UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or

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

Commission File Number 001-32641

BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
20-3068069
(I.R.S. Employer
 Identification No.)


111 Westwood Place, Suite 200
Brentwood, Tennessee 37027
(Address of Principal Executive Offices)


(Registrant’s telephone number including area code)
(615) 221-2250


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class
Common Stock, $0.01 Par Value Per Share
 
Name of Each Exchange on Which Registered
New York Stock Exchange


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [X] No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes [  ] No [X]

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

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 [  ] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

 
 
 

 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    [   ]
 
Accelerated filer    [X]
     
Non-accelerated filer   [   ] (Do not check if a smaller reporting company)
 
Smaller reporting company   [   ]

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

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $428.1 million. The market value calculation was determined using a per share price of $9.74, the price at which the registrant’s common stock was last sold on the New York Stock Exchange on such date. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by the registrant’s executive officers, directors, and stockholders owning 10% or more of the outstanding common stock (and, in each case, their immediate family members and affiliates).

As of February 18, 2010, 119,302,532 shares of the registrant’s common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s Definitive Proxy Statement relating to its 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
 

 
 
 
 
 
TAB LE OF CONTENTS
BROOKDALE SENIOR LIVING INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2009

     
PAGE
 
       
     
       
 
 
 
 
 
 
       
     
       
 
 
 
 
 
 
 
 
       
     
       
 
 
 
 
 
       
     
       
 
       
       

 

 
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this Annual Report on Form 10-K and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations regarding occupancy, revenue, cash flow, expense levels, the demand for senior housing, expansion activity, acquisition opportunities, asset dispositions and the impact of a failure to reinstate therapy cap exceptions; our belief regarding our growth prospects; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity; our plans to deleverage; our expectations regarding financings and refinancings of assets (including the timing thereof); our plans to generate growth organically through occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy and home health); our plans to expand existing communities; the expected project costs for our expansion program; our plans to acquire additional communities, asset portfolios, operating companies and home health agencies; our expected levels of expenditures and reimbursements (and the timing thereof); our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”, “could”, “should”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; the risk that therapy caps exceptions are not reinstated; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; the risk that we may be required to post additional cash collateral in connection with our interest rate swaps; the risk that continued market deterioration could jeopardize the performance of certain of our counterparties’ obligations; changes in governmental reimbursement programs; our limited operating history on a combined basis; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates; environmental contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under “Risk Factors” included elsewhere in this Annual Report on Form 10-K. Such forward-looking statements speak only as of the date of this Annual Report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

4

 
PA RT I

Ite m 1.          Business.

Overview

As of December 31, 2009, we are the largest operator of senior living communities in the United States based on total capacity, with 565 communities in 35 states and the ability to serve approximately 53,600 residents. We offer our residents access to a full continuum of services across the most attractive sectors of the senior living industry.  As of December 31, 2009, we operated in four business segments:  retirement centers, assisted living, continuing care retirement communities (“CCRCs”) and management services.

As of December 31, 2009, we operated 80 retirement center communities with 14,867 units/beds, 430 assisted living communities with 22,954 units/beds, 36 CCRCs with 12,017 units/beds and 19 communities with 3,788 units/beds where we provide management services for third parties. The majority of our units/beds are located in campus settings or communities containing multiple services, including CCRCs. As of December 31, 2009, our owned/leased communities were 88.9% occupied. We generate approximately 83.0% of our revenues from private pay customers. For the year ended December 31, 2009, 40.0% of our revenues were generated from owned communities, 59.7% from leased communities and 0.3% from management fees from communities we operate on behalf of third parties.

The table below presents a summary of our operating results and certain other financial metrics for each of the years ended December 31, 2009, 2008 and 2007 (dollars in millions):

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Total revenues
  $ 2,023.1     $ 1,928.1     $ 1,839.3  
Net loss attributable to common stockholders (1)
  $ (66.3 )   $ (373.2 )   $ (162.0 )
Adjusted EBITDA (2)
  $ 348.6     $ 302.6     $ 306.4  
Cash From Facility Operations (3)
  $ 196.8     $ 130.1     $ 143.2  
Facility Operating Income (2)
  $ 690.1     $ 637.5     $ 642.3  
__________
 
(1)
Net loss for 2009 and 2008 include non-cash impairment charges of $10.1 million and $220.0 million, respectively.
 
(2)
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for an explanation of how we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, and a reconciliation of net loss to each of these measures.
 
(3)
Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for an explanation of how we define this measure, a detailed description of why we believe such measure is useful and the limitations of such measure, and a reconciliation of net cash provided by operating activities to such measure.
 
Our operating results for the year ended December 31, 2009 were favorably impacted by an increase in our total revenues (primarily driven by an increase in average monthly revenue per unit/bed including an increase in our ancillary services revenue) and by the significant cost control measures that were implemented in recent periods.  The difficult operating environment during 2009 has resulted in slightly lower occupancy and diminished growth in the rates we charge our residents.  We responded by controlling our expenses and capital spending, and by increasing the reach of our ancillary services programs.  We also continue to aggressively focus on maintaining and increasing occupancy.

During the first half of the year, we took steps to preserve our liquidity and increase our financial flexibility.  For


 
example, during the second quarter, we completed a public equity offering which yielded $163.8 million of net proceeds, which were primarily used to repay the $125.0 million of indebtedness which was outstanding under our credit facility.  Furthermore, we have extended the maturity of a number of mortgage loans and, factoring in contractual extension options, have no mortgage debt maturities until 2011 (other than periodic, scheduled principal payments).  Finally, we have taken steps to reduce materially our exposure to collateralization requirements associated with interest rate swaps.  As a result of these steps and our operating performance during the year ended December 31, 2009, we ended the year with $66.4 million of unrestricted cash and cash equivalents on our consolidated balance sheet.

As discussed in more detail elsewhere in the Annual Report on Form 10-K, subsequent to December 31, 2009, we entered into a new revolving credit facility with General Electric Capital Corporation, as administrative agent. The new facility has a commitment of $100.0 million, with an option to increase the commitment to $120.0 million, and matures on June 30, 2013. The new facility replaced the $75.0 million revolving credit agreement with Bank of America, N.A. that was scheduled to expire in August 2010.

During the fourth quarter of 2009 we engaged in a limited and measured amount of acquisition activity.  We acquired 18 senior living communities from affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net purchase price of approximately $190.0 million.  The portfolio of 18 communities is comprised of a total of 1,197 units, including 92 independent living units, 746 assisted living units and 359 Alzheimer’s units.  We financed the transaction with approximately $98.8 million of non-recourse mortgage debt (substantially through the assumption of existing debt), with the balance of the purchase price paid from cash on hand.

We also acquired the remaining interest in three retirement center communities that were previously managed by us and in which we previously had a noncontrolling interest.  Our interest was accounted for under the equity method and had a carrying value of zero prior to the acquisition.  The aggregate purchase price for the communities was $102.0 million.  The portfolio of three communities is comprised of 642 total units, including 504 independent living units and 138 assisted living units.  We financed the transaction by obtaining a $75.4 million non-recourse mortgage loan with the balance of the purchase price paid from cash on hand.

We believe that we are positioned to take advantage of favorable demographic trends and future supply-demand dynamics in the senior living industry.  We also believe that we operate in the most attractive sectors of the senior living industry with significant opportunities to increase our revenues through providing a combination of housing, hospitality services, ancillary services and health care services. Our senior living communities offer residents a supportive “home-like” setting, assistance with activities of daily living, or ADLs, and, in several communities, licensed skilled nursing services. We also provide ancillary services, including therapy and home health services, to our residents. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to “age-in-place” and thereby maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives.

We believe that there are substantial organic growth opportunities inherent in our existing portfolio. We intend to take advantage of those opportunities by growing revenues, while tightening expense control, at our existing communities, continuing the expansion and maturation of our ancillary services business, expanding our existing communities, and acquiring additional operating companies and communities.

Growth Strategy

Our primary growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income.  Key elements of our strategy to achieve these objectives include:

 
·
Organic growth in our core business, including expense control and the realization of economies of scale.   We plan to grow our existing operations by increasing revenues through a combination of occupancy growth and monthly service fee increases as a result of our competitive strength and growing demand for senior living communities. In addition, we intend to take advantage of our sophisticated operating and marketing expertise to retain existing residents and attract new residents to our communities.  We also plan to continue our efforts to achieve cost savings through the realization of additional economies of scale.  The size of our business has allowed us to achieve savings in the

 
 
 
procurement of goods and services and increased efficiencies with respect to various corporate functions, and we expect that we can achieve additional savings and efficiencies.
 
 
·
Growth through the continued expansion of our ancillary services programs (including therapy services and home health).   We plan to grow our revenues by further expanding our Innovative Senior Care program throughout our retirement centers, assisted living, CCRCs and management services segments. This expansion includes expanding the scope of services provided at the communities currently served and the continuing rollout of home health to communities not currently serviced.  Through the Innovative Senior Care program, we currently provide therapy, home health and other ancillary services, as well as education and wellness programs, to residents of many of our communities.  These programs are focused on wellness and physical fitness to allow residents to maintain maximum independence. These services provide many continuing education opportunities for residents and their families through health fairs, seminars, and other consultative interactions. The therapy services we provide include physical, occupational, speech and other specialized therapy and home health services.  The home health services we provide include skilled nursing, physical therapy, occupational therapy, speech language pathology, home health aide services as well as social services as needed.  In addition to providing these in-house therapy and wellness services at our communities, we also provide these services to other senior living communities that we do not own or operate. These services may be reimbursed under the Medicare program or paid directly by residents from private pay sources and revenues are recognized as services are provided. We believe that our Innovative Senior Care program is unique in the senior living industry and that we have a significant advantage over our competitors with respect to providing ancillary services because of our established infrastructure and experience.  We believe there is a significant opportunity to grow our revenues by continuing to expand the scope of services at communities currently served and continuing the rollout of home health to additional communities, which we believe will increase our revenue per unit/bed in the future.  As of December 31, 2009 we offered therapy services to approximately 36,000 of our units and home health services to approximately 23,000 of our units.

