supporting obligations” (as defined in the Code) (all of said Personal Property and the replacements, substitutions and additions thereto and the proceeds thereof being sometimes hereinafter collectively referred to as the “ Collateral ”), and that a security interest in and to the Collateral is hereby granted to Mortgagee, and the Collateral and all of Mortgagor’s right, title and interest therein are hereby assigned to Mortgagee, all to secure payment of the Indebtedness. All of the provisions contained in this Mortgage pertain and apply to the Collateral as fully and to the same extent as to any other property comprising the Premises; and the following provisions of this paragraph shall not limit the applicability of any other provision of this Mortgage but shall be in addition thereto:

a. Mortgagor (being the Debtor as that term is used in the Code) is and will be the true and lawful owner of the Collateral and has rights in and the power to transfer the Collateral, subject to no liens, charges or encumbrances other than the lien hereof, other liens and encumbrances benefiting Mortgagee and no other party, and liens and encumbrances, if any, expressly permitted by the other Loan Documents.

b. The Collateral is to be used by Mortgagor solely for business purposes.

c. The Collateral will be kept at the Real Estate and, except for Collateral no longer useful in connection with the operation of the Premises or other dispositions in the ordinary course of Mortgagor’s business (“ Obsolete Collateral ”), will not be removed therefrom without the consent of Mortgagee (being the “Secured Party” as that term is used in the Code). The Collateral may be affixed to the Real Estate but will not be affixed to any other real estate.

d. The only persons having any interest in the Premises are Mortgagor, Mortgagee and holders of interests, if any, expressly permitted hereby.

e. No financing statement (other than financing statements showing Mortgagee as the sole secured party, or with respect to liens or encumbrances, if any, expressly permitted hereby) covering any of the Collateral or any proceeds thereof is on file in any public office except pursuant hereto; and Mortgagor, at its own cost and expense, upon demand, will furnish to Mortgagee such further information and will execute and deliver to Mortgagee such financing statements and other documents in form satisfactory to Mortgagee and will do all such acts as Mortgagee may request at any time or from time to time as may be

necessary or appropriate to establish and maintain a perfected security interest in the Collateral as security for the Indebtedness, subject to no other liens or encumbrances, other than liens or encumbrances benefiting Mortgagee and no other party, and liens and encumbrances (if any) expressly permitted hereby; and Mortgagor will pay the cost of filing or recording such financing statements or other documents, and this instrument, in all public offices wherever filing or recording is deemed by Mortgagee to be desirable. Mortgagor hereby irrevocably authorizes Mortgagee at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto that (i) indicate the Collateral as all assets of Mortgagor (or words of similar effect), regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or as being of an equal or lesser scope or with greater detail, and (ii) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including whether Mortgagor is an organization, the type of organization, and any organization identification number issued to Mortgagor, and in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of the real property to which the Collateral relates. Mortgagor agrees to furnish any such information to Mortgagee promptly upon request. Mortgagor further ratifies and affirms its authorization for any financing statements and/or amendments thereto executed and filed by Mortgagee in any jurisdiction prior to the date of this Mortgage.

f. Upon an Event of Default hereunder, Mortgagee shall have the remedies of a “Secured Party” under the Code, including, without limitation, the right to take immediate and exclusive possession of the Collateral, or any part thereof, and for that purpose, so far as Mortgagor can give authority therefor, with or without judicial process, may enter (if this can be done without breach of the peace) upon any place which the Collateral or any part thereof may be situated and remove the same therefrom (provided that if the Collateral is affixed to real estate, such removal shall be subject to the conditions stated in the Code); and Mortgagee shall be entitled to hold, maintain, preserve and prepare the Collateral for sale, until disposed of, or may propose to retain the Collateral subject to Mortgagor’s right of redemption, if any, in satisfaction of Mortgagor’s obligations, as provided in the Code. Mortgagee may render the Collateral unusable without removal and may dispose of the Collateral on the Premises. Mortgagee may require Mortgagor to assemble the Collateral and make it available to Mortgagee for its possession at a place to be designated by Mortgagee which is reasonably convenient to both parties. Mortgagee will give Mortgagor at least ten (10) days’ notice of the time and place of any public sale of the Collateral or of the time at or after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is mailed, by certified United States mail or equivalent, postage prepaid, to the address of Mortgagor hereinafter set forth at least ten (10) days before the time of the sale or disposition. Mortgagee may buy at any public sale. Mortgagee may buy at private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. Any such sale may be held in conjunction with any foreclosure sale of the

Premises. If Mortgagee so elects, the Premises and the Collateral may be sold as one lot. The net proceeds realized upon any such disposition, after deduction for the expenses of retaking, holding, preparing for sale, selling and the reasonable attorneys’ fees and legal expenses incurred by Mortgagee, shall be applied against the Indebtedness in such order or manner as Mortgagee shall select. Mortgagee will account to Mortgagor for any surplus realized on such disposition.

g. The terms and provisions contained in this paragraph, unless the context otherwise requires, shall have the meanings, and be construed as, provided in the Code.

h. This Mortgage is intended to be a financing statement within the purview of Section 9-502(b) of the Code with respect to the Collateral and the goods described herein, which goods are or may become fixtures relating to the Premises. The addresses of Mortgagor (“ Debtor ”) and Mortgagee (“ Secured Party ”) are herein below set forth. This Mortgage is to be filed for recording with the Recorder of Deeds of the county or counties where the Premises are located.

i. To the extent permitted by applicable law, the security interest created hereby is specifically intended to cover all Leases between Mortgagor or its agents as lessor, and various tenants named therein, as lessee, including all extended terms and all extensions and renewals of the terms thereof, as well as any amendments to or replacement of said Leases, together with all of the right, title and interest of Mortgagor, as lessor thereunder.

j. Mortgagor represents and warrants that:

i. Mortgagor is the record owner of the Premises;

ii. Mortgagor’s chief executive office is located in the State of Georgia;

iii. Mortgagor’s state of organization is the State of Georgia;

iv. Mortgagor’s exact legal name is as set forth in the first paragraph of this Mortgage; and

v. Mortgagor’s organizational identification number is 12032774.

k. Mortgagor agrees that:

i. Where Collateral is in possession of a third party, Mortgagor will join with Mortgagee in notifying the third party of Mortgagee’s interest and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of Mortgagee;

ii. Mortgagor will cooperate with Mortgagee in obtaining control with respect to Collateral consisting of: deposit accounts, investment property, letter of credit rights and electronic chattel paper; and

iii. Until the Indebtedness is paid in full, Mortgagor will not change the state where it is located or change its company name without giving Mortgagee at least thirty (30) days’ prior written notice in each instance.

14. Restrictions on Transfe r . Mortgagor, without the prior written consent of Mortgagee, shall not effect, suffer or permit any Prohibited Transfer (as such term is defined in the Loan Agreement).

15. Single Asset Entity . Mortgagor shall not hold or acquire, directly or indirectly, any ownership interest (legal or equitable) in any real or personal property other than the Premises, or become a shareholder of, or a member or partner in, any entity which acquires any property other than the Premises, until such time as the Indebtedness has been fully repaid. Mortgagor’s articles of incorporation, partnership agreement or operating agreement, as applicable, shall limit its purpose to the acquisition, ownership, operation, leasing, maintenance, management, development and disposition of the Premises, and to engage in any lawful act or activity, and to exercise any powers, permitted to limited liability companies organized under the laws of its jurisdiction of formation that are related or incidental to and necessary, or advisable for the accomplishment of the foregoing purposes, and such purposes shall not be amended without the prior written consent of Mortgagee. Mortgagor covenants:

a. To maintain its assets, accounts, books, records, financial statements, stationery, invoices, and checks separate from and not commingled with any of those of any other person or entity;

b. To conduct its own business in its own name, pay its own liabilities out of its own funds, allocate fairly and reasonably any overhead for shared employees and office space, and to maintain an arm’s length relationship with its affiliates;

c. To hold itself out as a separate entity, correct any known misunderstanding regarding its separate identity, maintain adequate capital in light of its contemplated business operations, and observe all organizational formalities;

d. Not to guarantee or become obligated for the debts of any other entity or person or hold out its credit as being available to satisfy the obligations of others, including not acquiring obligations or securities of its partners, members or shareholders;

e. Not to pledge its assets for the benefit of any other entity or person or make any loans or advances to any person or entity;

f. Not to enter into any contract or agreement with any party which is directly or indirectly controlling, controlled by or under common control with Mortgagor (an “ Affiliate ”), except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm’s‑length basis with third parties other than any Affiliate;

g. Neither Mortgagor nor any constituent party of Mortgagor will seek the dissolution or winding up, in whole or in part, of Mortgagor, nor will Mortgagor merge with or be consolidated into any other entity;

h. Mortgagor has and will maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any constituent party of Mortgagor, Affiliate, any guarantor of the Note (including, without limitation, Guarantor) or any other person;

i. Mortgagor now has and will hereafter have no debts or obligations other than normal accounts payable in the ordinary course of business, this Mortgage, and the Loan; and any other indebtedness or other obligation of Mortgagor has been paid in full prior to, or through application of proceeds from, the funding of the Loan.

16. Events of Default; Acceleration . Each of the following shall constitute an “ Event of Default ” for purposes of this Mortgage:

a. Mortgagor fails to pay (i) any installment of principal or interest payable pursuant to the Note within on or before the date when any such payment is due, or (ii) any other amount payable to Mortgagee under the Loan Agreement, the Note, this Mortgage or any of the other Loan Documents within three (3) days after the date when any such payment is due in accordance with the terms hereof or thereof;

b. Mortgagor fails to perform or cause to be performed any other obligation or observe any other condition, covenant, term, agreement or provision required to be performed or observed by Mortgagor under the Loan Agreement, the Note, this Mortgage or any of the other Loan Documents; provided, however, that if such failure by its nature can be cured, then so long as the continued operation and safety of the Premises, and the priority, validity and enforceability of the liens created by the Mortgage or the Loan Documents and the value of the Premises are not impaired, threatened or jeopardized, then Mortgagor shall have a period (“ Cure Period ”) of thirty (30) days after Mortgagor obtains knowledge of such failure or receives written notice of such failure to cure the same and an Event of Default shall not be deemed to exist during the Cure Period, provided further that if Mortgagor commences to cure such failure during the Cure Period and is diligently and in good faith attempting to effect such cure, the Cure Period shall be extended for thirty (30) additional days, but in no event shall the Cure Period be longer than sixty (60) days in the aggregate;

c. the existence of any inaccuracy or untruth in any material respect in any representation or warranty contained in this Mortgage or any of the other Loan Documents or in any statement or certification as to facts delivered to Mortgagee by Mortgagor or any guarantor of the Note which remains uncured;

d. (i) Mortgagor or any guarantor of the Note files a voluntary petition in bankruptcy or is adjudicated a bankrupt or insolvent or files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar

relief under the present or any future federal, state, or other statute or law, or seeks or consents to or acquiesces in the appointment of any trustee, receiver or similar officer of Mortgagor or of all or any substantial part of the property of Mortgagor or any guarantor of the Note or any of the Premises, or (ii) all or a substantial part of the assets of Mortgagor or any guarantor of the Note are attached, seized, subjected to a writ or distress warrant or are levied upon unless the same is released or vacated within thirty (30) days;

e. the commencement of any involuntary petition in bankruptcy against Mortgagor or any guarantor of the Note or the institution against Mortgagor or any guarantor of the Note of any reorganization, arrangement, composition, readjustment, dissolution, liquidation or similar proceedings under any present or future federal, state or other statute or law, or the appointment of a receiver, trustee or similar officer for all or any substantial part of the property of Mortgagor or any guarantor of the Note which shall remain undismissed or undischarged for a period of sixty (60) days;

f. the dissolution, insolvency, termination, merger or winding-up of Mortgagor or any entity guarantor of the Note or the occurrence of the death or declaration of legal incompetency of any individual guarantor of the Note;

g. the occurrence of a Prohibited Transfer (as defined in the Loan Agreement); or

h. the occurrence of an “Event of Default” under the Loan Agreement, the Note or any of the other Loan Documents.

If an Event of Default occurs, Mortgagee may, at its option, declare the whole of the Indebtedness to be immediately due and payable without further notice to Mortgagor, with interest thereon accruing from the date of such Event of Default until paid at the Default Rate.

17. Foreclosure; Expense of Litigation .

a. Foreclosure . Mortgagee may foreclose this Mortgage either by judicial proceeding or pursuant to the Oklahoma Power of Sale Mortgage Foreclosure Act, 46 Okla. Stat. 40 et seq . (1991), as amended from time to time (the " Act "). The Mortgagor hereby confers upon the Mortgagee and grants to the Mortgagee the power to sell the Premises pursuant to the Act or any other applicable authority. No action of the Mortgagee based upon the provisions contained herein or contained in the Act, including, without limitation, the giving of any of the notices provided for in the Act shall constitute an election of remedies which would preclude the Mortgagee from pursuing judicial foreclosure before or at any time after commencement of the power of sale foreclosure procedure.

b. Waiver of Appraisement . Appraisement of the Premises is hereby expressly waived, or not, at the option of the Mortgagee, such option to be exercised at the time judgment is rendered in any judicial foreclosure proceeding or at any time prior thereto.

c. Power of Sale. A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW THE MORTGAGEE TO TAKE

THE PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.

d. Expenses of Litigation . In any suit to foreclose the lien hereof, there shall be allowed and included as additional indebtedness in the decree for sale all expenditures and expenses which may be paid or incurred by or on behalf of Mortgagee for reasonable attorneys’ fees, appraisers’ fees, outlays for documentary and expert evidence, stenographers’ charges, publication costs, and costs (which may be estimated as to items to be expended after entry of the decree) of procuring all such abstracts of title, title searches and examinations, title insurance policies, and similar data and assurances with respect to the title as Mortgagee may deem reasonably necessary either to prosecute such suit or to evidence to bidders at any sale which may be had pursuant to such decree the true condition of the title to or the value of the Premises. All expenditures and expenses of the nature mentioned in this paragraph and such other expenses and fees as may be incurred in the enforcement of Mortgagor’s obligations hereunder, the protection of said Premises and the maintenance of the lien of this Mortgage, including the reasonable fees of any attorney employed by Mortgagee in any litigation or proceeding affecting this Mortgage, the Loan Agreement, the Note, or any of the other Loan Documents or the Premises, including probate and bankruptcy proceedings, or in preparation for the commencement or defense of any proceeding or threatened suit or proceeding shall be immediately due and payable by Mortgagor, with interest thereon until paid at the Default Rate and shall be secured by this Mortgage.

18. Application of Proceeds of Foreclosure Sale . The proceeds of any foreclosure sale of the Premises shall be distributed and applied in such order as Mortgagee may determine in its sole and absolute discretion.

19. Appointment of Receiver . Upon or at any time after the filing of a complaint to foreclose this Mortgage, the court in which such complaint is filed shall, upon petition by Mortgagee, appoint a receiver for the Premises. Such appointment may be made either before or after sale, without notice, and without giving bond to Mortgagor or anyone claiming under Mortgagor, without regard to the solvency or insolvency of Mortgagor at the time of application for such receiver and without regard to the value of the Premises or whether the same shall be then occupied as a homestead or not and Mortgagee hereunder or any other holder of the Note may be appointed as such receiver. Such receiver shall have power to collect the rents, issues and profits of the Premises (i) during the pendency of such foreclosure suit, (ii) in case of a sale and a deficiency, during the full statutory period of redemption, whether there be redemption or not, and (iii) during any further times when Mortgagor, but for the intervention of such receiver, would be entitled to collect such rents, issues and profits. Such receiver also shall have all other powers and rights that may be necessary or are usual in such cases for the protection, possession, control, management and operation of the Premises during said period, including, to the extent permitted by law, the right to lease all or any portion of the Premises for a term that extends beyond the time of such receiver’s possession without obtaining prior court approval of such lease. The court from time to time may authorize the application of the net income received by the receiver in payment of (a) the Indebtedness, or by any decree

foreclosing this Mortgage, or any tax, special assessment or other lien which may be or become superior to the lien hereof or of such decree, provided such application is made prior to foreclosure sale, and (b) any deficiency upon a sale and deficiency.

20. Mortgagee’s Right of Possession in Case of Default . At any time after an Event of Default has occurred, Mortgagor shall, upon demand of Mortgagee, surrender to Mortgagee possession of the Premises. Mortgagee, in its discretion, may, with process of law, enter upon and take and maintain possession of all or any part of the Premises, together with all documents, books, records, papers and accounts relating thereto, and may exclude Mortgagor and its employees, agents or servants therefrom, and Mortgagee may then hold, operate, manage and control the Premises, either personally or by its agents. Mortgagee shall have full power to use such measures, legal or equitable, as in its discretion may be deemed proper or necessary to enforce the payment or security of the Rents of the Premises, including actions for the recovery of rent, actions in forcible detainer and actions in distress for rent. Without limiting the generality of the foregoing, Mortgagee shall have full power to:

a. cancel or terminate any Lease or sublease for any cause or on any ground which would entitle Mortgagor to cancel the same;

b. elect to disaffirm any Lease or sublease which is then subordinate to the lien hereof;

c. extend or modify any then existing Leases and to enter into new Leases, which extensions, modifications and Leases may provide for terms to expire, or for options to lessees to extend or renew terms to expire, beyond the Maturity Date and beyond the date of the issuance of a deed or deeds to a purchaser or purchasers at a foreclosure sale, it being understood and agreed that any such Leases, and the options or other such provisions to be contained therein, shall be binding upon Mortgagor and all persons whose interests in the Premises are subject to the lien hereof and upon the purchaser or purchasers at any foreclosure sale, notwithstanding any redemption from sale, discharge of the Indebtedness, satisfaction of any foreclosure judgment, or issuance of any certificate of sale or deed to any purchaser;

d. make any repairs, renewals, replacements, alterations, additions, betterments and improvements to the Premises as Mortgagee deems are necessary;

e. insure and reinsure the Premises and all risks incidental to Mortgagee’s possession, operation and management thereof; and

f. receive all of such Rents.

21. Mortgagee’s Right to Sell in Case of Default . At any time after an Event of Default has occurred, Mortgagee, in its sole discretion, may, with or without entry, personally or by attorney, sell to the highest bidder all or any part of the Premises, and all right, title and interest therein as an entirety, or in separate lots, as Mortgagee may elect, and in one sale or in any number of separate sales held at one time or at any number of times, all in any manner and upon such notice as provided by the Code or the Act. Upon the completion of any such sale or sales, Mortgagee shall transfer

and deliver, or cause to be transferred and delivered, to the purchaser the property so sold, in the manner and form provided by the Code or the Act, and Mortgagee is hereby irrevocably appointed the true and lawful attorney-in-fact of Mortgagor, in its name and stead, to make all necessary transfers of property thus sold, and for that purpose Mortgagee may execute and deliver, for and in the name of Mortgagor, all necessary instruments of assignment and transfer, Mortgagor hereby ratifying and confirming all that said attorney-in-fact shall lawfully do. All proceeds of any such sale or sales remaining after payment of the Indebtedness shall be paid to Mortgagee, its successors and assigns, or to whomever is entitled to receive them.

22. Application of Income Received by Mortgagee . Mortgagee, in the exercise of the rights and powers hereinabove conferred upon it, shall have full power to use and apply the Rents of the Premises to the payment of or on account of the following, in such order as Mortgagee may determine:

a. to the payment of the operating expenses of the Premises, including cost of management and leasing thereof (which shall include compensation to Mortgagee and its agent or agents, if management be delegated to an agent or agents, and shall also include lease commissions and other compensation and expenses of seeking and procuring tenants and entering into Leases), established claims for damages, if any, and premiums on insurance hereinabove authorized;

b. to the payment of taxes and special assessments now due or which may hereafter become due on the Premises; and

c. to the payment of any Indebtedness, including any deficiency which may result from any foreclosure sale.

23. Compliance with Oklahoma Mortgage Foreclosure Law .

a. If any provision in this Mortgage shall be inconsistent with any provision of the Act, provisions of the Act shall take precedence over the provisions of this Mortgage, but shall not invalidate or render unenforceable any other provision of this Mortgage that can be construed in a manner consistent with the Act.

b. If any provision of this Mortgage shall grant to Mortgagee (including Mortgagee acting as a mortgagee‑in‑possession) or a receiver appointed pursuant to the provisions of Paragraph 20 of this Mortgage any powers, rights or remedies prior to, upon or following the occurrence of an Event of Default which are more limited than the powers, rights or remedies that would otherwise be vested in Mortgagee or in such receiver under the Act in the absence of said provision, Mortgagee and such receiver shall be vested with the powers, rights and remedies granted in the Act to the full extent permitted by law.

c. Without limiting the generality of the foregoing, all expenses incurred by Mortgagee, which are of the type referred to in the Act, whether incurred before or after any decree or judgment of foreclosure, and whether or not enumerated in Paragraph 12, 18 or 31 of this Mortgage, shall be added to the Indebtedness and/or the judgment of foreclosure.

24. Rights Cumulative . Each right, power and remedy herein conferred upon Mortgagee is cumulative and in addition to every other right, power or remedy, express or implied, given now or hereafter existing under any of the Loan Documents or at law or in equity, and each and every right, power and remedy herein set forth or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by Mortgagee, and the exercise or the beginning of the exercise of one right, power or remedy shall not be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy, and no delay or omission of Mortgagee in the exercise of any right, power or remedy accruing hereunder or arising otherwise shall impair any such right, power or remedy, or be construed to be a waiver of any Event of Default or acquiescence therein.

25. Mortgagee’s Right of Inspection . Mortgagee and its representatives shall have the right to inspect the Premises and the books and records with respect thereto at all reasonable times upon not less than twenty‑four (24) hours prior notice to Mortgagor, and access thereto, subject to the rights of tenants in possession, shall be permitted for that purpose. Prior to the occurrence of an Event of Default, Mortgagee may elect to make Mortgagor liable for the costs, fees and expenses incurred by Mortgagee, or for which Mortgagee has become obligated, in connection with up to two such inspections per year, and after the occurrence of an Event of Default, Mortgagor shall be liable for the costs, fees and expenses incurred by Mortgagee, or for which Mortgagee has become obligated, in connection with all such inspections and/or verifications. Mortgagor’s obligation to pay such costs shall constitute part of the Indebtedness, payable by Mortgagor to Mortgagee on demand.

26. Release Upon Payment and Discharge of Mortgagor’s Obligations . Mortgagee shall release this Mortgage and the lien hereof by proper instrument upon payment and discharge of all Indebtedness, including payment of all reasonable expenses incurred by Mortgagee in connection with the execution of such release.

27. Notices . Any notices, communications and waivers under this Mortgage shall be in writing and shall be (i) delivered in person, (ii) mailed, postage prepaid, either by registered or certified mail, return receipt requested, (iii) by overnight express carrier, or (iv) by facsimile transmission or email, addressed in each case as follows:



To Mortgagee:	Housing & Healthcare Funding, LLC
	2 Wisconsin Circle, Ste. 540
	Chevy Chase, Maryland 20815
	Attention: Michael Gehl
	Phone: 212-971-9779
	Facsimile: ___________________
	Email: mgehl@hhcfinance.com

With a copy to:	Gutnicki LLP
	4711 Golf Road, Suite 200



	Skokie, Illinois 60076
	Attn: Abraham A. Gutnicki
	Facsimile: 847-933-9285
	Email: agutnicki@gutnicki.com

To Mortgagor:	QC Property Holdings, LLC
	1145 Hembree Road
	Roswell, GA 30076
	Attn: Boyd P. Gentry
	Facsimile: 678-869-5123
	Email: bpg@adcarehealth.com

With copy to:	Holt Ney Zatcoff & Wasserman, LLP
	100 Galleria Parkway, Suite 1800
	Atlanta, GA 30339
	Attn: Ellen W. Smith
	Facsimile: 770-956-1490
	Email: esmith@hnzw.com

or to any other address as to any of the parties hereto, as such party shall designate in a written notice to the other party hereto. All notices sent pursuant to the terms of this paragraph shall be deemed received (i) if personally delivered, then on the date of delivery, (ii) if sent by overnight express carrier, then on the next federal banking day immediately following the day sent, (iii) if sent by registered or certified mail, then on the earlier of the third federal banking day following the day sent or when actually received, or (iv) if sent by facsimile or email, as evidenced by receipt of a successful transmission report, (followed by delivery by one of the other means identified in (i)-(iii)); provided, however, that if any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender unless expressly set forth in such notice.

28. Waiver of Rights . Mortgagor hereby covenants and agrees that it will not at any time insist upon or plead, or in any manner claim or take any advantage of, any stay, exemption or extension law or any so‑called “Moratorium Law” now or at any time hereafter in force providing for the valuation or appraisement of the Premises, or any part thereof, prior to any sale or sales thereof to be made pursuant to any provisions herein contained, or to any decree, judgment or order of any court of competent jurisdiction; or, after such sale or sales, claim or exercise any rights under any statute now or hereafter in force to redeem the property so sold, or any part thereof, or relating to the marshalling thereof, upon foreclosure sale or other enforcement hereof, and without limiting the foregoing:

a. Mortgagor hereby expressly waives any and all rights of reinstatement and redemption, if any, under any order or decree of foreclosure of this Mortgage, on its own

behalf and on behalf of each and every person, it being the intent hereof that any and all such rights of reinstatement and redemption of the Mortgagor and of all other persons are and shall be deemed to be hereby waived to the full extent permitted by the provisions of applicable law;

b. Mortgagor will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any right, power remedy herein or otherwise granted or delegated to Mortgagee but will suffer and permit the execution of every such right, power and remedy as though no such law or laws had been made or enacted; and

c. If Mortgagor is a trustee, Mortgagor represents that the provisions of this paragraph (including the waiver of reinstatement and redemption rights) were made at the express direction of Mortgagor’s beneficiaries and the persons having the power of direction over Mortgagor, and are made on behalf of the trust estate of Mortgagor and all beneficiaries of Mortgagor, as well as all other persons mentioned above.