 
·
Growth through the expansion of existing communities.   We intend to grow our revenues and cash flows through the expansion of certain of our existing communities where economically advantageous.  Certain of our communities with stabilized occupancies and excess demand in their respective markets may benefit from additions and expansions (which additions and expansions may be subject to landlord, lender and other third party consents) offering increased capacity.  Additionally, the community, as well as our presence in the market, may benefit from adding a new level of service for residents.
 
·
Growth through the acquisition and consolidation of asset portfolios and other senior living companies.   As opportunities arise, we plan to continue to take advantage of the fragmented continuing care , independent living and assisted living sectors by selectively purchasing existing operating companies, asset portfolios, home health agencies and communities.  We may also seek to acquire the fee interest in communities that we currently lease or manage.  Our acquisition strategy will continue to focus primarily on communities where we can improve service delivery, occupancy rates and cash flow.
 
The Senior Living Industry

The senior living industry is highly fragmented and characterized by numerous local and regional operators.  We are one of a limited number of national operators that provide a broad range of community locations and service level offerings at varying price levels.  The industry has seen significant growth in recent years and has been marked by the emergence of the assisted living segment in the mid-1990’s.

Since the beginning of 2007, the industry has been affected by the downturn in the housing market and by the declining economy in general.  In spite of these factors, occupancy in the industry has only decreased by 120 basis points to 88.9% in the twelve months ended December 31, 2009 according to the National Investment Center for the Seniors Housing & Care Industry (“NIC”).  Occupancy has declined 160 basis points to 89.0% in the independent living sector and 70 basis points to 88.9% in the assisted living sector in the twelve months ended December 31, 2009.  Industry occupancy rates have been declining after reaching a cyclic high in early 2007 of 92.3% according to NIC.  New construction starts have slowed dramatically since late 2008.  Due to the continued impact of the economic recession, locating financing for new projects has been very difficult.  For the


 
foreseeable future, there will be very limited amounts of new construction in senior living.

Despite current economic conditions, we believe that a number of trends will contribute to the continued growth of the senior living industry in coming years.  The primary market for senior living services is individuals age 70 and older.  According to U.S. Census data, the group is expected to grow by 3.6 million through 2015.  As a result of these demographic trends, we expect an increase in the demand for senior living services in future years.

We believe the senior living industry has been and will continue to be impacted by several other trends.  The use of long-term care insurance is increasing among current and future seniors as a means of planning for the costs of senior living services.  In addition, as a result of increased mobility in society, reduction of average family size and increased number of two-wage earner couples, more seniors are looking for alternatives outside of their family for their care.  Growing consumer awareness among seniors and their families concerning the types of services provided by independent and assisted living operators has further contributed to the opportunities in the senior living industry. Also, seniors currently possess greater financial resources than in the past, which makes it more likely that they are able to afford to live in market-rate senior housing. Seniors in the geographic areas in which we operate tend to have a significant amount of assets generated from savings, pensions and, despite weakening in national housing markets, equity from the sale of private homes.

Challenges in our industry include increased state and local regulation of the assisted living and skilled nursing sectors, which has led to an increase in the cost of doing business. The regulatory environment continues to  intensify in the number and types of laws and regulations affecting us, accompanied by increased enforcement activity by state and local officials. In addition, like other companies, our financial results may be negatively impacted by increasing employment costs including salaries, wages and benefits, such as health care, for our employees. Increases in the costs of utilities, insurance, and real estate taxes may also have a negative impact on our financial results.

Certain per person annual limits on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These exceptions expired on December 31, 2009. Although legislation has been proposed in Congress to reinstate the exceptions (and the exceptions have been repeatedly extended in the past), this legislation has not yet been adopted.  There can be no assurance as to whether the exceptions will eventually be reinstated or the timing thereof.  A failure to reinstate these exceptions (or a delay in their reinstatement) could have a material adverse impact on the revenues and net operating income relating to our outpatient therapy services program.  While it is inherently difficult to quantify the impact of a failure to reinstate the therapy cap exceptions (including, among other things, possible changes by residents in accessing their Medicare benefits), we estimate that such failure would have a recurring negative effect on the net operating income from our outpatient therapy services program in the range of $5.0 million to $10.0 million per year.  In addition, the Company would likely incur additional one-time charges (such as severance expense) in response thereto.

In addition, there continues to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future. Changes in the reimbursement policies of the Medicare and Medicaid programs could have an adverse effect on our results of operations and cash flow.

Our History

We were formed as a Delaware corporation in June 2005 for the purpose of combining two leading senior living operating companies, Brookdale Living Communities, Inc., or BLC, and Alterra Healthcare Corporation, or Alterra. BLC and Alterra had been operating independently since 1986 and 1981, respectively.  On November 22, 2005, we completed our initial public offering of common stock, and on July 25, 2006, we acquired American Retirement Corporation, or ARC, another leading senior living provider which had been operating independently since 1978.


 
Our Product Offerings

We offer a variety of senior living housing and service alternatives in communities located across the United States. Our primary product offerings consist of (i) retirement center communities; (ii) assisted living communities; and (iii) CCRCs. As discussed below under “Segments”, we also operate certain communities on behalf of third parties pursuant to management agreements.

Retirement centers.   Our retirement center communities are primarily designed for middle to upper income seniors generally age 70 and older who desire an upscale residential environment providing the highest quality of service.

The majority of our retirement center communities consist of both independent and assisted living units in a single community, which allows residents to “age-in-place” by providing them with a continuum of senior independent and assisted living services. While the number varies depending upon the particular community, approximately 79.2% of all of the units at our retirement center communities are independent living units, with the balance of units licensed for assisted living.

Our retirement center communities are large multi-story buildings containing on average 186 units/beds with extensive common areas and amenities. Residents may choose from studio, one-bedroom and two-bedroom units, depending upon the specific community.

Each retirement center community provides residents with basic services such as meal service, 24-hour emergency response, housekeeping, concierge services, transportation and recreational activities. Most of these communities also offer custom tailored supplemental care services at an additional charge, which may include medication reminders, check-in services and escort and companion services. In addition, our Innovative Senior Care program is currently available in most of our retirement centers communities. Through the program, we are able to offer our residents various education, wellness, therapy, home health and other ancillary services.

In addition to the basic services, our retirement center communities that include assisted living also provide residents with supplemental care service options to provide assistance with activities of daily living, or ADLs. The levels of care provided to residents vary from community to community depending, among other things, upon the licensing requirements of the state in which the community is located.

Residents in our retirement center communities are able to maintain their residency for an extended period of time due to the range of service options available to residents (not including skilled nursing) as their needs change. Residents with cognitive or physical frailties and higher level service needs are accommodated with supplemental services in their own units or, in certain communities, are cared for in a more structured and supervised environment on a separate wing or floor. These communities also generally have a dedicated assisted living staff, including nurses at the majority of communities, and separate assisted living dining rooms and activity areas.

The communities in our Retirement Centers segment represent approximately 27.7% of our total senior living capacity.

Assisted Living.   Our assisted living communities offer housing and 24-hour assistance with ADLs to mid-acuity frail and elderly residents.

Our assisted living communities include both freestanding, multi-story communities with more than 50 beds and smaller, freestanding single story communities with less than 50 beds. Depending upon the specific location, the community may include (i) private studio, one-bedroom and one-bedroom deluxe apartments, or (ii) individual rooms for one or two residents in wings or “neighborhoods” scaled to a single-family home, which includes a living room, dining room, patio or enclosed porch, laundry room and personal care area, as well as a caregiver work station.

Under our Clare Bridge brand, we also operate 86 memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer’s disease and other dementias requiring the attention, personal care and services needed to help cognitively impaired residents maintain a higher quality of


 
life. Our memory care communities have from 20 to 60 beds and some are part of a campus setting which includes a freestanding assisted living community.

All residents at our assisted living and memory care communities receive the basic care level, which includes ongoing health assessments, three meals per day and snacks, coordination of special diets planned by a registered dietitian, assistance with coordination of physician care, social and recreational activities, housekeeping and personal laundry services. In some locations we offer our residents exercise programs and programs designed to address issues associated with early stages of Alzheimer’s and other forms of dementia. In addition, we offer at additional cost higher levels of personal care services to residents at these communities who are very physically frail or experiencing early stages of Alzheimer’s disease or other dementia and who require more frequent or intensive physical assistance or increased personal care and supervision due to cognitive impairments. We also offer our Innovative Senior Care program at certain of our assisted living and memory care communities.

As a result of their progressive decline in cognitive abilities, residents at our memory care communities typically require higher levels of personal care and services and therefore pay higher monthly service fees. Specialized services include assistance with ADLs, behavior management and an activities program, the goal of which is to provide a normalized environment that supports residents’ remaining functional abilities. Whenever possible, residents participate in all facets of daily life at the residence, such as assisting with meals, laundry and housekeeping.

The communities in our Assisted Living segment (including our memory care communities) represent approximately 42.8% of our total senior living capacity.

CCRCs.   Our CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of our CCRCs have independent living, assisted living and skilled nursing available on one campus, and some also include memory care/Alzheimer’s units.