29. Reserved .

30. Contests . Notwithstanding anything to the contrary herein contained, Mortgagor shall have the right to contest by appropriate legal proceedings diligently prosecuted any Taxes imposed or assessed upon the Premises or which may be or become a lien thereon and any mechanics’, materialmen’s or other liens or claims for lien upon the Premises (all herein called “ Contested Liens ”), and no Contested Liens shall constitute an Event of Default hereunder if, but only if:

a. Mortgagor shall forthwith give notice of any Contested Lien to Mortgagee at the time the same shall be asserted;

b. Mortgagor shall either pay under protest or deposit with Mortgagee the full amount (herein called “ Lien Amount ”) of such Contested Lien, together with such amount as Mortgagee may reasonably estimate as interest or penalties which might arise during the period of contest; provided that in lieu of such payment Mortgagor may furnish to Mortgagee a bond or title indemnity in such amount and form, and issued by a bond or title insuring company, as may be satisfactory to Mortgagee;

c. Mortgagor shall diligently prosecute the contest of any Contested Lien by appropriate legal proceedings having the effect of staying the foreclosure or forfeiture of the Premises, and shall permit Mortgagee to be represented in any such contest and shall pay all expenses incurred in so doing, including fees and expenses of Mortgagee’s counsel (all of which shall constitute so much additional Indebtedness bearing interest at the Default Rate until paid, and payable upon demand);

d. Mortgagor shall pay such Contested Lien and all Lien Amounts together with interest and penalties thereon (i) if and to the extent that any such Contested Lien shall be determined adverse to Mortgagor, or (ii) forthwith upon demand by Mortgagee if, in the opinion of Mortgagee, and notwithstanding any such contest, the Premises shall be in jeopardy or in danger of being forfeited or foreclosed; provided that if Mortgagor shall fail

so to do, Mortgagee may, but shall not be required to, pay all such Contested Liens and Lien Amounts and interest and penalties thereon and such other sums as may be necessary in the judgment of Mortgagee to obtain the release and discharge of such liens; and any amount expended by Mortgagee in so doing shall be so much additional Indebtedness bearing interest at the Default Rate until paid, and payable upon demand; and provided further that Mortgagee may in such case use and apply monies deposited as provided in subsection (b) above and may demand payment upon any bond or title indemnity furnished as aforesaid.

31. Expenses Relating to Note and Mortgage .

a. Mortgagor will pay all expenses, charges, costs and fees relating to the Loan or necessitated by the terms of the Loan Agreement, the Note, this Mortgage or any of the other Loan Documents, including without limitation, Mortgagee’s reasonable attorneys’ fees in connection with the negotiation, documentation, administration, servicing and enforcement of the Loan Agreement, the Note, this Mortgage and the other Loan Documents, all filing, registration and recording fees, all other expenses incident to the execution and acknowledgment of this Mortgage and all federal, state, county and municipal taxes, and other taxes (provided Mortgagor shall not be required to pay any income or franchise taxes of Mortgagee), duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Loan Agreement, the Note and this Mortgage. Mortgagor recognizes that, during the term of this Mortgage, Mortgagee:

i. May be involved in court or administrative proceedings, including, without restricting the foregoing, foreclosure, probate, bankruptcy, creditors’ arrangements, insolvency, housing authority and pollution control proceedings of any kind, to which Mortgagee shall be a party by reason of the Loan Documents or in which the Loan Documents or the Premises are involved directly or indirectly;

ii. May make preparations following the occurrence of an Event of Default hereunder for the commencement of any suit for the foreclosure hereof, which may or may not be actually commenced;

iii. May make preparations following the occurrence of an Event of Default hereunder for, and do work in connection with, Mortgagee’s taking possession of and managing the Premises, which event may or may not actually occur;

iv. May make preparations for and commence other private or public actions to remedy an Event of Default hereunder, which other actions may or may not be actually commenced;

v. May enter into negotiations with Mortgagor or any of its agents, employees or attorneys in connection with the existence or curing of any Event of Default hereunder, the sale of the Premises, the assumption by any third party of liability for any of the Indebtedness or the transfer of the Premises in lieu of foreclosure; or

vi. May enter into negotiations with Mortgagor or any of its agents, employees or attorneys pertaining to Mortgagee’s approval of actions taken or proposed to be taken by Mortgagor which approval is required by the terms of this Mortgage.

b. All expenses, charges, costs and fees described in this Paragraph 31 shall be so much additional Indebtedness, shall bear interest from the date so incurred until paid at the Default Rate and shall be paid, together with said interest, by Mortgagor forthwith upon demand.

32. Financial Statements . Mortgagor represents and warrants that the financial statements for Mortgagor and the Premises previously submitted to Mortgagee are true, complete and correct in all material respects, disclose all actual and contingent liabilities of Mortgagor and/or relating to the Premises and do not contain any untrue statement of a material fact or omit to state a fact material to such financial statements. No material adverse change has occurred in the financial condition of Mortgagor or the Premises from the dates of said financial statements until the date hereof. Mortgagor shall furnish to Mortgagee such financial information as required by the Loan Agreement.

33. Statement of Indebtedness . Mortgagor, within seven (7) days after being so requested by Mortgagee, shall furnish a duly acknowledged written statement setting forth the amount of the debt secured by this Mortgage, the date to which interest has been paid and stating either that no offsets or defenses exist against such debt or, if such offsets or defenses are alleged to exist, the nature thereof.

34. Further Instruments . Upon request of Mortgagee, Mortgagor shall execute, acknowledge and deliver all such additional instruments and further assurances of title and shall do or cause to be done all such further acts and things as may reasonably be necessary to fully effectuate the intent of this Mortgage and of the other Loan Documents.

35. Additional Indebtedness Secured . All persons and entities with any interest in the Premises or about to acquire any such interest should be aware that this Mortgage secures more than the stated principal amount of the Note and interest thereon; this Mortgage secures any and all other amounts which may become due under the Note or any other document or instrument evidencing, securing or otherwise affecting the Indebtedness, including, without limitation, any and all amounts expended by Mortgagee to operate, manage or maintain the Premises or to otherwise protect the Premises or the lien of this Mortgage.

36. Indemnity . Mortgagor hereby covenants and agrees that no liability shall be asserted or enforced against Mortgagee in the exercise of the rights and powers granted to Mortgagee in this Mortgage, and Mortgagor hereby expressly waives and releases any such liability. Mortgagor shall indemnify and save Mortgagee harmless from and against any and all liabilities, obligations, losses, damages, claims, costs and expenses (including reasonable attorneys’ fees and court costs) (collectively, “ Claims ”) of whatever kind or nature which may be imposed on, incurred by or asserted against Mortgagee at any time by any third party which relate to or arise from: (a) any suit or proceeding (including probate and bankruptcy proceedings), or the threat thereof, in or to which Mortgagee may or does become a party, either as plaintiff or as a defendant, by reason of this

Mortgage or for the purpose of protecting the lien of this Mortgage; (b) the offer for sale or sale of all or any portion of the Premises; and (c) the ownership, leasing, use, operation or maintenance of the Premises, if such Claims relate to or arise from actions taken prior to the surrender of possession of the Premises to Mortgagee in accordance with the terms of this Mortgage; provided, however, that Mortgagor shall not be obligated to indemnify or hold Mortgagee harmless from and against any Claims directly arising from the gross negligence or willful misconduct of Mortgagee. All costs provided for herein and paid for by Mortgagee shall be so much additional Indebtedness and shall become immediately due and payable upon demand by Mortgagee and with interest thereon from the date incurred by Mortgagee until paid at the Default Rate.

37. Subordination of Property Manager’s Lien . Any property management agreement for the Premises entered into hereafter with a property manager shall contain a provision whereby the property manager agrees that any and all mechanics’ lien rights that the property manager or anyone claiming by, through or under the property manager may have in the Premises shall be subject and subordinate to the lien of this Mortgage and shall provide that Mortgagee may terminate such agreement at any time after the occurrence of an Event of Default hereunder. Such property management agreement or a short form thereof, at Mortgagee’s request, shall be recorded with the Recorder of Deeds of the county where the Premises are located. In addition, if any property management agreement in existence as of the date hereof does not contain a subordination provision, Mortgagor shall cause the property manager under such agreement to enter into a subordination of the management agreement with Mortgagee, in recordable form, whereby such property manager subordinates present and future lien rights and those of any party claiming by, through or under such property manager to the lien of this Mortgage.

38. Compliance with Environmental Laws . Mortgagor acknowledges that concurrently herewith Mortgagor has executed and delivered to Mortgagee an Environmental Indemnity Agreement (“ Indemnity ”) pursuant to which Mortgagor and the Guarantor (as defined in the Loan Agreement) have fully indemnified Mortgagee for certain environmental matters concerning the Premises, as more particularly described therein. The provisions of the Indemnity are hereby incorporated herein, and this Mortgage shall secure the obligations of Mortgagor thereunder. Mortgagor agrees to abide by all of the provisions of the Indemnity.

39. Miscellaneous .

a. Successors and Assigns . This Mortgage and all provisions hereof shall be binding upon and enforceable against Mortgagor and its assigns and other successors. This Mortgage and all provisions hereof shall inure to the benefit of Mortgagee, its successors and assigns and any holder or holders, from time to time, of the Note.

b. Invalidity of Provisions; Governing Law; Non-Homestead . In the event that any provision of this Mortgage is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any administrative agency or any court, Mortgagor and Mortgagee shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of this Mortgage, and the validity and enforceability of the remaining provisions, or portions or applications

thereof, shall not be affected thereby and shall remain in full force and effect. This Mortgage is to be construed in accordance with and governed by the laws of the State of Oklahoma.

c. Municipal Requirements . Mortgagor shall not by act or omission permit any building or other improvement on premises not subject to the lien of this Mortgage to rely on the Premises or any part thereof or any interest therein to fulfill any municipal or governmental requirement, and Mortgagor hereby assigns to Mortgagee any and all rights to give consent for all or any portion of the Premises or any interest therein to be so used. Similarly, no building or other improvement on the Premises shall rely on any premises not subject to the lien of this Mortgage or any interest therein to fulfill any governmental or municipal requirement. Any act or omission by Mortgagor which would result in a violation of any of the provisions of this subparagraph shall be void.

d. Rights of Tenants . Mortgagee shall have the right and option to commence a civil action to foreclose this Mortgage and to obtain a decree of foreclosure and sale subject to the rights of any tenant or tenants of the Premises having an interest in the Premises prior to that of Mortgagee. The failure to join any such tenant or tenants of the Premises as party defendant or defendants in any such civil action or the failure of any decree of foreclosure and sale to foreclose their rights shall not be asserted by Mortgagor as a defense in any civil action instituted to collect the Indebtedness or any part thereof or any deficiency remaining unpaid after foreclosure and sale of the Premises, any statute or rule of law at any time existing to the contrary notwithstanding.

e. Option of Mortgagee to Subordinate . At the option of Mortgagee, this Mortgage shall become subject and subordinate, in whole or in part (but not with respect to priority of entitlement to insurance proceeds or any condemnation or eminent domain award) to any and all leases of all or any part of the Premises upon the execution by Mortgagee of a unilateral declaration to that effect and the recording thereof in the Office of the Recorder of Deeds in and for the county wherein the Premises are situated.

f. Mortgagee-in-Possession . Nothing herein contained shall be construed as constituting Mortgagee a mortgagee-in-possession in the absence of the actual taking of possession of the Premises by Mortgagee pursuant to this Mortgage.

g. Relationship of Mortgagee and Mortgagor . Mortgagee shall in no event be construed for any purpose to be a partner, joint venturer, agent or associate of Mortgagor or of any lessee, operator, concessionaire or licensee of Mortgagor in the conduct of their respective businesses, and, without limiting the foregoing, Mortgagee shall not be deemed to be such partner, joint venturer, agent or associate on account of Mortgagee becoming a mortgagee-in-possession or exercising any rights pursuant to this Mortgage, any of the other Loan Documents, or otherwise. The relationship of Mortgagor and Mortgagee hereunder is solely that of debtor/creditor.

h. Time of the Essence . Time is of the essence for the payment by Mortgagor of all amounts due and owing to Mortgagee under the Loan Agreement, the Note and the other

Loan Documents and the performance and observance by Mortgagor of all terms, conditions, obligations and agreements contained in this Mortgage and the other Loan Documents.

i. No Merger . The parties hereto intend that the Mortgage and the lien hereof shall not merge in fee simple title to the Premises, and if Mortgagee acquires any additional or other interest in or to the Premises or the ownership thereof, then, unless a contrary intent is manifested by Mortgagee as evidenced by an express statement to that effect in an appropriate document duly recorded, this Mortgage and the lien hereof shall not merge in the fee simple title and this Mortgage may be foreclosed as if owned by a stranger to the fee simple title.

j. Intentionally omitted .

k. Consent to Jurisdiction . TO INDUCE MORTGAGEE TO ACCEPT THE NOTE, MORTGAGOR IRREVOCABLY AGREES THAT, SUBJECT TO MORTGAGEE’S SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO THE LOAN, THE NOTE AND THIS MORTGAGE WILL BE LITIGATED IN COURTS HAVING SITUS IN CHEVY CHASE, MARYAND, UNLESS APPLICABLE LAW REQUIRES JURISDICTION OF THE STATE WHERE THE PREMISES IS LOCATED. MORTGAGOR HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN CHEVY CHASE, MARYAND.

l. Waiver of Jury Trial . MORTGAGOR AND MORTGAGEE (BY ACCEPTANCE HEREOF), HAVING BEEN REPRESENTED BY COUNSEL EACH KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS MORTGAGE OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS MORTGAGE OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS MORTGAGE, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. MORTGAGOR AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST MORTGAGEE OR ANY OTHER PERSON INDEMNIFIED UNDER THIS MORTGAGE ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

m. Complete Agreement . This Mortgage, the Loan Agreement, the Note and the other Loan Documents constitute the complete agreement between the parties with respect to the subject matter hereof, and the Loan Documents may not be modified, altered or amended except by an agreement in writing signed by both Mortgagor and Mortgagee.

n. Government Regulation . Mortgagor shall not (a) be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation,

the U.S. Office of Foreign Asset Control list) that prohibits or limits Mortgagee from making any advance or extension of credit to Mortgagor or from otherwise conducting business with Mortgagor, or (b) fail to provide documentary or other evidence of Mortgagor's identity as may be requested by Mortgagee at any time to enable Mortgagee to verify Mortgagor's identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.

o. USA PATRIOT ACT NOTIFICATION . The following notification is provided to Mortgagor pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318: IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT . To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit or other financial services product. What this means for Mortgagor: When Mortgagor opens an account, if Mortgagor is an individual, Mortgagee will ask for Mortgagor’s name, taxpayer identification number, residential address, date of birth, and other information that will allow Mortgagee to identify Mortgagor. Mortgagee may also ask, if Mortgagor is an individual, to see Mortgagor’s driver’s license or other identifying documents, and, if Mortgagor is not an individual, to see Mortgagor’s legal organizational documents or other identifying documents.

p. Collateral Protection Act . Mortgagor is hereby notified as follows: Unless Mortgagor provides Mortgagee with evidence of the insurance coverage required by this Mortgage, or any of the other Loan Documents, Mortgagee may purchase insurance at Mortgagor's expense to protect Mortgagee's interests in the Premises or any other collateral for the Indebtedness or Obligations. This insurance may, but need not protect Mortgagor's interests. The coverage Mortgagee purchases may not pay any claim that Mortgagor makes or any claim that is made against Mortgagor in connection with the Premises or any other collateral for the Indebtedness or Obligations. Mortgagor may later cancel any insurance purchased by Mortgagee but only after providing Mortgagee with evidence that Mortgagor has obtained insurance as required by this Mortgage, or any of the other Loan Documents. If Mortgagee purchases insurance for the Premises or any other collateral for the Indebtedness or Obligations, Mortgagor will be responsible for the costs of that insurance, including interest on any other charges that Mortgagee may lawfully impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the total outstanding Indebtedness. The costs of the insurance may be more than the cost of insurance that Mortgagor may be able to obtain on its own.

[Signature Page Follows]

IN WITNESS WHEREOF , Mortgagor has executed and delivered this Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing the day and year first above written.



MORTGAGOR:

QC Property Holdings, LLC , A Georgia limited liability company

	By:	/s/ Ronald W. Fleming
	Name:	Ronald W. Fleming
	Title:	Manager



STATE OF ______________	)
	)	ss
COUNTY OF ____________	)

I, the undersigned, a Notary Public in and for said County, in the State aforesaid, do hereby certify that Ronald W. Fleming , the Manager of QC Property Holdings, LLC , a Georgia limited liability company (the “Company”), who is personally known to me to be the same person whose name is subscribed to the foregoing instrument as such __________________, appeared before me this day in person and acknowledged that he signed and delivered the said instrument as his own free and voluntary act as _____________________ of the Company and as the free and voluntary act of the Company, for the uses and purposes therein set forth.

GIVEN under my hand and notarial seal, this ___ day of _______, 2013.




	NOTARY PUBLIC

	(SEAL)

HHC Funding / QC Property Holdings, LLC

Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing

Signature Page

EXHIBIT A

LEGAL DESCRIPTION

Beginning at a point located South 00°28'33" East a distance of 503.87 feet and North 89°31 '27" East a distance of 30.00 feet from the Northwest Comer of said Northeast Quarter (NE/4);

Thence from said Point of Beginning South 00°28'33" East a distance of293.65 feet to a point on a curve to the right, said curve having a central angle of 15°52'38" and a radius of

205.65 feet;

Thence along the arc of said curve in a Southwesterly direction a distance of 56.99 feet;

Thence South 89°51'09" East a distance of 722.34 feet;

Thence North 00°28'33" West a distance of 350.00 feet;

Thence North 89°51 '09" West a distance of 714.50 feet to the Point of Beginning.

Together with rights of ingress and egress established by the easement estate created by

The North 15 feet of the following described tract:

Thence from said Point of Beginning, said easement being 15.00 feet North and 15.00 feet South of the following described line;

South 89°51'09" East 584.00 feet to the point of termination.

Property Address: 13500 Brandon Place, Oklahoma City, OK APN: 3861-14-947-1090

A-1

EXHIBIT B

PERMITTED EXCEPTIONS

1. Ad valorem taxes for 2013, amount of which is not ascertainable, not yet due or payable.

2. All interest in and to all oil, gas, coal and other minerals and all rights pertaining thereto.


3.	Journal Entry entered in Logan County District Court Case No. 11244 establishing Conservancy District No. 11 recorded in Book 2213, Page 228.


4.	Rights of residents of the facility on the land pursuant to unrecorded residency agreements, if any.


5.	Easement in favor of Westchase Land Co., Limited Partnership recorded in Book 5576,

Page 1628.

6. Easement in favor of the City of Oklahoma City recorded in Book 5594, Page 1558.

7. Easement in favor of the City of Oklahoma City recorded in Book 5594, Page 1561.

8. Right-of-Way in favor of the City of Oklahoma City, recorded in Book 5702, Page 874.


9.	Right-of-Way in favor of Conoco, Inc., via Assignment, recorded in Book 7214, Page 1010.


10.	Memorandum of Agreement in favor of Cox Communications Oklahoma City, Inc., recorded in Book 11391, Page 1621.


11.	Easement In favor of CoxCom, Inc., d/b/a Cox Communications Oklahoma City recorded in Book 11671, Page 1681.


12.	The following matters disclosed by an ALTA/ACSM survey made by James S. Yager, LPLS No. 1006 on May 11, 2012:


a.	Encroachment of sign into public street right of way near Northwest corner of subject property.


b.	Rights, if any, of property owners adjoining on the South in and to that portion of subject property lying between the property line and fence inside said line.


13.	Notice of West Edmond Hunton Lime Unit and Surface Rights recorded in Book 12208, Page 1863.

B-1

Exhibit 10.33

GUARANTY

THIS GUARANTY (this “ Guaranty ”) is dated as of September 27, 2013 by AdCare Health Systems, Inc. , an Ohio corporation (“ Guarantor ”), to and for the benefit of Housing & Healthcare Funding, LLC , a Delaware limited liability company, its successors and assigns (“ Lender ”).

R E C I T A L S :

A. Pursuant to the terms and conditions of that certain Loan and Security Agreement of even date herewith (as amended and/or restated from time to time, the “ Loan Agreement ”) between Lender and QC Property Holdings, LLC, a Georgia limited liability company (“ Borrower ”), Lender has extended to Borrower a loan in the original principal amount of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) (the “ Loan ”). All terms not otherwise defined herein shall have the meanings set forth in the Loan Agreement.

B. The Loan is evidenced by that certain Promissory Note of even date herewith made payable by Borrower to the order of Lender in the maximum principal amount of the Loan (as amended and/or restated from time to time, the “ Note ”).

C. The Note is secured by, among other things: (i) a Mortgage, Security Agreement Assignment of Leases and Rents and Fixture Filing of even date herewith (as amended and/or restated from time to time, the “ Mortgage ”), from Borrower to and for the benefit of Lender encumbering the real property, improvements and personalty described therein (the “ Property ”) and (ii) all other Loan Documents (as defined in the Loan Agreement).

D. As a condition precedent to Lender’s extension of the Loan to Borrower and in consideration therefor, Lender has required the execution and delivery of (i) this Guaranty by Guarantor, (ii) the Note, (iii) the Mortgage, (iv) the Loan Agreement, and (v) the other Loan Documents (as defined in the Loan Agreement).

E. Guarantor, as an affiliate of Borrower, having a financial interest in the success of Borrower, has therefore agreed to execute and deliver this Guaranty to Lender.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, Guarantor hereby agrees as follows:

1. Guaranty . Guarantor hereby, unconditionally and irrevocably guarantees to Lender the punctual payment and performance when due, whether at stated maturity or by acceleration or otherwise, of the indebtedness and other obligations of Borrower to Lender evidenced by the Note and any other amounts that may become owing by Borrower under the Loan Documents (such indebtedness, obligations, and other amounts are hereinafter referred to as the “ Payment Obligations ”). This Guaranty is a present and continuing guaranty of payment and not of

collectibility, and Lender shall not be required to prosecute collection, enforcement or other remedies against Borrower or any other guarantor of the Payment Obligations, or to enforce or resort to any collateral for the repayment of the Payment Obligations or other rights or remedies pertaining thereto, before calling on Guarantor for payment. If for any reason Borrower shall fail or be unable to pay, punctually and fully, any of the Payment Obligations, Guarantor shall pay such obligations to Lender in full immediately upon demand. One or more successive actions may be brought against Guarantor, as often as Lender deems advisable, until all of the Payment Obligations are paid and performed in full. The Payment Obligations together with all other payment and performance obligations of Guarantor hereunder are referred to herein as “ Borrower’s Obligations ”.

2. Representations and Warranties . The following shall constitute representations and warranties of Guarantor, and Guarantor hereby acknowledges that Lender intends to make the Loan in reliance thereon:

a. Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Ohio. Guarantor has full power and authority to enter into this Guaranty and to perform all of its duties and obligations under this Guaranty; such execution and performance have been duly authorized by all necessary manager, member and/or shareholder approval.

b. Guarantor is not in default and no event has occurred that with the passage of time and/or the giving of notice will constitute a default under any agreement to which a Guarantor is a party, the effect of which will impair performance by a Guarantor of its or his obligations under this Guaranty. Neither the execution and delivery of this Guaranty nor compliance with the terms and provisions hereof will violate any applicable law, rule, regulation, judgment, decree or order, or will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind that creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the property or assets of a Guarantor, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which a Guarantor is a party or to which a Guarantor or the property of a Guarantor may be subject.

c. There is not any litigation, arbitration, governmental or administrative proceedings, actions, examinations, claims or demands pending, or to knowledge of Guarantor, threatened that could adversely affect performance by a Guarantor of its obligations under this Guaranty.

d. Neither this Guaranty nor any statement or certification as to facts previously furnished or required herein to be furnished to Lender by Guarantor contains any material inaccuracy or untruth in any representation, covenant or warranty or omits to state a fact material to this Guaranty.

e. Guarantor has received copies of, and has had the opportunity to review, all of the Loan Documents referred to in this Guaranty, and the representations and warranties

made in the Loan Agreement with respect to Guarantor are true and correct as of the date hereof, and shall remain true and correct at all times hereafter so long as any part of the Payment Obligations shall remain outstanding.

f. This Guaranty creates legal, valid, and binding obligations of Guarantor enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, moratorium, insolvency, reorganization, fraudulent conveyance or other laws affecting the enforcement of creditors’ rights generally or by general equitable principles.

3. Continuing Guaranty . Guarantor agrees that performance of Borrower’s Obligations by Guarantor shall be a primary obligation, shall not be subject to any counterclaim, set‑off, abatement, deferment or defense based upon any claim that any Guarantor may have against Lender, Borrower, any other guarantor of Borrower’s Obligations, or any other person or entity, and shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by, any circumstance or condition (whether or not Guarantors shall have any knowledge thereof), including without limitation:

a. any lack of validity or enforceability of any of the Loan Documents;

b. any termination, amendment, modification or other change in any of the Loan Documents, including, without limitation, any modification of the interest rate(s) described therein;

c. any furnishing, exchange, substitution or release of any collateral securing repayment of the Loan, or any failure to perfect any lien in such collateral;

d. any failure, omission or delay on the part of Borrower, Guarantor, any other guarantor of Borrower’s Obligations, or Lender to conform or comply with any term of any of the Loan Documents or any failure of Lender to give notice of any Event of Default (as defined in the Loan Agreement);

e. any waiver, compromise, release, settlement or extension of time of payment or performance or observance of any of the obligations or agreements contained in any of the Loan Documents;

f. any action or inaction by Lender under or in respect of any of the Loan Documents, any failure, lack of diligence, omission or delay on the part of Lender to perfect, enforce, assert or exercise any lien, security interest, right, power or remedy conferred on it in any of the Loan Documents, or any other action or inaction on the part of Lender;

g. any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshalling of assets and liabilities or similar events or proceedings with respect to Borrower, any Guarantor, any other guarantor of Borrower’s Obligations,

as applicable, or any of their respective property or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding;

h. any merger or consolidation of Borrower into or with any entity, or any sale, lease or transfer of any of the assets of Borrower, any Guarantor or any other guarantor of Borrower’s Obligations to any other person or entity;

i. any change in the ownership of Borrower or any change in the relationship between Borrower, any Guarantor, any other guarantor of Borrower’s Obligations, or any termination of any such relationship;

j. any release or discharge by operation of law of Borrower, any Guarantor, or any other guarantor of Borrower’s Obligations, from any obligation or agreement contained in any of the Loan Documents; or

k. any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing and whether foreseen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against Borrower or any Guarantor to the fullest extent permitted by law.