Eleven of our CCRCs are entry fee communities, in which residents in the independent living apartment units pay a one-time upfront entrance fee, typically $100,000 to $400,000 or more, which fee is partially refundable in certain circumstances. The amount of the entrance fee varies depending upon the type and size of the dwelling unit, the type of contract plan selected, whether the contract contains a lifecare benefit (i.e., a healthcare discount) for the resident, the amount and timing of refund, and other variables. These agreements are subject to regulations in various states. In addition to their initial entrance fee, residents under all of our entrance fee agreements also pay a monthly service fee, which entitles them to the use of certain amenities and services. Since we receive entrance fees upon initial occupancy, the monthly fees are generally less than fees at a comparable rental community.

The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or upon the sale of the unit, or in some agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit. In addition, some entrance fee agreements entitle the resident to a refund of the original entrance fee paid plus a percentage of the appreciation of the unit upon resale.

We also offer a broad array of ancillary services, including therapy, home health, and other services through our Innovative Senior Care program, to the residents of each of our CCRCs.

The communities in our CCRCs segment represent approximately 22.4% of our total senior living capacity.  The independent living units at our entrance fee communities (those units on which entry fees are paid) represent 5.8% of our total senior living capacity.  Excluding managed communities and equity homes (which are residences located on certain of our CCRC campuses that we do not generally own), entrance fee communities represent 9.5% of our total senior living capacity.

Competitive Strengths

We believe our nationwide network of senior living communities is well positioned to benefit from the growth and increasing demand in the industry. Some of our most significant competitive strengths are:


 
 
·
Skilled management team with extensive experience.   Our senior management team has extensive experience in acquiring, operating and managing a broad range of senior living assets, including experience in the senior living, healthcare, hospitality and real estate industries.

 
·
Geographically diverse, high-quality, purpose-built communities.   As of December 31, 2009, we operate a nationwide base of 565 purpose-built communities in 35 states, including 78 communities in nine of the top ten standard metropolitan statistical areas.

 
·
Ability to provide a broad spectrum of care.   Given our diverse mix of retirement centers, assisted living communities and CCRCs, we are able to meet a wide range of our customers’ needs. We believe that we are one of the few companies in the senior living industry with this capability. We believe that our multiple product offerings create marketing synergies and cross-selling opportunities.

 
·
The size of our business allows us to realize cost and operating efficiencies.   We are the largest operator of senior living communities in the United States based on total capacity. The size of our business allows us to realize cost savings and economies of scale in the procurement of goods and services.  Our scale also allows us to achieve increased efficiencies with respect to various corporate functions. We intend to utilize our expertise and size to capitalize on economies of scale resulting from our national platform. Our geographic footprint and centralized infrastructure provide us with a significant operational advantage over local and regional operators of senior living communities. In connection with our formation transactions and our acquisitions, we negotiated new contracts for food, insurance and other goods and services. In addition, we have and will continue to consolidate corporate functions such as accounting, finance, human resources, legal, information technology and marketing. We began to realize these savings upon the completion of our formation transactions in September 2005 and have realized additional savings as we continued to consolidate and integrate various corporate functions.

 
·
Significant experience in providing ancillary services.   Through our Innovative Senior Care program, we provide a range of education, wellness, therapy, home health and other ancillary services to residents of certain of our retirement centers, assisted living, and CCRC communities.  Having therapy clinics and home health agencies located in our buildings to provide needed services to our residents is a distinctive competitive difference.  We have significant experience in providing these ancillary services and expect to receive additional revenues as we expand our ancillary service offerings to additional communities.

Segments

As of December 31, 2009, we had four reportable segments: retirement centers; assisted living; CCRCs; and management services. These segments were determined based on the way that our chief operating decision makers organize our business activities for making operating decisions and assessing performance.

Our management services segment includes the results of communities that we operate on behalf of third parties pursuant to management agreements. Information regarding the other segments is included above under “Our Product Offerings”.

Operating results from our four business segments are discussed further in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 24 to our consolidated financial statements included herein.

Operations

Operations Overview

We believe that successful senior living operators must effectively combine the expertise and business disciplines of housing, hospitality, health care, marketing, finance and real estate.

We continually review opportunities to expand the types of services we provide to our residents. To date, we have been able to increase our monthly revenue per unit each year and we have generally experienced increasing facility operating margins through a combination of the implementation of efficient operating procedures and the


 
economies of scale associated with the size and number of our communities. Our operating procedures include securing national vendor contracts to obtain the lowest possible pricing for certain services such as food, energy and insurance, implementing effective budgeting and financial controls at each community, and establishing standardized training and operations procedures.

We have implemented intensive standards, policies and procedures and systems, including detailed staff manuals, which we believe have contributed to high levels of customer service and to improved facility operating margins. We have centralized accounting controls, finance and other operating functions in our support centers so that, consistent with our operating philosophy, community-based personnel can focus on resident care and efficient operations. We have established company-wide policies and procedures relating to, among other things: resident care; community design and community operations; billings and collections; accounts payable; finance and accounting; risk management; development of employee training materials and programs; marketing activities; the hiring and training of management and other community-based personnel; compliance with applicable local and state regulatory requirements; and implementation of our acquisition, development and leasing plans.

Consolidated Corporate Operations Support

We have developed a centralized infrastructure and services platform, which provides us with a significant operational advantage over local and regional operators of senior living communities. The size of our business also allows us to achieve increased efficiencies with respect to various corporate functions such as human resources, finance, accounting, legal, information technology and marketing. We are also able to realize cost efficiencies in the purchasing of food, supplies, insurance, benefits, and other goods and services. In addition, we have established centralized operations groups to support all of our product lines and communities in areas such as training, regulatory affairs, asset management, dining and procurement.

Community Staffing and Training

Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of service, social services and financial performance. Each Executive Director receives specialized training from us. In addition, a portion of each Executive Director’s compensation is directly tied to the operating performance of the community and key service quality measures. We believe that the quality of our communities, coupled with our competitive compensation philosophy, has enabled us to attract high-quality, professional community Executive Directors.

Depending upon the size of the community, each Executive Director is supported by a community staff member who is directly responsible for day-to-day care of the residents and either community staff or regional support to oversee the community’s marketing and community outreach programs. Other key positions supporting each community may include individuals responsible for food service, activities, housekeeping, and engineering.

We believe that quality of care and operating efficiency can be maximized by direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the support and care needs of the residents and emergency response techniques. We have adopted formal training and evaluation procedures to help ensure quality care for our residents. We have extensive policy and procedure manuals and hold frequent training sessions for management and staff at each site.

Quality Assurance

We maintain quality assurance programs at each of our communities through our corporate and regional staff. Our quality assurance program is designed to achieve a high degree of resident and family member satisfaction with the care and services that we provide. Our quality control measures include, among other things, community inspections conducted by corporate staff on a regular basis. These inspections cover the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; quality of resident care (including assisted living services, nursing care, therapy and home health programs); the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. Our quality control measures also include the survey of residents and family members on a regular basis to monitor their perception of the quality of services provided to residents.


 
In order to foster a sense of community as well as to respond to residents’ desires, at many of our communities, we have established a resident council or other resident advisory committee that meets monthly with the Executive Director of the community. Separate resident committees also exist at many of these communities for food service, activities, marketing and hospitality. These committees promote resident involvement and satisfaction and enable community management to be more responsive to the residents’ needs and desires.

Marketing and Sales

Our marketing strategy is intended to create awareness of us, our communities, our products and our services among potential residents and their family members and among referral sources, including hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities, home health agencies and social workers. Our marketing staff develops overall strategies for promoting our communities and monitors the success of our marketing efforts, including outreach programs. In addition to direct contacts with prospective referral sources, we also rely on internet inquiries, print advertising, yellow pages advertising, direct mail, signage and special events, health fairs and community receptions. Certain resident referral programs have been established and promoted within the limitations of federal and state laws at many communities.

In order to mitigate the impact of weakness in the housing market, we have implemented several sales and marketing initiatives designed to increase our entrance fee sales results.  These include the acceptance of short-term promissory notes in satisfaction of a resident’s required entrance fee from certain pre-qualified, prospective residents who are waiting for their homes to sell.  In addition, we have implemented the MyChoice program, which allows new and existing residents in certain communities the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee, thereby offering choices to residents desiring a more affordable ongoing monthly service fee.

Competition

The senior living industry is highly competitive. We compete with numerous other organizations that provide similar senior living alternatives, such as home health care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers. In general, regulatory and other barriers to competitive entry in the retirement center and assisted living sectors of the senior living industry are not substantial, except in the skilled nursing area.  Although new construction of senior living communities has declined in recent years, we have experienced and expect to continue to experience competition in our efforts to acquire and operate senior living communities. Some of our present and potential senior living competitors have, or may obtain, greater financial resources than us and may have a lower cost of capital. Consequently, we may encounter competition that could limit our ability to attract residents or expand our business, which could have a material adverse effect on our revenues and earnings. Our major publicly-traded competitors are Sunrise Senior Living, Inc., Emeritus Corporation and Capital Senior Living Corporation and our major private competitors include Life Care Services, LLC and Atria Senior Living Group, as well as a large number of not-for-profit entities.

Customers

Our target retirement center residents are senior citizens age 70 and older who desire or need a more supportive living environment. The average retirement center resident resides in a retirement center community for approximately 32 months. A number of our retirement center residents relocate to one of our communities in order to be in a metropolitan area that is closer to their adult children.

Our target assisted living residents are predominantly senior citizens age 80 and older who require daily assistance with two or three ADLs. The average assisted living resident resides in an assisted living community for approximately 20 months. Residents typically enter an assisted living community due to a relatively immediate need for services that might have been triggered by a medical event or need.

Our target CCRC residents are senior citizens who are seeking a community that offers a variety of services and a continuum of care so that they can “age in place.” These residents generally first enter the community as a resident of an independent living unit and may later move into an assisted living or skilled nursing unit as their needs change.