4. Waivers . Guarantor expressly and unconditionally waives (i) notice of any of the matters referred to in Section 3 above, (ii) all notices which may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights against Guarantor, including, without limitation, any demand, presentment and protest, proof of notice of non‑payment under any of the Loan Documents and notice of any Event of Default or any failure on the part of Borrower, any other guarantor of Borrower’s Obligations, or any Guarantor to perform or comply with any covenant, agreement, term or condition of any of the Loan Documents, (iii) any right to the enforcement, assertion or exercise against Borrower, any Guarantor or any other guarantor of Borrower’s Obligations of any right or remedy conferred under any of the Loan Documents, (iv) any requirement of diligence on the part of any person or entity, (v) to the fullest extent permitted by law and except as otherwise expressly provided in this Guaranty or the other Loan Documents, any claims based on allegations that Lender has failed to act in a commercially reasonable manner or failed to exercise Lender’s so‑called obligation of good faith and fair dealing, (vi) any requirement to exhaust any remedies or to mitigate the damages resulting from any default under any of the Loan Documents, and (vii) any notice of any sale, transfer or other disposition of any right, title or interest of Lender under any of the Loan Documents.

5. Subordination . Guarantor agrees that any and all present and future debts and obligations of Borrower to Guarantor are hereby subordinated to the claims of Lender and are hereby assigned by Guarantor to Lender as security for Borrower’s Obligations and the obligations of Guarantor under this Guaranty.

6. Subrogation Waiver . Until Borrower’s Obligations are paid in full and all periods under applicable bankruptcy law for the contest of any payment by any Guarantor or Borrower as

a preferential or fraudulent payment have expired, Guarantor knowingly, and with advice of counsel, waives, relinquishes, releases and abandons all rights and claims to indemnification, contribution, reimbursement, subrogation and payment which Guarantor may now or hereafter have by and from Borrower and the successors and assigns of Borrower, for any payments made by Guarantor to Lender, including, without limitation, any rights which might allow Borrower, Borrower’s successors, a creditor of Borrower, or a trustee in bankruptcy of Borrower to claim in bankruptcy or any other similar proceedings that any payment made by Borrower or Borrower’s successors and assigns to Lender was on behalf of or for the benefit of a Guarantor and that such payment is recoverable by Borrower, a creditor or trustee in bankruptcy of Borrower as a preferential payment, fraudulent conveyance, payment of an insider or any other classification of payment which may otherwise be recoverable from Lender.

7. Reinstatement . The obligations of Guarantor pursuant to this Guaranty shall continue to be effective or automatically be reinstated, as the case may be, if at any time payment of any of Borrower’s Obligations is, or the obligations of Guarantor under this Guaranty are, rescinded or otherwise must be restored or returned by Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of a Guarantor or Borrower or otherwise, all as though such payment had not been made.

8. Financial Statements; Furnishing Information . Guarantor represents and warrants to Lender that (a) the financial statements of Guarantor previously submitted to Lender are true, complete and correct in all material respects, disclose all actual and contingent liabilities, and fairly present the financial condition of Guarantor, and do not contain any untrue material information or omit to state information material to the financial statements submitted or this Guaranty and (b) no material adverse change has occurred in the financial statements from the dates thereof until the date hereof. Guarantor shall provide to Lender, as soon as available and in no event later than the time frames provided for in the Loan Agreement, such financial statements, reports and other documents and items, all as required for Borrower to remain at all times in compliance with the terms, conditions and covenants under the Loan Agreement, including specifically, but not limited to, such statements, documents and other information required in Section 11.5 of the Loan Agreement.

9. Transfers, Sales, Etc. Guarantor shall not sell, lease, transfer, convey or assign any of its or his assets, unless such sale, lease, transfer, conveyance or assignment will not have a material adverse effect on the financial condition of such Guarantor or such Guarantor’s ability to perform its or his obligations under this Guaranty or any other Loan Document to which such Guarantor is a party.

10. Enforcement Costs . If: (a) this Guaranty is placed in the hands of one or more attorneys for collection or is collected through any legal proceeding; (b) one or more attorneys is retained to represent Lender in any bankruptcy, reorganization, receivership or other proceedings affecting creditors’ rights and involving a claim under this Guaranty, or (c) one or more attorneys is retained to represent Lender in any other proceedings whatsoever in connection with this Guaranty, then Guarantor shall pay to Lender upon demand all fees, costs and expenses incurred by Lender

in connection therewith, including, without limitation, reasonable attorneys’ fees, court costs and filing fees, in addition to all other amounts due hereunder.

11. Successors and Assigns; Joint and Several Liability . Lender may assign its rights under this Guaranty to any third party assignee or successor in the interests of Lender in connection with the Loan. Guarantor may not assign its obligations under this Guaranty without the prior written consent of Lender. This Guaranty shall inure to the benefit of Lender and its successors and assigns. This Guaranty shall be binding on Guarantor and the respective successors and permitted assigns of each Guarantor. It is agreed that the liability of each Guarantor hereunder is several and independent of any other guarantees or other obligations at any time in effect with respect to Borrower’s Obligations or any part thereof, and that liability of Guarantor hereunder may be enforced regardless of the existence, validity, enforcement or non‑enforcement of any such other guarantees or other obligations. It is further agreed that the liability of Guarantor hereunder is joint and several, and that Lender may proceed against any or all Guarantor with respect to any liability under this Guaranty.

12. No Waiver of Rights . No delay or failure on the part of Lender to exercise any right, power or privilege under this Guaranty or any of the other Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any right, power or privilege shall preclude any other or further exercise thereof or the exercise of any other power or right, or be deemed to establish a custom or course of dealing or performance between the parties hereto. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No notice to or demand on Guarantor in any case shall entitle Guarantor to any other or further notice or demand in the same, similar or other circumstance.

13. Modification . The terms of this Guaranty may be waived, discharged, or terminated only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. No amendment, modification, waiver or other change of any of the terms of this Guaranty shall be effective without the prior written consent of Lender.

14. Joinder . Any action to enforce this Guaranty may be brought against Guarantor without any reimbursement or joinder of Borrower or any other guarantor of Borrower’s Obligations in such action.

15. Severability . If any provision of this Guaranty is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any administrative agency or any court, Guarantors and Lender shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of this Guaranty and the validity and enforceability of the remaining provisions, or portions or applications thereof, shall not be affected thereby and shall remain in full force and effect.

16. Applicable Law . This Guaranty is governed as to validity, interpretation, effect and in all other respects by laws and decisions of the State of Maryland.

17. Notice . Any notices, communications and waivers under this Agreement shall be in writing and shall be (i) delivered in person, (ii) mailed, postage prepaid, either by registered or certified mail, return receipt requested, (iii) by overnight express carrier, or (iv) by facsimile or email transmission, addressed in each case as follows:



To Lender:	Housing & Healthcare Funding, LLC
	2 Wisconsin Circle, Ste. 540
	Chevy Chase, Maryland 20815
	Attn: Michael Gehl
	Facsimile: _______________________
	Email: mgehl@hhcfinance.com

With a copy to:	Gutnicki LLP
	4711 Golf Road, Suite 200
	Skokie, Illinois 60076
	Attn: Abraham A. Gutnicki
	Facsimile: 847-933-9285
	Email: agutnicki@gutnicki.com

To Guarantors:	AdCare Health Systems, Inc.
	1145 Hembree Road
	Roswell, GA 30076
	Attn: Boyd P. Gentry
	Facsimile: 678-869-5123
	Email: bpg@adcarehealth.com

With a copy to:	Holt Ney Zatcoff & Wasserman, LLP
	100 Galleria Parkway, Suite 1800
	Atlanta, GA 30339
	Attn: Ellen W. Smith
	Facsimile: 770-956-1490
	Email: esmith@hnzw.com

or to any other address as to any of the parties hereto, as such party shall designate in a written notice to the other party hereto. All notices sent pursuant to the terms of this paragraph shall be deemed received (i) if personally delivered, then on the date of delivery, (ii) if sent by overnight express carrier, then on the next federal banking day immediately following the day sent, (iii) if sent by registered or certified mail, then on the earlier of the third federal banking day following the day sent or when actually received, or (iv) if sent by facsimile or email, as evidenced by receipt of a successful transmission report (followed by delivery by one of the other means identified in (i)-(iii)).

18. CONSENT TO JURISDICTION . TO INDUCE LENDER TO ACCEPT THIS GUARANTY, EACH GUARANTOR IRREVOCABLY AGREES THAT, SUBJECT TO LENDER’S SOLE AND ABSOLUTE ELECTION , ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO THIS GUARANTY WILL BE LITIGATED IN COURTS HAVING SITUS IN CHEVY CHASE, MARYLAND. EACH GUARANTOR HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN CHEVY CHASE, MARYLAND.

19. WAIVER OF JURY TRIAL . EACH GUARANTOR AND LENDER (BY ACCEPTANCE HEREOF), HAVING BEEN REPRESENTED BY COUNSEL, EACH KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. EACH GUARANTOR AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST LENDER ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

[Signature Page Follows]

IN WITNESS WHEREOF , Guarantor has executed this Guaranty as of the date first above written.



	AdCare Health Systems, Inc. , an Ohio corporation

	By:	/s/ Ronald W. Fleming
	Name:	Ronald W. Fleming
	Title:	CFO

HHC Funding, LLC / QC Property Holdings, LLC

Guaranty

Signature Page

Exhibit 10.34




This instrument was prepared by and should be mailed to : Gutnicki LLP 4711 Golf Road, Suite 200 Skokie, Illinois 60076 Attn: Abraham A. Gutnicki, Esq.


		This space reserved for Recorder’s use only.

ASSIGNMENT OF RENTS AND LEASES

THIS ASSIGNMENT OF RENTS AND LEASES (“ Assignment ”) is made and delivered as of September 27, 2013 by QC Property Holdings, LLC , a Georgia limited liability company (“ Assignor ”), to and for the benefit of Housing & Healthcare Funding, LLC , a Delaware limited liability company, its successors and assigns (“ Assignee ”).

R E C I T A L S :

A. Pursuant to the terms of a Loan and Security Agreement dated as of even date herewith (as amended, modified, replaced or restated from time to time, the “ Loan Agreement ”) by and between Assignor and Assignee, Assignee has agreed to make to Assignor a loan in the original principal amount of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) (the “ Loan ”). The Loan is evidenced by a promissory note of even date herewith made payable by Assignor to the order of Assignee in the maximum principal amount of the Loan (the “ Note ”).

B. Assignor owns the Premises (as hereinafter defined) and leases the Premises to QC Nursing, LLC, a Georgia limited liability company (“ Lessee ”), pursuant to that certain Lease Agreement dated as of June 25, 2012 by and between Assignor and Lessee, as amended from time to time (the “ Operating Lease ”).

D. As an affiliate of Assignor, Lessee will receive substantial benefit from the availability of the Loan by Assignee to Assignor.

E. A condition precedent to Assignee’s making of the Loan to Assignor is the execution and delivery by Assignor of this Assignment.

1. Definitions . All capitalized terms which are not defined herein shall have the meanings ascribed thereto in that certain Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated as of even date herewith from Assignor to and for the benefit of Assignee (as amended, modified, replaced or restated from time to time, the “ Mortgage ”) encumbering certain real property located in Oklahoma County, Oklahoma, and described on Exhibit A attached hereto and made a part hereof, together with certain other collateral as described in the Mortgage, given as security for the Loan.

2. Grant of Security Interest . Assignor hereby grants, transfers, sets over and assigns to Assignee, all of the right, title and interest of Assignor in and to (i) all of the rents, revenues, issues, profits, proceeds, receipts, income, accounts and other receivables arising out of or from the land legally described in Exhibit A attached hereto and made a part hereof and all buildings and other improvements located thereon (said land and improvements being hereinafter referred to collectively as the “ Premises ”), including, without limitation, lease termination fees, purchase option fees and other fees and expenses payable under any lease (all of the foregoing collectively referred to herein as the “ Rents ”); (ii) all leases and subleases (collectively, “ Leases ”), now or hereafter existing, of all or any part of the Premises together with all guaranties of any of such Leases and all security deposits delivered by tenants thereunder, whether in cash or letter of credit; (iii) all rights and claims for damage against tenants arising out of defaults under the Leases, including rights to termination fees and compensation with respect to rejected Leases pursuant to Section 365(a) of the Federal Bankruptcy Code or any replacement Section thereof; and (iv) all tenant improvements and fixtures located on the Premises. This Assignment is an absolute transfer and assignment of the foregoing interests to Assignee given to secure:

(a) Payment by Assignor when due of (i) the indebtedness evidenced by the Note and any and all renewals, extensions, replacements, amendments, modifications and refinancings thereof; (ii) any and all other indebtedness and obligations that may be due and owing to Assignee by Assignor under or with respect to the Loan Documents (as defined in the Loan Agreement); and (iii) all costs and expenses paid or incurred by Assignee in enforcing its rights hereunder, including without limitation, court costs and reasonable attorneys’ fees; and

(b) Observance and performance by Assignor of the covenants, conditions, agreements, representations, warranties and other liabilities and obligations of Assignor or any other obligor to or benefiting Assignee which are evidenced or secured by or otherwise provided in the Note, this Assignment or any of the other Loan Documents, together with all amendments and modifications thereof.

3. Representations and Warranties of Assignor . Assignor represents and warrants to Assignee that:

(a) this Assignment, as executed by Assignor, constitutes the legal and binding obligation of Assignor enforceable in accordance with its terms and provisions;

(b) Assignor is the lessor under all Leases;

(c) there is no other existing assignment of Assignor’s entire or any part of its interest in or to any of the Leases or any of the Rents assigned hereunder, nor has Assignor entered into any agreement to subordinate any of the Leases or such Assignor’s right to receive any of the Rents assigned hereunder;

(d) Assignor has not executed any instrument or performed any act which may prevent Assignee from operating under any of the terms and provisions hereof or which would limit Assignee in such operation; and

(e) there are no defaults by Assignor under any of the Leases and, to Assignor’s knowledge, there are no material defaults by tenants under any Leases.

4. Covenants of Assignor . Assignor covenants and agrees that so long as this Assignment shall be in effect:

(a) Except for the Operating Lease existing as of the date hereof and the lease(s) listed on Schedule 2.1(p) to the Loan Agreement, Assignor shall not lease any portion of the Premises, or permit any sublease of any portion of the Premises, unless Assignor obtains Assignee’s prior written consent to all aspects of such lease;

(b) Assignor shall observe and perform all of the covenants, terms, conditions and agreements contained in the Leases to be observed or performed by Assignor thereunder, and Assignor shall not do or suffer to be done anything to impair the security thereof. Assignor shall not (i) release the liability of any tenant under any Lease, (ii) consent to any tenant’s withholding of rent or making monetary advances and off‑setting the same against future rentals, (iii) consent to any tenant’s claim of a total or partial eviction, (iv) consent to a tenant termination or cancellation of any Lease (as defined below), except as specifically provided therein, or (v) enter into any oral leases with respect to all or any portion of the Premises;

(c) Assignor shall not collect any of the Rents assigned hereunder more than thirty days in advance of the time when the same shall become due, except for security or similar deposits;

(d) Assignor shall not make any other assignment of its entire or any part of its interest in or to any or all Leases, or any or all Rents assigned hereunder, except as specifically permitted by the Loan Documents;

(e) Assignor shall not modify the terms and provisions of any Lease, nor shall Assignor give any consent (including, but not limited to, any consent to any assignment of, or subletting under, any Lease) or approval required or permitted by such terms and provisions or cancel or terminate any Lease, without Assignee’s prior written consent;

(f) Assignor shall not accept a surrender of any Lease or convey or transfer, or suffer or permit a conveyance or transfer of, the premises demised under any Lease or of any interest in any Lease so as to effect, directly or indirectly, proximately or remotely, a merger of the estates and rights of, or a termination or diminution of the obligations of, any tenant thereunder; any termination fees payable under a Lease for the early termination or surrender thereof shall be paid jointly to Assignor and Assignee. Assignor hereby assigns any such payment to Assignee and further covenants and agrees that upon the request of Assignee, it will duly endorse to the order of Assignee any such check, the proceeds of which shall be applied in accordance with the provisions of Paragraph 8 below;

(g) Assignor shall not alter, modify or change the terms of any guaranty of any Lease, or cancel or terminate any such guaranty or do or permit to be done anything which would terminate any such guaranty as a matter of law without the prior written consent of Assignee;

(h) Assignor shall not waive or excuse the obligation to pay rent under any Lease;

(i) Assignor shall, at its sole cost and expense, appear in and defend any and all actions and proceedings arising under, relating to, or in any manner connected with, any Lease or the obligations, duties or liabilities of the lessor or any tenant or guarantor thereunder, and shall pay all reasonable costs and expenses of Assignee, including court costs and reasonable attorneys’ fees, in any such action or proceeding in which Assignee may appear;

(j) Assignor shall give prompt notice to Assignee of any notice of any default by Assignor under any Lease received from any tenant or guarantor thereunder;

(k) Assignor shall enforce the observance and performance of each covenant, term, condition and agreement contained in each Lease to be observed and performed by the tenants and guarantors thereunder and shall immediately notify Assignee of any material breach by the tenant or guarantor under any such Lease;

(l) Assignor shall not permit any of the Leases to become subordinate to any lien or liens other than liens securing the indebtedness secured hereby or liens for general real estate taxes not delinquent;

(m) Assignor shall not execute hereafter any Lease unless there shall be included therein a provision providing that the tenant thereunder acknowledges that such Lease has been assigned pursuant to this Assignment and agrees not to look to Assignee as mortgagee, beneficiary, lender in possession or successor in title to the Premises for accountability for any security deposit required by lessor under such Lease unless such sums have actually been received in cash by Assignee as security for tenant’s performance under such Lease, and any such lease shall further provide that the same shall be subordinate to the provisions of the Mortgage; and

(n) If any tenant under any Lease is or becomes the subject of any proceeding under the Federal Bankruptcy Code, as amended from time to time, or any other federal, state or local statute which provides for the possible termination or rejection of the Leases assigned hereby, Assignor covenants and agrees that if any such Lease is so terminated or rejected, no settlement for damages shall be made without the prior written consent of Assignee, and any check in payment of damages for termination or rejection of any such Lease will be made payable both to Assignor and Assignee. Assignor hereby assigns any such payment to Assignee and further covenants and agrees that upon the request of Assignee, it will duly endorse to the order of Assignee any such check, the proceeds of which shall be applied in accordance with the provisions of Paragraph 8 below.

5. Rights Prior to Default . Unless or until an Event of Default (as defined in Paragraph 6) shall occur, Assignor shall have the right to collect, at the time provided for the payment thereof (but in no event more than thirty (30) days in advance), all Rents assigned hereunder, and to retain, use and enjoy the same. Upon the occurrence of an Event of Default, Assignor’s right to collect such rents, issues, income and profits shall immediately terminate without further notice thereof to Assignor. Assignee shall have the right to notify the tenants under the Leases of the existence of this Assignment at any time.

6. Events of Default . An “Event of Default” shall occur under this Assignment upon the occurrence of (a) a breach by Assignor of any of the covenants, agreements, representations, warranties or other provisions hereof which is not cured or waived within the applicable grace or cure period, if any, set forth in the Mortgage or (b) any other Event of Default described in the Note, the Mortgage, or any of the other Loan Documents.

7. Rights and Remedies Upon Default . At any time upon or following the occurrence of any Event of Default, Assignee, at its option, may exercise any one or more of the following rights and remedies without any obligation to do so, without in any way waiving such Event of Default, without further notice or demand on Assignor, without regard to the adequacy of the security for the obligations secured hereby, without releasing Assignor or any guarantor of the Note from any obligation, and with or without bringing any action or proceeding to foreclose the Mortgage or any other lien or security interest granted by the Loan Documents:

(a) Declare the unpaid balance of the principal sum of the Note, together with all accrued and unpaid interest thereon, immediately due and payable;

(b) Enter upon and take possession of the Premises, either in person or by agent or by a receiver appointed by a court, and have, hold, manage, lease and operate the same on such terms and for such period of time as Assignee may deem necessary or proper, with full power to make from time to time all alterations, renovations, repairs or replacements thereto or thereof as may seem proper to Assignee, to make, enforce, modify and accept the surrender of Leases, to obtain and evict tenants, to fix or modify rents, and to do any other act which Assignee deems necessary or proper;

(c) Either with or without taking possession of the Premises, demand, sue for, settle, compromise, collect, and give acquittances for all Rents and pursue all remedies for enforcement of the Leases and all the lessor’s rights therein and thereunder. This Assignment shall constitute an authorization and direction to the tenants under the Leases to pay all rents and other amounts payable under the Leases to Assignee, without proof of default hereunder, upon receipt from Assignee of written notice to thereafter pay all such rents and other amounts to Assignee and to comply with any notice or demand by Assignee for observance or performance of any of the covenants, terms, conditions and agreements contained in the Leases to be observed or performed by the tenants thereunder, and Assignor shall facilitate in all reasonable ways Assignee’s collection of such Rents, and upon request will execute written notices to the tenants under the Leases to thereafter pay all such rents and other amounts to Assignee; and

(d) Make any payment or do any act required herein of Assignor in such manner and to such extent as Assignee may deem necessary, and any amount so paid by Assignee shall become immediately due and payable by Assignor with interest thereon until paid at the Default Rate (as defined in the Note) and shall be secured by this Assignment.

8. Application of Proceeds . All sums collected and received by Assignee out of the Rents following the occurrence of any one or more Events of Default shall be applied in accordance with applicable law and, unless otherwise specified in such law or laws, in such order as Assignee shall elect in its sole and absolute discretion.

9. Limitation of Assignee’s Liability . Assignee shall not be liable for any loss sustained by Assignor resulting from Assignee’s failure to let the Premises or from any other act or omission of Assignee in managing, operating or maintaining the Premises following the occurrence of an Event of Default. Assignee shall not be obligated to observe, perform or discharge, nor does Assignee hereby undertake to observe, perform or discharge any covenant, term, condition or agreement contained in any Lease to be observed or performed by the lessor thereunder, or any obligation, duty or liability of Assignor under or by reason of this Assignment. Assignor shall and does hereby agree to indemnify, defend (using counsel satisfactory to Assignee) and hold Assignee harmless from and against any and all liability, loss or damage which Assignee may incur under any Lease or under or by reason of this Assignment and of and from any and all claims and demands whatsoever which may be asserted against Assignee by reason of any alleged obligation or undertaking on its part to observe or perform any of the covenants, terms, conditions and agreements contained in any Lease; provided, however, in no event shall Assignor be liable for any liability, loss or damage which Assignee incurs as a direct result of Assignee’s gross negligence or willful

misconduct. Should Assignee incur any such liability, loss or damage under any Lease or under or by reason of this Assignment or in the defense of any such claim or demand, the amount thereof, including reasonable costs, expenses and attorneys’ fees, shall become immediately due and payable by Assignor with interest thereon at the Default Rate and shall be secured by this Assignment and the other Loan Documents. This Assignment shall not operate to place responsibility upon Assignee for the care, control, management or repair of the Premises or for the carrying out of any of the covenants, terms, conditions and agreements contained in any Lease, nor shall it operate to make Assignee responsible or liable for any waste committed upon the Premises by any tenant, occupant or other party, or for any dangerous or defective condition of the Premises, or for any negligence in the management, upkeep, repair or control of the Premises resulting in loss or injury or death to any tenant, occupant, licensee, employee or stranger. Nothing set forth herein or in the Mortgage, and no exercise by Assignee of any of the rights set forth herein or in the Mortgage, shall constitute or be construed as constituting Assignee a “lender in possession” of the Premises, in the absence of the taking of actual possession of the Premises by Assignee pursuant to the provisions hereof or of the Mortgage.

10. No Waiver . Nothing contained in this Assignment and no act done or omitted to be done by Assignee pursuant to the rights and powers granted to it hereunder shall be deemed to be a waiver by Assignee of its rights and remedies under any of the Loan Documents. This Assignment is made and accepted without prejudice to any of the rights and remedies of Assignee under the terms and provisions of such instruments, and Assignee may exercise any of its rights and remedies under the terms and provisions of such instruments either prior to, simultaneously with, or subsequent to any action taken by it hereunder. Assignee may take or release any other security for the performance of the obligations secured hereby, may release any party primarily or secondarily liable therefor, and may apply any other security held by it for the satisfaction of the obligations secured hereby without prejudice to any of its rights and powers hereunder.

11. Further Assurances . Assignor shall execute or cause to be executed such additional instruments (including, but not limited to, general or specific assignments of such Leases as Assignee may designate) and shall do or cause to be done such further acts, as Assignee may request, in order to permit Assignee to perfect, protect, preserve and maintain the assignment made to Assignee by this Assignment.

12. Assignment Pursuant to Statute . This is an assignment of rents and profits pursuant to 46 Okla. Stat. 4 et seq. , as amended from time to time.

13. Security Deposits . Assignor acknowledges that Assignee has not received for its own account any security deposited by any tenant pursuant to the terms of the Leases and that Assignee assumes no responsibility or liability for any security so deposited.

14. Severability . If any provision of this Assignment is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any administrative agency or any court, Assignee and Assignor shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of this

Assignment, and the validity and enforceability of the remaining provisions, or portions or applications thereof, shall not be affected thereby and shall remain in full force and effect.

15. Successors and Assigns . This Assignment is binding upon Assignor and its legal representatives, successors and assigns, and the rights, powers and remedies of Assignee under this Assignment shall inure to the benefit of Assignee and its successors and assigns.

16. Written Modifications . This Assignment shall not be amended, modified or supplemented without the written agreement of Assignor and Assignee at the time of such amendment, modification or supplement.

17. Duration . This Assignment shall become null and void at such time as Assignor shall have paid the principal sum of the Note, together with all interest thereon, and shall have fully paid and performed all of the other obligations secured hereby and by the other Loan Documents.

18. Governing Law . This Assignment shall be governed by and construed in accordance with the laws of the State of Maryland.