 
We believe our combination of retirement center and assisted living operating expertise and the broad base of customers that this enables us to target creates a unique opportunity for us to invest in a broad spectrum of assets in the senior living industry, including retirement center, assisted living, CCRC and skilled nursing communities.

Employees

As of December 31, 2009, we had approximately 23,500 full-time employees and approximately 13,300 part-time employees, of which 210 work in our Nashville headquarters office, 361 work in our Milwaukee office, 53 work in our Chicago office and 81 work in a variety of field-based management positions.  We currently consider our relationship with our employees to be good.

Government Regulation

The regulatory environment surrounding the senior living industry continues to intensify in the number and type of laws and regulations affecting it. In addition, federal, state and local officials are increasingly focusing their efforts on enforcement of these laws and regulations. This is particularly true for large for-profit, multi-community providers like us. Some of the laws and regulations that impact our industry include: state and local laws impacting licensure, protecting consumers against deceptive practices, and generally affecting the communities’ management of property and equipment and how we otherwise conduct our operations, such as fire, health and safety laws and regulations and privacy laws; federal and state laws designed to protect Medicare and Medicaid, which mandate what are allowable costs, pricing, quality of services, quality of care, food service, resident rights (including abuse and neglect) and fraud; federal and state residents’ rights statutes and regulations; Anti-Kickback and physicians referral (“Stark”) laws; and safety and health standards set by the Occupational Safety and Health Administration. We are unable to predict the future course of federal, state and local legislation or regulation. Changes in the regulatory framework could have a material adverse effect on our business.

Many senior living communities are also subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state, these requirements may address, among others, the following: personnel education, training and records; community services, including administration of medication, assistance with self-administration of medication and the provision of nursing, home health and therapy services; staffing levels; monitoring of resident wellness; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; professional licensing and certification of staff prior to beginning employment; and resident rights and responsibilities, including in some states the right to receive health care services from providers of a resident’s choice that are not our employees. In several of the states in which we operate or may operate, we are prohibited from providing certain higher levels of senior care services without first obtaining the appropriate licenses. In addition, in several of the states in which we operate or intend to operate, assisted living communities, home health agencies and/or skilled nursing facilities require a certificate of need before the community can be opened or the services at an existing community can be expanded. Senior living communities may also be subject to state and/or local building, zoning, fire and food service codes and must be in compliance with these local codes before licensing or certification may be granted. These laws and regulatory requirements could affect our ability to expand into new markets and to expand our services and communities in existing markets. In addition, if any of our presently licensed communities operates outside of its licensing authority, it may be subject to penalties, including closure of the community.

The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by governmental authorities and consequent citations for failure to comply with regulatory requirements. Unannounced surveys or inspections may occur annually or bi-annually, or following a regulator’s receipt of a complaint about the community. From time to time in the ordinary course of business, we receive deficiency reports from state regulatory bodies resulting from such inspections or surveys. Most inspection deficiencies are resolved through an agreed-to plan of corrective action relating to the community’s operations, but the reviewing agency typically has the authority to take further action against a licensed or certified community, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs or imposition of other sanctions, including criminal penalties. Loss, suspension or modification of a license may also cause us to default under our loan or lease agreements and/or trigger cross-defaults. Sanctions may be taken against providers or facilities without regard to the providers’ or facilities’ history of compliance. We may also expend considerable resources to respond to federal and state


 
investigations or other enforcement action under applicable laws or regulations. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse effect on our revenues. However, any future substantial failure to comply with any applicable legal and regulatory requirements could result in a material adverse effect to our business as a whole. In addition, states Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. State Medicaid Fraud and Abuse Units may also investigate assisted living communities even if the community or any of its residents do not receive federal or state funds.

Regulation of the senior living industry is evolving at least partly because of the growing interests of a variety of advocacy organizations and political movements attempting to standardize regulations for certain segments of the industry, particularly assisted living. Our operations could suffer if future regulatory developments, such as federal assisted living laws and regulations, as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials or increase the number of citations that can result in civil or criminal penalties. Certain current state laws and regulations allow enforcement officials to make determinations on whether the care provided by one or more of our communities exceeds the level of care for which the community is licensed. A finding that a community is delivering care beyond its license might result in the immediate transfer and discharge of residents, which may create market instability and other adverse consequences. Furthermore, certain states may allow citations in one community to impact other communities in the state. Revocation or suspension of a license, or a citation, at a given community could therefore impact our ability to obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our loan or lease agreements and trigger cross-defaults or may also trigger defaults under certain of our credit agreements, or adversely affect our ability to operate and/or obtain financing in the future. If a state were to find that one community’s citation will impact another of our communities, this will also increase costs and result in increased surveillance by the state survey agency. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the enforcement of existing rules, including increased enforcement brought about by advocacy groups, in addition to federal and state regulators, our operations could be adversely affected. In addition, any adverse finding by survey and inspection officials may serve as the basis for false claims lawsuits by private plaintiffs and may lead to investigations under federal and state laws, which may result in civil and/or criminal penalties against the community or individual.

There are various extremely complex federal and state laws governing a wide array of referrals, relationships and arrangements and prohibiting fraud by health care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud initiatives. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Balanced Budget Act of 1997 expanded the penalties for health care fraud. In addition, with respect to our participation in federal health care reimbursement programs, the government or private individuals acting on behalf of the government may bring an action under the False Claims Act alleging that a health care provider has defrauded the government and seek treble damages for false claims and the payment of additional monetary civil penalties. Recently, other health care providers have faced enforcement action under the False Claims Act. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government’s recovery. Because of these incentives, so-called “whistleblower” suits have become more frequent. Also, if any of our communities exceeds its level of care, we may be subject to private lawsuits alleging “transfer trauma” by residents. Such allegations could also lead to investigations by enforcement officials, which could result in penalties, including the closure of communities. The violation of any of these regulations may result in the imposition of fines or other penalties that could jeopardize our business.

Additionally, we operate communities that participate in federal and/or state health care reimbursement programs, including state Medicaid waiver programs for assisted living communities, the Medicare skilled nursing facility benefit program and other healthcare programs such as therapy and home health services, or other federal and/or state health care programs. Consequently, we are subject to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent or are for items or services that were not provided as claimed. Similar state laws vary from state to state and we cannot be sure that these laws will be interpreted consistently or in keeping with past practices. Violation of any of these laws can result in loss of licensure, claims for recoupment, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the applicable federal and/or state health care reimbursement program. Loss of licensure may also cause us to default under our leases and loan agreements and/or trigger cross-defaults.


 
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law, the Stark laws and certain state referral laws. The Federal Anti-Kickback Law makes it unlawful for any person to offer or pay (or to solicit or receive) “any remuneration ... directly or indirectly, overtly or covertly, in cash or in kind” for referring or recommending for purchase any item or service which is eligible for payment under the Medicare and/or Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and relationships between health care providers and sources of patient referral. If we were to violate the Federal Anti-Kickback Law, we may face criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid, which may also cause us to default under our leases and loan agreements and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our senior living communities, it is difficult to predict how our revenues could be affected if we were subject to an action alleging such violations. We are also subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services, or HHS, has issued rules pursuant to HIPAA relating to the privacy of such information. Rules that became effective April 14, 2003 govern our use and disclosure of health information at certain HIPAA covered communities. We established procedures to comply with HIPAA privacy requirements at these communities. We were required to be in compliance with the HIPAA rule establishing administrative, physical and technical security standards for health information by April 2005. To the best of our knowledge, we are in compliance with these rules.

Environmental Matters

Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain circumstances for the costs of investigation, removal or remediation of certain hazardous or toxic substances, including, among others, petroleum and materials containing asbestos, that could be located on, in, at or under a property, regardless of how such materials came to be located there. Additionally, such an owner or operator of real property may incur costs relating to the release of hazardous or toxic substances, including government fines and payments for personal injuries or damage to adjacent property. The cost of any required investigation, remediation, removal, mitigation, compliance, fines or personal or property damages and our liability therefore could exceed the property’s value and/or our assets’ value. In addition, the presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents and retain existing residents, to borrow using such property as collateral or to develop or redevelop such property. In addition, such laws impose liability for investigation, remediation, removal and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third-party sites. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release or disposal of such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Moreover, the imposition of such liability upon us could be joint and several, which means we could be required to pay for the cost of cleaning up contamination caused by others who have become insolvent or otherwise judgment proof.

We do not believe that we have incurred such liabilities that would have a material adverse effect on our business, financial condition and results of operations.

Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage, transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the environment and natural resources in connection with development or construction of our properties.

Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents, including, for example, blood-contaminated bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including its handling, storage, transportation, treatment and disposal, is subject to regulation under various federal, state and local environmental laws. These environmental laws set forth the management requirements for such waste, as well as related permit, record-keeping, notice and reporting obligations. Each of our communities has an agreement with a waste management company for the proper disposal of all infectious medical waste. The use of such waste management companies does not immunize us


 
from alleged violations of such medical waste laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with environmental laws could adversely affect our business operations and financial condition.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, their employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. The regulations also set forth employee training, record-keeping requirements and sampling protocols pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.

The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan. Furthermore, the presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may present a risk that third parties will seek recovery from the owners, operators or tenants of such properties for personal injury or property damage. In some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community’s market value.

We believe that we are in material compliance with applicable environmental laws.

We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory framework (including legislative or regulatory efforts designed to address climate change, such as the proposed “cap and trade” legislation) could have a material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, are available free of charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, at the following address: www.brookdaleliving.com. The information within, or that can be accessed through, the web site is not part of this report.

We have posted our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of our Audit, Compensation, Investment and Nominating and Corporate Governance Committees on our web site at www.brookdaleliving.com. In addition, our Code of Ethics for Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Co-Presidents, Chief Financial Officer, Treasurer and Controller, is also available on our website. Our corporate governance materials are available in print free of charge to any stockholder upon request to our Corporate Secretary, Brookdale Senior Living Inc., 111 Westwood Place, Suite 200, Brentwood, Tennessee 37027.


 
Ite m 1A.          Risk Factors.

Risks Related to Our Business

Recent disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our liquidity, financial condition and the market price of our common stock.

The United States stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.

As of December 31, 2009, we had an available secured line of credit of $75.0 million (including a $25.0 million letter of credit sublimit) and separate letter of credit facilities of up to $78.5 million in the aggregate.  As of February 26, 2010, we have an available secured line of credit with a $100.0 million commitment and separate letter of credit facilities of up to $78.5 million in the aggregate.  As of December 31, 2009, we also had $166.2 million of debt that is scheduled to mature during the twelve months ending December 31, 2010.  Although these debt obligations are scheduled to mature on or prior to December 31, 2010, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $126.0 million of non-recourse mortgages payable included in such debt until 2011.  If we are unable to extend (or refinance, as applicable) any of our debt or credit or letter of credit facilities prior to their scheduled maturity dates, our liquidity and financial condition could be adversely impacted. In addition, even if we are able to extend or refinance our other maturing debt or credit or letter of credit facilities, the terms of the new financing may not be as favorable to us as the terms of the existing financing.

A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. Continued disruptions in the financial markets could have an adverse effect on us and our business.  If we are not able to obtain additional financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.

If we are not able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements, our liquidity and financial condition could be negatively impacted.

Our consolidated financial statements reflect approximately $166.2 million of debt obligations due on or prior to December 31, 2010.  Although these debt obligations are scheduled to mature on or prior to December 31, 2010, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $126.0 million of non-recourse mortgages payable included in such debt until 2011, as the instruments associated with these mortgages payable provide that we can extend the respective maturity dates for one 12 month term each from the existing maturity dates.  We presently anticipate that we will exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations.  If we are not able to satisfy the conditions precedent to exercising these extension options, our liquidity and financial condition could be adversely impacted.

We will rely on reimbursement from governmental programs for a greater portion of our revenues than in the past, and will be subject to changes in reimbursement levels, which could adversely affect our results of operations and cash flow.

We will rely on reimbursement from governmental programs for a greater portion of our revenues than before, and we cannot assure you that reimbursement levels will not decrease in the future, which could adversely affect our results of operations and cash flow. Certain per person annual limits on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These exceptions expired on December 31, 2009.  Although legislation has been proposed in Congress to reinstate the exceptions (and the exceptions have


 
been repeatedly extended in the past), this legislation has not yet been adopted.  There can be no assurance as to whether the exceptions will eventually be reinstated or the timing thereof.  A failure to reinstate these exceptions (or a delay in their reinstatement) could have a material adverse impact on the revenues and net operating income relating to our outpatient therapy services program.  In addition, there continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future. Changes in the reimbursement policies of the Medicare program could have an adverse effect on our results of operations and cash flow.

Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees (including downturns in the economy, housing market, consumer confidence or the equity markets and unemployment among resident family members) could cause our occupancy rates, revenues and results of operations to decline.

Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs such as Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located typically can afford to pay our monthly resident fees. Economic downturns, softness in the housing market, higher levels of unemployment among resident family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford our resident fees or entrance fees. If we are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our occupancy rates, revenues and results of operations could decline.

The inability of seniors to sell real estate may delay their moving into our communities, which could negatively impact our occupancy rates, revenues, cash flows and results of operations.

Recent housing price declines and reduced home mortgage availability have negatively affected the U.S. housing market, with certain geographic areas experiencing more acute deterioration than others.  Downturns in the housing markets, such as the one we have recently experienced, could adversely affect the ability (or perceived ability) of seniors to afford our entrance fees and resident fees as our customers frequently use the proceeds from the sale of their homes to cover the cost of our fees. Specifically, if seniors have a difficult time selling their homes, these difficulties could impact their ability to relocate into our communities or finance their stays at our communities with private resources.  If the recent volatility in the housing market continues for a protracted period, our occupancy rates, revenues, cash flows and results of operations could be negatively impacted.

General economic factors could adversely affect our financial performance and other aspects of our business.

General economic conditions, such as inflation, commodity costs, fuel and other energy costs, costs of labor, insurance and healthcare, interest rates, and tax rates, affect our community operating and general and administrative expenses, and we have no control or limited ability to control such factors.  In addition, current global economic conditions and uncertainties, the potential impact of a prolonged recession, the potential for failures or realignments of financial institutions, and the related impact on available credit may affect us and our business partners, landlords, counterparties and residents or prospective residents in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk that certain of our business partners, landlords or counterparties would be unable to fulfill their obligations to us, and other impacts which we are unable to fully anticipate.

If we are unable to generate sufficient cash flow to cover required interest and lease payments, this would result in defaults of the related debt or leases and cross-defaults under other debt or leases, which would adversely affect our ability to continue to generate income.

We have significant indebtedness and lease obligations, and we intend to continue financing our communities through mortgage financing, long-term leases and other types of financing, including borrowings under our line of credit and future credit facilities we may obtain. We cannot give any assurance that we will generate sufficient cash flow from operations to cover required interest, principal and lease payments. Any non-payment or other default under our financing arrangements could, subject to cure provisions, cause the lender to foreclose upon the community or communities securing such indebtedness or, in the case of a lease, cause the lessor to terminate the lease, each with a consequent loss of income and asset value to us. Furthermore, in some cases, indebtedness is


 
secured by both a mortgage on a community (or communities) and a guaranty by us and/or one or more of our subsidiaries. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due and payable, and requiring the respective guarantor to fulfill its obligations to make such payments. The realization of any of these scenarios would have an adverse effect on our financial condition and capital structure. Additionally, a foreclosure on any of our properties could cause us to recognize taxable income, even if we did not receive any cash proceeds in connection with such foreclosure. Further, because our mortgages and leases generally contain cross-default and cross-collateralization provisions, a default by us related to one community could affect a significant number of our communities and their corresponding financing arrangements and leases.

Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business and our ability to execute our growth strategy.

Our level of indebtedness and our long-term leases could adversely affect our future operations and/or impact our stockholders for several reasons, including, without limitation:

 
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We may have little or no cash flow apart from cash flow that is dedicated to the payment of any interest, principal or amortization required with respect to outstanding indebtedness and lease payments with respect to our long-term leases;

 
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Increases in our outstanding indebtedness, leverage and long-term leases will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure;

 
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Increases in our outstanding indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures, expansions, new developments, acquisitions, general corporate and other purposes; and

 
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Our ability to pay dividends to our stockholders may be limited.

Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our leases depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. Our business might not continue to generate cash flow at or above current levels. If we are unable to generate sufficient cash flow from operations in the future to service our debt or to make lease payments on our leases, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital expenditures or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our debt or to make lease payments on our leases. The failure to make required payments on our debt or leases or the delay or abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate revenues and sustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms to us.

Our existing credit facilities, mortgage loans and lease arrangements contain covenants that restrict our operations and any default under such facilities, loans or arrangements could result in the acceleration of indebtedness, termination of the leases or cross-defaults, any of which would negatively impact our liquidity and inhibit our ability to grow our business and increase revenues.

Our outstanding indebtedness and leases contain restrictions and covenants and require us to maintain or satisfy specified financial ratios and coverage tests, including maintaining prescribed net worth levels, leverage ratios and debt service and lease coverage ratios on a consolidated basis, and on a community or communities basis based on the debt or lease securing the communities. In addition, certain of our leases require us to maintain lease coverage ratios on a lease portfolio basis (each as defined in the leases) and maintain stockholders’ equity or tangible net worth amounts. The debt service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or lease payment. Net worth is generally calculated as stockholders’ equity as calculated in accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. These restrictions and covenants may interfere with our ability to obtain financing or to engage in other business activities, which may


 
inhibit our ability to grow our business and increase revenues. If we fail to comply with any of these requirements, then the related indebtedness could become immediately due and payable. We cannot assure you that we could pay this debt if it became due.

Our outstanding indebtedness and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, an event of default under the outstanding indebtedness or leases, subject to cure provisions in certain instances, would give the respective lenders or lessors, as applicable, the right to declare all amounts outstanding to be immediately due and payable, terminate the lease, foreclose on collateral securing the outstanding indebtedness and leases, and restrict our ability to make additional borrowings under the outstanding indebtedness or continue to operate the properties subject to the lease. Certain of our outstanding indebtedness and leases contain cross-default provisions so that a default under certain outstanding indebtedness would cause a default under certain of our leases. Certain of our outstanding indebtedness and leases also restrict, among other things, our ability to incur additional debt.

The substantial majority of our lease arrangements are structured as master leases. Under a master lease, we may lease a large number of geographically dispersed properties through an indivisible lease. As a result, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. Failure to comply with Medicare or Medicaid provider requirements is a default under several of our master lease and debt financing instruments. In addition, potential defaults related to an individual property may cause a default of an entire master lease portfolio and could trigger cross-default provisions in our outstanding indebtedness and other leases, which would have a negative impact on our capital structure and our ability to generate future revenues, and could interfere with our ability to pursue our growth strategy.

Certain of our master leases also contain radius restrictions, which limit our ability to own, develop or acquire new communities within a specified distance from certain existing communities covered by such master leases. These radius restrictions could negatively affect our expansion, development and acquisition plans.

Mortgage debt and lease obligations expose us to increased risk of loss of property, which could harm our ability to generate future revenues and could have an adverse tax effect.