19. Notices . All notices, demands, requests and other correspondence which are required or permitted to be given hereunder shall be deemed sufficiently given when delivered or mailed in the manner and to the addresses of Assignor and Assignee, as the case may be, as specified in the Mortgage.

20. WAIVER OF TRIAL BY JURY . ASSIGNOR AND ASSIGNEE (BY ACCEPTANCE HEREOF), HAVING BEEN REPRESENTED BY COUNSEL, EACH KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (A) UNDER THIS ASSIGNMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS ASSIGNMENT OR (B) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS ASSIGNMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. ASSIGNOR AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST ASSIGNEE OR ANY OTHER PERSON INDEMNIFIED UNDER THIS ASSIGNMENT ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

[Signature page to follow]

IN WITNESS WHEREOF , Assignor has executed and delivered this Assignment of Rents and Leases as of the day and year first above written.



ASSIGNOR:

QC Property Holdings, LLC,
a Georgia limited liability company

	By:	/s/ Ronald W. Fleming
	Name:	Ronald W. Fleming
	Title:	Manager



STATE OF ______________	)
	)	ss
COUNTY OF ____________	)

I, the undersigned, a Notary Public in and for said County, in the State aforesaid, do hereby certify that Ronald W. Fleming , the Manager of QC Property Holdings, LLC, a Georgia limited liability company (the “Company”), who is personally known to me to be the same person whose name is subscribed to the foregoing instrument as such __________________, appeared before me this day in person and acknowledged that he signed and delivered the said instrument as his own free and voluntary act as _____________________ of the Company and as the free and voluntary act of the Company, for the uses and purposes therein set forth.

GIVEN under my hand and notarial seal, this ___ day of _________, 2013.




	NOTARY PUBLIC

	(SEAL)

Assignment of Rents and Leases / QC Property Holdings, LLC

Signature Page

EXHIBIT A

Legal Description

Beginning at a point located South 00°28'33" East a distance of 503.87 feet and North 89°31 '27" East a distance of 30.00 feet from the Northwest Comer of said Northeast Quarter (NE/4);

Thence from said Point of Beginning South 00°28'33" East a distance of293.65 feet to a point on a curve to the right, said curve having a central angle of 15°52'38" and a radius of

205.65 feet;

Thence along the arc of said curve in a Southwesterly direction a distance of 56.99 feet;

Thence South 89°51'09" East a distance of 722.34 feet;

Thence North 00°28'33" West a distance of 350.00 feet;

Thence North 89°51 '09" West a distance of 714.50 feet to the Point of Beginning.

Together with rights of ingress and egress established by the easement estate created by

The North 15 feet of the following described tract:

Thence from said Point of Beginning, said easement being 15.00 feet North and 15.00 feet South of the following described line;

South 89°51'09" East 584.00 feet to the point of termination.

Property Address: 13500 Brandon Place, Oklahoma City, OK APN:

3861-14-947-1090

Exhibit 10.35

THIRD MODIFICATION AGREEMENT

THIS THIRD MODIFICATION AGREEMENT dated as of September 30, 2013 (this “ Agreement ” ), is entered into by and among ADK THOMASVILLE OPERATOR, LLC ( “ Borrower 1 ” ), ADK LUMBER CITY OPERATOR, LLC ( “ Borrower 2 ” ), ADK JEFFERSONVILLE OPERATOR, LLC ( “ Borrower 3 ” ), ADK LAGRANGE OPERATOR, LLC ( “ Borrower 4 ” ), ADK POWDER SPRINGS OPERATOR, LLC ( “ Borrower 5 ” ), ADK OCEANSIDE OPERATOR, LLC ( “ Borrower 6 ” ), ADK THUNDERBOLT OPERATOR, LLC ( “ Borrower 7 ” ), ADK SAVANNAH BEACH OPERATOR, LLC ( “ Borrower 8 ” ), ATTALLA NURSING ADK, LLC ( “ Borrower 9 ” ), MOUNTAIN TRACE NURSING ADK, LLC , an Ohio limited liability company ( “ Borrower 10 ” ), MT. KENN NURSING, LLC ( “ Borrower 11 ” ), ERIN NURSING, LLC ( “ Borrower 12 ” ), CP NURSING, LLC ( “ Borrower 13 ” ), BENTON NURSING, LLC ( “ Borrower 14 ” ), VALLEY RIVER NURSING, LLC ( “ Borrower 15 ” ), PARK HERITAGE NURSING, LLC ( “ Borrower 16 ” ), HOMESTEAD NURSING, LLC ( “ Borrower 17 ” ), WOODLAND MANOR NURSING, LLC ( “ Borrower 18 ” ), MOUNTAIN VIEW NURSING, LLC ( “ Borrower 19 ” ), LITTLE ROCK HC&R NURSING, LLC ( “ Borrower 21 ” ), GLENVUE H&R NURSING, LLC ( “ Borrower 24 ” ) and COOSA NURSING ADK, LLC (“ Borrower 25 ” ) each a Georgia limited liability company except as hereinabove set forth (the “ Existing Borrowers ” ), QC NURSING, LLC (“ Borrower 26 ” ) a Georgia limited liability company (the “ New Borrower ” and together with the Existing Borrowers, the “ Borrowers ” ), ADCARE HEALTH SYSTEMS, INC., an Ohio corporation (the “ Guarantor ” ) (the Borrowers and the Guarantor being sometimes referred to herein collectively as the “ Borrower/Guarantor Parties ” ), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( “ Lender ” ).

RECITALS

A. The Borrower/Guarantor Parties and the Lender heretofore entered into the following documents (collectively, the “ Documents ” ):

(i) Loan and Security Agreement dated as of September 20, 2012 (the “ Loan Agreement ” ), by and among the Existing Borrowers, Northridge HC&R Nursing, LLC (“ Borrower 20 ” ), Woodland Hills HC Nursing, LLC (“ Borrower 22 ” ), and APH&R Nursing, LLC, each a Georgia limited liability company (“ Borrower 23 ” and together with Borrowers 20 and 22, the “ Released Borrowers ” ; the Released Borrowers together with the Existing Borrowers, the “ Original Borrowers ” ), and the Lender.

(ii) Promissory Note dated September 20, 2012 (the “ Note ” ), from the Original Borrowers to the Lender in the principal amount of $10,600,000.

(iii) Guaranty of Payment and Performance dated as of September 20, 2012, by the Guarantor to and for the benefit of the Lender.

B. The Documents were previously modified and amended by the following documents (the “ Previous Modifications ” ): (i) the Modification Agreement dated as of October 26, 2012, by and among the Original Borrowers, the Guarantor and the Lender; and (ii) the Memorandum of Agreement dated January 25, 2013 (the “ Second Modification ” ), by and among the Released Borrowers and the Lender.

C. The Released Borrowers were released from their respective obligations under the Documents pursuant to the Second Modification.

D. The parties desire to make certain modifications and amendments to the Documents, as modified and amended by the Previous Modifications, as more fully provided for herein, all as modifications, amendments and continuations of, but not as novations of, the Documents.

AGREEMENTS

In consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

Section 1 . Recitals Part of Agreement; Defined Terms; References to Documents .

(a) The foregoing Recitals are hereby incorporated into and made a part of this Agreement.

(b) All capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the Loan Agreement.

(c) Except as otherwise stated herein, all references in this Agreement to any one or more of the Documents shall be deemed to include the previous modifications and amendments to the Documents provided for in the Previous Modification, whether or not express reference is made to such previous modifications and amendments.

Section 2 . Release of ADK Jeffersonville Operator, LLC, ADK Oceanside Operator, LLC and ADK Savannah Beach Operator, LLC . ADK Jeffersonville Operator, LLC ( “ Borrower 3 ” ), ADK Oceanside Operator, LLC ( “ Borrower 6 ” ) and ADK Savannah Beach Operator, LLC ( “ Borrower 8 ” ) have each requested that they be released from their respective obligations under the Documents due to the fact that each of them no longer operates a Facility. The Lender is agreeable to such request and hereby releases Borrower 3, Borrower 6 and Borrower 8 as Borrowers under the Loan Agreement, and releases the Collateral which is the property of Borrower 3, Borrower 6 and Borrower 8 as security for the Loan.

Section 3 . Addition of New Borrower .

(a) The New Borrower is hereby added as a Borrower under the Loan Agreement and the Note, each as modified and amended by the Previous Modifications. The New Borrower hereby joins in the Loan Agreement and the Note, each as modified and amended by the Previous

Modifications, and agrees to be jointly and severally bound and obligated under the Loan Agreement and the Note with the other parties thereto, and hereby joins in all of the representations, warranties, covenants and grants of security interests by the Borrowers which are contained therein, and other provisions by which the Borrowers are bound which are contained therein, all with the same effect as if the New Borrower had executed the Loan Agreement and the Note as of September 20, 2012. All references in the Documents to the Borrowers under the Loan Agreement and the Note shall be deemed to include a reference to the New Borrower. All of the Documents, as modified and amended by the Previous Modifications, are hereby further modified and amended to incorporate the foregoing provisions of this paragraph.

(b) The following new defined terms are hereby added in alphabetical order in Section 1.1 of the Loan Agreement:

Borrower 26 : As defined in the Preamble hereto.

Borrower 26 Permitted Liens : Liens and security interests in its property granted by Borrower 26 to HHC, provided that the HHC Consent and Subordination has been entered into by the parties thereto and is in full force and effect.

HHC : Housing & Healthcare Funding, LLC, a Delaware limited liability company.

HHC Loan : The loan by HHC to QC Property Holdings, LLC (the “ QC Owner ” ), the owner of the Quail Creek Facility, as from time to time modified, amended, increased, renewed and extended.

HHC Consent and Subordination : The Consent and Subordination dated as of September 30, 2013, by and between Lender, HHC, Borrower 26, the QC Owner and Guarantor.

Quail Creek Facility : Borrower 26’s Facility described in the definition of the term Facility in this Agreement.

Quail Creek Project : The Project in which the Quail Creek Facility is located.

(c) The definition of the term “Borrowers” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby further modified and amended in its entirety to read as follows effective as of the date of this Agreement, with the existing definition of the term “Borrowers” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to the date of this Agreement:

Borrowers : Borrowers 1 through 26, except for Borrowers 3, 6, 8, 20, 22 and 23.

(d) The definition of the term “Facility” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby further modified and amended in

its entirety to read as follows effective as of the date of this Agreement, with the existing definition of the term “Facility” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to the date of this Agreement:

Facility : Each of the 20 Facilities which are operated by Borrowers in the Projects, described as follows:



Facility	Borrower	Facility Name	Location	Beds
1	Borrower 1	Thomasville Nursing and Rehab Center	120 Skyline Drive, Thomasville, Thomas County, Georgia	52
2	Borrower 2	Lumber City Nursing and Rehabilitation Center	93 Highway 19, Lumber City, Telfair County, Georgia	86
3	Borrower 3	Released
4	Borrower 4	LaGrange Nursing and Rehab Center	2111 West Point Road, LaGrange, Troup County, Georgia	138
5	Borrower 5	Powder Springs Nursing and Rehab Center	3460 Powder Springs Road, Powder Springs, Cobb County, Georgia	208
6	Borrower 6	Released		85
7	Borrower 7	Tara at Thunderbolt Nursing and Rehabilitation Center	3223 Falligant Avenue, Thunderbolt, Chatham County, Georgia	134
8	Borrower 8	Released		50
9	Borrower 9	Attalla Health Care	915 Stewart Avenue SE, Attalla, Etowah County, Alabama	182
10	Borrower 10	Mountain Trace Nursing and Rehabilitation Center	417 Mountain Trace Road, Sylva, Jackson County, North Carolina	106
11	Borrower 11	Autumn Breeze Healthcare Center	1480 Sandtown Road, Marietta, Cobb County, Georgia	109
12	Borrower 12	Southland Healthcare and Rehab Center	606 Simmons Street, Dublin, Laurens County, Georgia	126
13	Borrower 13	College Park Healthcare Center	1765 Temple Avenue, College Park, Fulton County, Georgia	100



14	Borrower 14	Bentonville Manor Nursing Home	224 South Main Street, Bentonville, Benton County, Arkansas	95
15	Borrower 15	River Valley Health and Rehabilitation Center	5301 Wheeler Ave, Fort Smith, Sebastian County, Arkansas	117
16	Borrower 16	Heritage Park Nursing Center	1513 South Dixieland Road, Rogers, Benton County, Arkansas	100
17	Borrower 17	Homestead Manor Nursing Home	826 North Street, Stamps, LaFayette County, Arkansas	94
18	Borrower 18	Eaglewood Care Center	2000 Villa Road, Springfield, Clark County, Ohio	113
19	Borrower 19	Stone County Nursing and Rehabilitation Center	706 Oak Grove Street, Mountain View, Stone County, Arkansas	97
20	Borrower 20	Released
21	Borrower 21	Little Rock Healthcare and Rehab, a/k/a West Markham Sub Acute & Rehab Center	5720 W. Markham, Little Rock, Pulaski County, Arkansas	157
22	Borrower 22	Released
23	Borrower 23	Released
24	Borrower 24	Glenvue Health and Rehabilitation	721 N. Veterans Boulevard, Glennville, Tatnall County, Georgia	160
25	Borrower 25	Coosa Valley Healthcare	513 Pineview Avenue, Glencoe, Etowah County, Alabama 35905	124
26	Borrower 26	Quail Creek Nursing and Rehabilitation Center	13500 Brandon Place, Oklahoma City, Oklahoma County, Oklahoma	118