Mortgage debt and lease obligations increase our risk of loss because defaults on indebtedness secured by properties or pursuant to the terms of the lease may result in foreclosure actions initiated by lenders or lessors and ultimately our loss of the property securing any loans for which we are in default or cause the lessor to terminate the lease. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could negatively impact our earnings and liquidity. Further, our mortgage debt and leases generally contain cross-default and cross-collateralization provisions and a default on one community could affect a significant number of our communities, financing arrangements and leases.

Increases in market interest rates could significantly increase the costs of our unhedged debt and lease obligations, which could adversely affect our liquidity and earnings.

Our unhedged floating-rate debt and lease payment obligations and any unhedged floating-rate debt incurred in the future, exposes us to interest rate risk. Therefore, increases in prevailing interest rates could increase our payment obligations, which would negatively impact our liquidity and earnings.

Changes in the value of our interest rate swaps could require us to post additional cash collateral with our counterparties, which could negatively impact our liquidity and financial condition.

In the normal course of our business, we use a variety of financial instruments to manage or hedge interest rate risk. We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. Pursuant to certain of our hedge agreements, we are required to secure our obligation to our counterparty if the fair value liability exceeds a specified threshold by posting cash or other collateral.  In periods of significant volatility in the credit markets, the value of our swaps can change significantly and, as a result, the amount of collateral we are required to post can change significantly.  If we are required to post additional collateral due to changes in the fair


 
value liability of our existing or future swaps, our liquidity and financial condition could be negatively impacted.

We have a limited operating history on a combined basis and we are therefore subject to the risks generally associated with the formation of any new business and the combination of existing businesses.

In June 2005, we were formed for the purpose of combining two leading senior living operating companies, Brookdale Living Communities, Inc., or BLC, and Alterra Healthcare Corporation, or Alterra, through a series of mergers that occurred in September 2005. Prior to this combination, we had no operations or assets. We are therefore subject to the risks generally associated with the formation of any new business and the combination of existing businesses, including the risk that we will not be able to realize expected efficiencies and economies of scale or implement our business strategies. As such, we only have a brief combined and consolidated operating history upon which investors may evaluate our performance as an integrated entity and assess our future prospects. In addition, from the date of our initial public offering in November 2005, we have purchased over 241 additional communities, including 83 communities from American Retirement Corporation, or ARC. There can be no assurance that we will be able to successfully integrate and oversee the combined operations of BLC, Alterra and ARC and the additional communities purchased in these acquisitions. Accordingly, our financial performance to date may not be indicative of our long-term future performance and may not necessarily reflect what our results of operations, financial condition and cash flows would have been had we operated as a combined entity throughout the periods presented.

We have a history of losses and we may not be able to achieve profitability.

We have incurred net losses in every quarter since our formation in June 2005. Given our history of losses, there can be no assurance that we will be able to achieve and/or maintain profitability in the future. If we do not effectively manage our cash flow and combined business operations going forward or otherwise achieve profitability, our stock price would be adversely affected.

If we do not effectively manage our growth and successfully integrate new or recently-acquired or initiated operations into our existing operations, our business and financial results could be adversely affected.

Our growth has and will continue to place significant demands on our current management resources. Our ability to manage our growth effectively and to successfully integrate new or recently-acquired or initiated operations (including expansions, developments, acquisitions and the expansion of our ancillary services program) into our existing business will require us to continue to expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and manage key employees. There can be no assurance that we will be successful in attracting qualified individuals to the extent necessary, and management may expend significant time and energy attracting the appropriate personnel to manage assets we purchase in the future and our expansion and development activities. Also, the additional communities and expansion activities will require us to maintain consistent quality control measures that allow our management to effectively identify deviations that result in delivering care and services that are substandard, which may result in litigation and/or loss of licensure or certification. If we are unable to manage our growth effectively, successfully integrate new or recently-acquired or initiated operations into our existing business, or maintain consistent quality control measures, our business, financial condition and results of operations could be adversely affected.

Delays in obtaining regulatory approvals could hinder our plans to expand our ancillary services program, which could negatively impact our anticipated revenues, results of operations and cash flows.

We plan to continue to expand our offering of ancillary services (including therapy and home health) to additional communities.  In the current environment, it is difficult to obtain certain required regulatory approvals.  Delays in obtaining required regulatory approvals could impede our ability to expand to additional communities in accordance with our plans, which could negatively impact our anticipated revenues, results of operations and cash flows.

If we are unable to expand our communities in accordance with our plans, our anticipated revenues and results of operations could be adversely affected.

We are currently working on projects that will expand a number of our existing senior living communities over the next several years.  These projects are in various stages of development and are subject to a number of factors


 
over which we have little or no control. Such factors include the necessity of arranging separate leases, mortgage loans or other financings to provide the capital required to complete these projects; difficulties or delays in obtaining zoning, land use, building, occupancy, licensing, certificate of need and other required governmental permits and approvals; failure to complete construction of the projects on budget and on schedule; failure of third-party contractors and subcontractors to perform under their contracts; shortages of labor or materials that could delay projects or make them more expensive; adverse weather conditions that could delay completion of projects; increased costs resulting from general economic conditions or increases in the cost of materials; and increased costs as a result of changes in laws and regulations. We cannot assure you that we will elect to undertake or complete all of our proposed expansion and development projects, or that we will not experience delays in completing those projects. In addition, we may incur substantial costs prior to achieving stabilized occupancy for each such project and cannot assure you that these costs will not be greater than we have anticipated. We also cannot assure you that any of our expansion or development projects will be economically successful. Our failure to achieve our expansion and development plans could adversely impact our growth objectives, and our anticipated revenues and results of operations.

We may encounter difficulties in acquiring communities at attractive prices or integrating acquisitions with our operations, which may adversely affect our operations and financial condition.

We will continue to selectively target strategic acquisitions as opportunities arise. The process of integrating acquired communities into our existing operations may result in unforeseen operating difficulties, divert managerial attention or require significant financial resources. These acquisitions and other future acquisitions may require us to incur additional indebtedness and contingent liabilities, and may result in unforeseen expenses or compliance issues, which may limit our revenue growth, cash flows, and our ability to achieve profitability. Moreover, any future acquisitions may not generate any additional income for us or provide any benefit to our business. In addition, we cannot assure you that we will be able to locate and acquire communities at attractive prices in locations that are compatible with our strategy or that competition for the acquisition of communities will not increase. Finally, when we are able to locate communities and enter into definitive agreements to acquire or lease them, we cannot assure you that the transactions will be completed. Failure to complete transactions after we have entered into definitive agreements may result in significant expenses to us.

Unforeseen costs associated with the acquisition of communities could reduce our future profitability.

Our growth strategy contemplates selected future acquisitions of existing senior living operating companies and communities. Despite our extensive underwriting and due diligence procedures, communities that we have previously acquired or may acquire in the future may generate unexpectedly low or no returns or may not meet a risk profile that our investors find acceptable. In addition, we might encounter unanticipated difficulties and expenditures relating to any of the acquired communities, including contingent liabilities, or newly acquired communities might require significant management attention that would otherwise be devoted to our ongoing business. For example, a community may require capital expenditures in excess of budgeted amounts, or it may experience management turnover that is higher than we project. These costs may negatively affect our future profitability.

Competition for the acquisition of strategic assets from buyers with lower costs of capital than us or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.

Several real estate investment trusts, or REITs, have similar asset acquisition objectives as we do, along with greater financial resources and lower costs of capital than we are able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to compete and successfully implement our growth strategy. There is significant competition among potential acquirers in the senior living industry, including REITs, and there can be no assurance that we will be able to successfully implement our growth strategy or complete acquisitions, which could limit our ability to grow our business effectively.

We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us, or at all, which may limit our ability to grow.

Continued expansion of our business through the expansion of our existing communities, the development of new communities and the acquisition of existing senior living operating companies and communities will require


 
additional capital, particularly if we were to accelerate our expansion and acquisition plans. Financing may not be available to us or may be available to us only on terms that are not favorable. In addition, certain of our outstanding indebtedness and long-term leases restrict, among other things, our ability to incur additional debt. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies. Further, if additional funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock.

We are susceptible to risks associated with the lifecare benefits that we offer the residents of our lifecare entrance fee communities.

As of December 31, 2009, we operated 11 lifecare entrance fee communities that offer residents a limited lifecare benefit. Residents of these communities pay an upfront entrance fee upon occupancy, of which a portion is generally refundable, with an additional monthly service fee while living in the community. This limited lifecare benefit is typically (a) a certain number of free days in the community’s health center during the resident’s lifetime, (b) a discounted rate for such services, or (c) a combination of the two. The lifecare benefit varies based upon the extent to which the resident’s entrance fee is refundable. The pricing of entrance fees, refundability provisions, monthly service fees, and lifecare benefits are determined utilizing actuarial projections of the expected morbidity and mortality of the resident population. In the event the entrance fees and monthly service payments established for our communities are not sufficient to cover the cost of lifecare benefits granted to residents, the results of operations and financial condition of these communities could be adversely affected.

Residents of these entrance fee communities are guaranteed a living unit and nursing care at the community during their lifetime, even if the resident exhausts his or her financial resources and becomes unable to satisfy his or her obligations to the community. In addition, in the event a resident requires nursing care and there is insufficient capacity for the resident in the nursing facility at the community where the resident lives, the community must contract with a third party to provide such care. Although we screen potential residents to ensure that they have adequate assets, income, and reimbursements from government programs and third parties to pay their obligations to our communities during their lifetime, we cannot assure you that such assets, income, and reimbursements will be sufficient in all cases. If insufficient, we have rights of set-off against the refundable portions of the residents’ deposits, and would also seek available reimbursement under Medicaid or other available programs. To the extent that the financial resources of some of the residents are not sufficient to pay for the cost of facilities and services provided to them, or in the event that our communities must pay third parties to provide nursing care to residents of our communities, our results of operations and financial condition would be adversely affected.

The geographic concentration of our communities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in those areas, resulting in a decrease in our revenues or an increase in our costs, or otherwise negatively impacting our results of operations.

We have a high concentration of communities in various geographic areas, including the states of Florida, Texas, North Carolina, California, Colorado, Ohio and Arizona. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations, particularly with respect to assisted living communities, acts of nature and other factors that may result in a decrease in demand for senior living services in these states could have an adverse effect on our revenues, costs and results of operations. In addition, given the location of our communities, we are particularly susceptible to revenue loss, cost increase or damage caused by other severe weather conditions or natural disasters such as hurricanes, earthquakes or tornados. Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase in the cost of insurance.

Termination of our resident agreements and vacancies in the living spaces we lease could adversely affect our revenues, earnings and occupancy levels.

State regulations governing assisted living communities require written resident agreements with each resident. Several of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, many of our assisted living resident agreements allow residents to terminate their agreements upon 0 to 30 days’ notice. Unlike typical apartment leasing or independent living arrangements that involve lease agreements with specified leasing periods of up to a


 
year or longer, in many instances we cannot contract with our assisted living residents to stay in those living spaces for longer periods of time. Our retirement center resident agreements generally provide for termination of the lease upon death or allow a resident to terminate his or her lease upon the need for a higher level of care not provided at the community.  If multiple residents terminate their resident agreements at or around the same time, our revenues, earnings and occupancy levels could be adversely affected. In addition, because of the demographics of our typical residents, including age and health, resident turnover rates in our communities are difficult to predict. As a result, the living spaces we lease may be unoccupied for a period of time, which could adversely affect our revenues and earnings.

Increases in the cost and availability of labor, including increased competition for or a shortage of skilled personnel or increased union activity, would have an adverse effect on our profitability and/or our ability to conduct our business operations.

Our success depends on our ability to retain and attract skilled management personnel who are responsible for the day-to-day operations of each of our communities. Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of care, social services and financial performance. Depending upon the size of the community, each Executive Director is supported by a community staff member who is directly responsible for day-to-day care of the residents and either community staff or regional support to oversee the community’s marketing and community outreach programs. Other key positions supporting each community may include individuals responsible for food service, healthcare services, therapy services, activities, housekeeping and engineering. We compete with various health care service providers, including other senior living providers, in retaining and attracting qualified and skilled personnel. Increased competition for or a shortage of nurses, therapists or other trained personnel, or general inflationary pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge to our residents or our service charges, which would negatively impact our results of operations. Turnover rates and the magnitude of the shortage of nurses, therapists or other trained personnel varies substantially from market to market. Although reliable industry-wide data on key employee retention does not exist, we believe that our employee retention rates are consistent with those of other national senior housing operators. If we fail to attract and retain qualified and skilled personnel, our ability to conduct our business operations effectively, our ability to implement our growth strategy, and our overall operating results could be harmed.

In addition, efforts by labor unions to unionize any of our community personnel could divert management attention, lead to increases in our labor costs and/or reduce our flexibility with respect to certain workplace rules.  Recently proposed legislation known as the Employee Free Choice Act, or card check, could make it significantly easier for union organizing drives to be successful, leading to increased organizational activity, and could give third-party arbitrators the ability to impose terms of collective bargaining agreements upon us and a labor union if we and such union are unable to agree to the terms of a collective bargaining agreement.  If we experience an increase in organizing activity, if onerous collective bargaining agreement terms are imposed upon us, or if we otherwise experience an increase in our staffing and labor costs, our profitability and cash flows from operations would be negatively affected.

Departure of our key officers could harm our business.

Our future success depends, to a significant extent, upon the continued service of our senior management personnel, particularly: W.E. Sheriff, our Chief Executive Officer; Mark W. Ohlendorf, our Co-President and Chief Financial Officer; John P. Rijos, our Co-President and Chief Operating Officer; and T. Andrew Smith, our Executive Vice President, General Counsel and Secretary. If we were to lose the services of any of these individuals, our business and financial results could be adversely affected.

Environmental contamination at any of our communities could result in substantial liabilities to us, which may exceed the value of the underlying assets and which could materially and adversely effect our liquidity and earnings.

Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain circumstances for the costs of investigation, removal or remediation of, or related to the release of, certain hazardous or toxic substances, that could be located on, in, at or under a property, regardless of how such materials came to be located there. The cost of any required


 
investigation, remediation, removal, mitigation, compliance, fines or personal or property damages and our liability therefore could exceed the property’s value and/or our assets’ value. In addition, the presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents and retain existing residents, to borrow using such property as collateral or to develop or redevelop such property. In addition, such laws impose liability, which may be joint and several, for investigation, remediation, removal and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third party sites. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release or disposal of such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Although we do not believe that we have incurred such liabilities as would have a material adverse effect on our business, financial condition and results of operations, we could be subject to substantial future liability for environmental contamination that we have no knowledge about as of the date of this report and/or for which we may not be at fault.

Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our asset value, which would have an adverse effect on our earnings and financial condition.

Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage, transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the environment and natural resources in connection with development or construction of our properties.

Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents. Each of our communities has an agreement with a waste management company for the proper disposal of all infectious medical waste, but the use of such waste management companies does not immunize us from alleged violations of such laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn their employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.

The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan and may result in third party litigation for personal injury or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community’s market value.

Although we believe that we are currently in material compliance with applicable environmental laws, if we fail to comply with such laws in the future, we would face increased expenditures both in terms of fines and remediation of the underlying problem(s), potential litigation relating to exposure to such materials, and potential decrease in value to our business and in the value of our underlying assets. Therefore, our failure to comply with existing environmental laws would have an adverse effect on our earnings, our financial condition and our ability to pursue our growth strategy.



We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory framework (including legislative or regulatory efforts designed to address climate change, such as the proposed “cap and trade” legislation) could have a material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.

We are subject to risks associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002.

We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to include a report with each Annual Report on Form 10-K regarding our internal control over financial reporting. We have implemented processes documenting and evaluating our system of internal controls. Complying with these requirements is expensive, time consuming and subject to changes in regulatory requirements. The existence of one or more material weaknesses, management’s conclusion that its internal control over financial reporting is not effective, or the inability of our auditors to express an opinion that our internal control over financial reporting is effective, could result in a loss of investor confidence in our financial reports, adversely affect our stock price and/or subject us to sanctions or investigation by regulatory authorities.

Risks Related to Pending Litigation

Complaints filed against us could, if adversely determined, subject us to a material loss.

We have been and are currently involved in litigation and claims incidental to the conduct of our business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, we maintain insurance policies in amounts and with coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. Effective January 1, 2009 through December 31, 2009, our policies provided for deductibles of $250,000 for each claim on a claims-made basis.  Effective January 1, 2010, our current policies are also written on a claims-made basis and provide for deductibles of $150,000 for each claim.  Accordingly, we are, in effect, self-insured for claims that are less than $150,000.  If we experience a greater number of losses than we anticipate, or if certain claims are not ultimately covered by insurance, our results of operation and financial condition could be adversely affected.

Risks Related to Our Industry

The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect on our business operations and profits.

The regulatory environment surrounding the senior living industry continues to evolve and intensify in the amount and type of laws and regulations affecting it, many of which vary from state to state. In addition, many senior living communities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. In several of the states in which we operate or may operate, we are prohibited from providing certain higher levels of senior care services without first obtaining the appropriate licenses. Also, in several of the states in which we operate or intend to operate, assisted living communities and/or skilled nursing facilities require a certificate of need before the community can be opened or the services at an existing community can be expanded. Furthermore, federal, state and local officials are increasingly focusing their efforts on enforcement of these laws, particularly with respect to large for-profit, multi-community providers like us. These requirements, and the increased enforcement thereof, could affect our ability to expand into new markets, to expand our services and communities in existing markets and, if any of our presently licensed communities were to operate outside of its licensing authority, may subject us to penalties including closure of the community. Future regulatory developments as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials could cause our operations to suffer. We are unable to predict the future course of federal, state and local legislation or regulation. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the enforcement of existing rules,


 
our earnings and operations could be adversely affected.

The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by governmental authorities and consequent citations for failure to comply with regulatory requirements. We also expend considerable resources to respond to federal and state investigations or other enforcement action. From time to time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such inspections or surveys. Although most inspection deficiencies are resolved through an agreed-to plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified facility, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs or imposition of other sanctions, including criminal penalties. Furthermore, certain states may allow citations in one community to impact other communities in the state. Revocation of a license at a given community could therefore impact our ability to obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our leases, trigger cross-defaults, trigger defaults under certain of our credit agreements or adversely affect our ability to operate and/or obtain financing in the future. If a state were to find that one community’s citation would impact another of our communities, this would also increase costs and result in increased surveillance by the state survey agency. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse effect on our revenues. However, the failure to comply with applicable legal and regulatory requirements in the future could result in a material adverse effect to our business as a whole.

There are various extremely complex federal and state laws governing a wide array of referral relationships and arrangements and prohibiting fraud by health care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud initiatives. Some examples are the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997, and the False Claims Act, which gives private individuals the ability to bring an action on behalf of the federal government. The violation of any of these laws or regulations may result in the imposition of fines or other penalties that could increase our costs and otherwise jeopardize our business. Under the Deficit Reduction Act of 2005, or DRA 2005, every entity that receives at least $5 million annually in Medicaid payments must have established written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal False Claims Act, and similar state laws. Failure to comply with this new compliance requirement may potentially give rise to potential liability. DRA 2005 also creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act.