(e) The definition of the term “Leases” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby further modified and amended in its entirety to read as follows effective as of the date of this Agreement, with the existing definition of the term “Leases” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to the date of this Agreement:

Leases : Leases by Owners to each of Borrower 11 through Borrower 26 (except for Borrowers 20, 22, 23 and 25) of the respective Projects and subleases by Sublessor to each of Borrower 1 through Borrower 8 (except for Borrowers 3, 6 and 8) of the respective Projects dated as follows:



Facility	Borrower	Owner/Sublessor	Date of Lease/Sublease
1	Borrower 1	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	Master Lease - August 1, 2010 Sublease - August 1, 2010
2	Borrower 2	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	Master Lease - August 1, 2010 Sublease - August 1, 2010
3	Borrower 3	Released
4	Borrower 4	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	Master Lease - August 1, 2010 Sublease - August 1, 2010
5	Borrower 5	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	Master Lease - August 1, 2010 Sublease - August 1, 2010
6	Borrower 6	Released
7	Borrower 7	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	Master Lease - August 1, 2010 Sublease - September 1, 2010
8	Borrower 8	Released
9	Borrower 9	Owner, Borrower 9	None
10	Borrower 10	Owner, Borrower 10	None
11	Borrower 11	Owner, Mt. Kenn Property Holdings, LLC	May 1, 2011
12	Borrower 12	Owner, Erin Property Holdings, LLC	May 1, 2011



13	Borrower 13	Owner, CP Property Holdings, LLC	September 6, 2011
14	Borrower 14	Owner, Benton Property Holdings, LLC	August 31, 2011
15	Borrower 15	Owner, Valley River Property Holdings, LLC	August 31, 2011
16	Borrower 16	Owner, Park Heritage Property Holdings, LLC	August 31, 2011
17	Borrower 17	Owner, Homestead Property Holdings, LLC	August 31, 2011
18	Borrower 18	Owner, Woodland Manor Property Holdings, LLC	December 29, 2011
19	Borrower 19	Owner, Mount V Property Holdings, LLC	November 30, 2011
20	Borrower 20	Released
21	Borrower 21	Owner, Little Rock HC&R Property Holdings, LLC	April 1, 2012
22	Borrower 22	Released
23	Borrower 23	Released
24	Borrower 24	Owner, Glenvue H&R Property Holdings, LLC	June 19, 2012
25	Borrower 25	Owner, Borrower 25	None
26	Borrower 26	Owner, QC Property Holdings, LLC	June 25, 2012, amended July 1, 2012

(f) Section 7.1(a) of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of the ate of this Agreement, with the existing Section 7.1(a) of the Loan Agreement to continue to be effective for periods prior to the date of this Agreement:

(a) Except for a security interest granted to Lender and, in the case of Borrower 26, Borrower 26 Permitted Liens, each Borrower agrees that all of the personal property, fixtures, attachments, furnishings and equipment owned by it will be kept free and clear of all chattel mortgages, vendor’s liens, and all other liens, claims, encumbrances and security interests whatsoever, and that such Borrower will be the absolute owner of said personal property, fixtures, attachments and equipment. Borrowers, on request, shall furnish Lender with satisfactory evidence of such ownership, and of the terms of purchase and payment therefor.

(g) Section 7.1 of the Loan Agreement is hereby modified and amended to add the following as subparagraph (e) effective as of the date of this Agreement:

(e) Borrower 26 shall promptly furnish to Lender copies of all notices of default and other material documents and communications sent or received by Borrower 26 under or relating to the HHC Loan.

(h) Section 7.10(a)(i) of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of the ate of this Agreement, with the existing Section 7.10(a)(i) of the Loan Agreement to continue to be effective for periods prior to the date of this Agreement:

(i) Tangible assets, excepting only (A) sales or other dispositions of property no longer useful in connection with the operation of a Facility, provided that prior to the sale or other disposition thereof, such property has been replaced by property of at least equal value and utility, and (B) in the case of Borrower 26, Borrower 26 Permitted Liens;

(i) Section 7.14 of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of the date of this Agreement, with the existing Section 7.14 of the Loan Agreement to continue to be effective for periods prior to the date of this Agreement:

7.14 Security Interest Matters . This Agreement is intended to be a security agreement under the Code for the purpose of creating the security interests provided for herein. Borrowers shall execute and deliver such additional security agreements and other documents as Lender shall from time to time request in order to create and perfect such security interests. With exception, in the case of Borrower 26, of Borrower 26 Permitted Liens, Borrowers shall keep all of the Collateral free and clear of all other liens, security interests and encumbrances. Borrower 26 may grant liens and security interests in its property to HHC provided that the HHC Consent and Subordination has been entered into by the parties thereto and is in full force and effect.

(j) Effective as of the date of this Agreement, the following new subparagraphs (r) and (s) are added to Section 10.1 of the Loan Agreement:

(r) The occurrence of any Default or Event of Default under the HHC Loan on the Quail Creek Project; or

(s) If there is any action taken by HHC to foreclose or otherwise enforce or realize on its liens or security interests in any collateral of Borrower 26’s in which the Lender has a lien or security interest.

(k) The address for notices to the New Borrower shall be the address for notices to Borrowers set forth in Section 12.10 of the Loan Agreement, and the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended accordingly.

(l) The New Borrower hereby represents and warrants to the Lender as follows:

(i) The nature of the New Borrower entity and the State in which it is organized are as stated in the first paragraph of this Agreement. The organizational number of the New Borrower in such State is as follows:



	Borrower	Organizational Number
	Borrower 26	12032778

(ii) The address of the New Borrower’s chief executive office is the address for notices to the New Borrower set forth in Section 12.10 of the Loan Agreement.

(iii) The New Borrower has no place of business other than the chief executive office referred to in (ii) above and at its Facility.

(m) Exhibit A to the Loan Agreement, as modified and amended by the Previous Modifications, is hereby further modified and amended in its entirety to be as attached to this Agreement effective as of the date of this Agreement, with the existing Exhibit A to the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to the date of this Agreement.

(n) The address for notices to the New Borrower shall be the address for notices to Borrowers set forth in Section 12.10 of the Loan Agreement, and the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended accordingly.

Section 4 . Attachment to Note . The Lender may, and prior to any transfer by it of the Note shall, attach a copy of this Agreement to the original Note and place an endorsement on the original Note making reference to the fact that such attachment has been made.

Section 5 . Representations and Warranties . The term “ Signing Entity ” as used in this Section means any entity (other than a Borrower/Guarantor Party itself) that appears in the signature block of any Borrower/Guarantor Party in this Agreement, any of the Documents or any of the Previous Modifications, if any. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby represent and warrant to the Lender as follows as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement:

(a) Each Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of which is stated in the Preambles to this Agreement, and if such State is not the State in which its Facility is located, such Borrower is duly registered or qualified to transact business and in good standing in the State in which its Facility is located. Each Borrower has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(b) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(c) Each Signing Entity is duly organized, validly existing and in good standing under the laws of the State in which it is organized, has all necessary power and authority to carry on its present business, and has full right, power and authority to execute this Agreement, the Documents and the Previous Modifications in the capacity shown in each signature block contained in this Agreement, the Documents and the Previous Modifications in which its name appears, and such execution has been duly authorized by all necessary legal action applicable to such Signing Entity.

(d) This Agreement, the Documents and the Previous Modifications have been duly authorized, executed and delivered by such of the Borrower/Guarantor Parties as are parties thereto, and this Agreement, the Documents and the Previous Modifications constitute valid and legally binding obligations enforceable against such of the Borrower/Guarantor Parties as are parties thereto. The execution and delivery of this Agreement, the Documents and the Previous Modifications and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the organizational documents of any Borrower/Guarantor Party or any Signing Entity, or any agreement or other instrument to which any of the Borrower/Guarantor Parties or any Signing Entity is a party, or by which any of them is bound, or to which any of their respective properties are subject, or any existing law, administrative regulation, court order or consent decree to which any of them is subject.

(e) The Borrower/Guarantor Parties are in full compliance with all of the terms and conditions of the Documents to which they are a party and the Previous Modifications, and no Default or Event of Default has occurred and is continuing with respect to any of the Documents or the Previous Modifications.

(f) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement, any of the Documents or the Previous Modifications, or questioning the validity thereof, or in any way contesting the existence or powers of any of the Borrower/Guarantor Parties or any Signing Entity, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement, any of the Documents or the Previous Modifications, or would result in any material adverse change in the financial condition, properties, business or operations of any of the Borrower/Guarantor Parties.

(g) The statements contained in the Recitals to this Agreement are true and correct.

Section 6 . Documents to Remain in Effect; Confirmation of Obligations; References . The Documents shall remain in full force and effect as originally executed and delivered by the parties, except as previously modified and amended by the Previous Modifications and as expressly modified and amended herein. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby (i) confirm and reaffirm all of their obligations under the Documents, as previously modified and amended by the Previous Modifications and as modified

and amended herein; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents; and (iv) acknowledge and agree that they do not have any defense, setoff or counterclaim to the payment or performance of any of their obligations under, or to the enforcement by the Lender of, the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein, including, without limitation, any defense, setoff or counterclaim based on the covenant of good faith and fair dealing. All references in the Documents to any one or more of the Documents, or to the “Loan Documents,” shall be deemed to refer to such Document, Documents or Loan Documents, as the case may be, as previously modified and amended by the Previous Modifications and as modified and amended by this Agreement. Electronic records of executed documents maintained by the Lender shall be deemed to be originals thereof.

Section 7 . Certifications, Representations and Warranties . In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby certify, represent and warrant to the Lender that all certifications, representations and warranties contained in the Documents and the Previous Modifications and in all certificates heretofore delivered to the Lender are true and correct as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement, and all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement.

Section 8 . Entire Agreement; No Reliance . This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. The Borrower/Guarantor Parties acknowledge that they are executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein.

Section 9 . Successors . This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives.

Section 10 . Severability . In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof.

Section 11 . Amendments, Changes and Modifications . This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto.

Section 12 . Construction .

(a) The words “hereof,” “herein,” and “hereunder,” and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used.

(b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed.

(d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders.

(e) The Borrower/Guarantor Parties and the Lender, and their respective legal counsel, have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement.

Section 13 . Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same document. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Agreement maintained by the Lender shall be deemed to be an original.

Section 14 . Governing Law . This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement.

[SIGNATURE PAGE(S) AND EXHIBIT(S),

IF ANY, FOLLOW THIS PAGE]

IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.



	ADK THOMASVILLE OPERATOR, LLC
	ADK LUMBER CITY OPERATOR, LLC
	ADK JEFFERSONVILLE OPERATOR, LLC
	ADK LAGRANGE OPERATOR, LLC
	ADK POWDER SPRINGS OPERATOR, LLC
	ADK OCEANSIDE OPERATOR, LLC
	ADK THUNDERBOLT OPERATOR, LLC
	ADK SAVANNAH BEACH OPERATOR, LLC
	ATTALLA NURSING ADK, LLC
	MOUNTAIN TRACE NURSING ADK, LLC
	MT. KENN NURSING, LLC
	ERIN NURSING, LLC
	CP NURSING, LLC
	BENTON NURSING, LLC
	VALLEY RIVER NURSING, LLC
	PARK HERITAGE NURSING, LLC
	HOMESTEAD NURSING, LLC
	WOODLAND MANOR NURSING, LLC
	MOUNTAIN VIEW NURSING, LLC
	LITTLE ROCK HC&R NURSING, LLC
	GLENVUE H&R NURSING, LLC
	COOSA NURSING ADK, LLC
	QC NURSING, LLC

	By:	/s/ David Rubenstein
		David Rubenstein, Manager of each Borrower


	ADCARE HEALTH SYSTEMS, INC.

	By:	/s/ Ronald W. Fleming
		Ronald W. Fleming, Chief Financial Officer

AdCare Portfolio Operator Loan Third Modification Agreement

Signature Page 1



	THE PRIVATEBANK AND TRUST COMPANY

	By:	/s/ Amy K. Hallberg
		Amy K. Hallberg, Managing Director

AdCare Portfolio Operator Loan Third Modification Agreement

Signature Page 2

Exhibit A

DIRECT AND INDIRECT OWNERSHIP OF BORROWERS

[See Attached Organization Chart]

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14(A) AND 15d-14(A)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Boyd P. Gentry, certify that:

1. I have reviewed this Form 10-Q for the quarter ended September 30, 2013 , of AdCare Health Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	November 14, 2013	/s/ Boyd P. Gentry
		Boyd P. Gentry
		Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14(A) AND 15d-14(A)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Ronald W. Fleming, certify that:

1. I have reviewed this Form 10-Q for the quarter ended September 30, 2013 of AdCare Health Systems, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	November 14, 2013	/s/ Ronald W. Fleming
		Ronald W. Fleming
		Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Boyd P. Gentry, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	November 14, 2013	/s/ Boyd P. Gentry
		Boyd P. Gentry
		Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald W. Fleming, Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted by § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	November 14, 2013	/s/ Ronald W. Fleming
		Ronald W. Fleming
		Chief Financial Officer