Additionally, we provide services and operate communities that participate in federal and/or state health care reimbursement programs, which makes us subject to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent or are for items or services that were not provided as claimed. Similar state laws vary from state to state and we cannot be sure that these laws will be interpreted consistently or in keeping with past practice. Violation of any of these laws can result in loss of licensure, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the applicable federal and/or state health care reimbursement program. Loss of licensure may also cause us to default under our leases and/or trigger cross-defaults.

We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law, the Stark laws and certain state referral laws. Authorities have interpreted the Federal Anti-Kickback Law very broadly to apply to many practices and relationships between health care providers and sources of patient referral. This could result in criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid, which may also cause us to default under our leases and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our business, it is difficult to predict how our revenues could be affected if we were subject to an action alleging such violations.


 
Compliance with the Americans with Disabilities Act (especially as recently amended), Fair Housing Act and fire, safety and other regulations may require us to make unanticipated expenditures, which could increase our costs and therefore adversely affect our earnings and financial condition.

All of our communities are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial properties,” but generally requires that buildings be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of damages to private litigants.

We must also comply with the Fair Housing Act, which prohibits us from discriminating against individuals on certain bases in any of our practices if it would cause such individuals to face barriers in gaining residency in any of our communities. Additionally, the Fair Housing Act and other state laws require that we advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our marketing techniques to comply with these requirements.

In addition, we are required to operate our communities in compliance with applicable fire and safety regulations, building codes and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like other health care facilities, senior living communities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance with regulatory requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint filed by a resident, a family member or one of our competitors. We may be required to make substantial capital expenditures to comply with those requirements.

Capital expenditures we have made to comply with any of the above to date have been immaterial, however, the increased costs and capital expenditures that we may incur in order to comply with any of the above would result in a negative effect on our earnings, and financial condition.

Significant legal actions and liability claims against us in excess of insurance limits could subject us to increased operating costs and substantial uninsured liabilities, which may adversely affect our financial condition and operating results.

The senior living business entails an inherent risk of liability, particularly given the demographics of our residents, including age and health, and the services we provide. In recent years, we, as well as other participants in our industry, have been subject to an increasing number of claims and lawsuits alleging that our services have resulted in resident injury or other adverse effects. Many of these lawsuits involve large damage claims and significant legal costs. Many states continue to consider tort reform and how it will apply to the senior living industry. We may continue to be faced with the threat of large jury verdicts in jurisdictions that do not find favor with large senior living providers. We maintain liability insurance policies in amounts and with the coverage and deductibles we believe are adequate based on the nature and risks of our business, historical experience and industry standards. We have formed a wholly-owned “captive” insurance company for the purpose of insuring certain portions of our risk retention under our general and professional liability insurance programs.  There can be no guarantee that we will not have any claims that exceed our policy limits in the future.

If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations could be materially and adversely affected. In some states, state law may prohibit or limit insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation. As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of our insurance policy limits. Also, the above deductibles, or self-insured retention, are accrued based on an actuarial projection of future liabilities. If these projections are inaccurate and if there are an unexpectedly large number of successful claims that result in liabilities in excess of our self-insured retention, our operating results could be negatively affected. Claims against us, regardless of their merit or eventual outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote time to matters unrelated to the day-to-day operation of our business. We also have to renew our policies every year and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases. There can be no assurance that we will be able to obtain liability insurance in the future or, if available, that such coverage will be available on acceptable terms.


 
Overbuilding and increased competition may adversely affect our ability to generate and increase our revenues and profits and to pursue our business strategy.

The senior living industry is highly competitive, and we expect that it may become more competitive in the future. We compete with numerous other companies that provide long-term care alternatives such as home healthcare agencies, therapy services, life care at home, community-based service programs, retirement communities, convalescent centers and other independent living, assisted living and skilled nursing providers, including not-for-profit entities. In general, regulatory and other barriers to competitive entry in the independent living and assisted living sectors of the senior living industry are not substantial. We have experienced and expect to continue to experience increased competition in our efforts to acquire and operate senior living communities. Consequently, we may encounter increased competition that could limit our ability to attract new residents, raise resident fees or expand our business, which could have a material adverse effect on our revenues and earnings.

In addition, overbuilding in the late 1990’s in the senior living industry reduced the occupancy rates of many newly constructed buildings and, in some cases, reduced the monthly rate that some newly built and previously existing communities were able to obtain for their services. This resulted in lower revenues for certain of our communities during that time. While we believe that overbuilt markets have stabilized and should continue to be stabilized for the immediate future, we cannot be certain that the effects of this period of overbuilding will not effect our occupancy and resident fee rate levels in the future, nor can we be certain that another period of overbuilding in the future will not have the same effects. Moreover, while we believe that the new construction dynamics and the competitive environments in the states in which we operate are substantially similar to the national market, taken as a whole, if the dynamics or environment were to be significantly adverse in one or more of those states, it would have a disproportionate effect on our revenues (due to the large portion of our revenues that are generated in those states).

Risks Related to Our Organization and Structure

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest.

As of December 31, 2009, funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and various principals of Fortress, in the aggregate, beneficially own 43,116,426 shares, or approximately 36.1% of our outstanding common stock (excluding unvested restricted shares). In addition, two of our directors are associated with Fortress and, pursuant to our Stockholders Agreement, Fortress currently has the ability to require us to nominate five individuals designated by Fortress for election as members of our nine-member Board of Directors (subject to their election by our stockholders).  As a result, Fortress may be able to effectively control fundamental and significant corporate matters and transactions, including: the election of directors; mergers, consolidations or acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Fortress’s interests, including its ownership of the North American operations of Holiday Retirement Corp., one of our competitors, may conflict with your interests. Their effective control of the Company could delay, deter or prevent acts that may be favored by our other stockholders such as hostile takeovers, changes in control of the Company and changes in management. As a result of such actions, the market price of our common stock could decline or stockholders might not receive a premium for their shares in connection with a change of control of the Company.

Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management.

Certain provisions of our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management. We have a number of anti-takeover devices in place that will hinder takeover attempts, including:

 
·
a staggered board of directors consisting of three classes of directors, each of whom serve three-year terms;



 
 
·
removal of directors only for cause, and only with the affirmative vote of at least 80% of the voting interest of stockholders entitled to vote;

 
·
blank-check preferred stock;

 
·
provisions in our amended and restated certificate of incorporation and amended and restated by-laws preventing stockholders from calling special meetings;

 
·
advance notice requirements for stockholders with respect to director nominations and actions to be taken at annual meetings; and

 
·
no provision in our amended and restated certificate of incorporation for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election.

Additionally, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders in certain situations, will not apply to us. This may make it easier for a third party to acquire an interest in some or all of us with Fortress’ approval, even though our other stockholders may not deem such an acquisition beneficial to their interests.

We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations.

We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us.

Risks Related to Our Common Stock

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 
·
variations in our quarterly operating results;

 
·
changes in our earnings estimates;

 
·
the contents of published research reports about us or the senior living industry or the failure of securities analysts to cover our common stock;

 
·
additions or departures of key management personnel;

 
·
any increased indebtedness we may incur or lease obligations we may enter into in the future;

 
·
actions by institutional stockholders;

 
·
changes in market valuations of similar companies;


 
 
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 
·
speculation or reports by the press or investment community with respect to the Company or the senior living industry in general;

 
·
increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

 
·
changes or proposed changes in laws or regulations affecting the senior living industry or enforcement of these laws and regulations, or announcements relating to these matters; and

 
·
general market and economic conditions.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, series of preferred shares or shares of our common stock. Upon liquidation, holders of our debt securities and preferred stock, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both.  Shares of our preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their share holdings in us.

We may issue all of the shares of our common stock that are authorized but unissued and not otherwise reserved for issuance under our stock incentive or purchase plans without any action or approval by our stockholders. We intend to continue to pursue selected acquisitions of senior living communities and may issue shares of common stock in connection with these acquisitions. Any shares issued in connection with our acquisitions or otherwise would dilute the holdings of our current stockholders.

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

At December 31, 2009, 119,291,309 shares of our common stock were outstanding (excluding unvested restricted shares). All of the shares of our common stock are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, or any shares otherwise subject to the limitations of Rule 144.

Pursuant to our Stockholders Agreement, Fortress and certain of its affiliates and permitted third-party transferees have the right, in certain circumstances, to require us to register their shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. In connection with our obligations under the Stockholders Agreement, we received a request from Fortress to file a registration statement on Form S-3 to permit the resale, from time to time, of up to 60,875,826 shares of common stock owned by certain affiliates of Fortress. The registration statement on Form S-3 was declared effective on May 22, 2009 and 18,205,000 shares owned by affiliates of Fortress were sold pursuant to the registration statement in November 2009.

In addition, as of December 31, 2009, we had registered under the Securities Act an aggregate of 12,100,000 shares for issuance under our Omnibus Stock Incentive Plan, an aggregate of 1,000,000 shares for issuance under our Associate Stock Purchase Plan and an aggregate of 100,000 shares for issuance under our Director Stock Purchase Plan.  In accordance with the terms of the Omnibus Stock Incentive Plan, the number of shares available for issuance automatically increases by 400,000 shares on January 1 of each year. Pursuant to the terms of the Associate Stock Purchase Plan, the number of shares available for purchase under the plan will automatically increase by 200,000 shares on the first day of each calendar year beginning January 1, 2010.


 
Subject to any restrictions imposed on the shares and options granted under our stock incentive programs, shares registered under these registration statements will be available for sale into the public markets.

Our ability to use net operating loss carryovers to reduce future tax payments may be limited.

Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. The determination of whether an ownership change occurs is complex and not within the control of the company. Consequently, no assurance can be provided as to whether an ownership change has occurred or will occur in the future. Generally, if an ownership change occurs, the yearly limitation is equal to the product of the applicable long term tax exempt rate and the value of the Company’s stock immediately before the ownership change.

Ite m 1B.          Unresolved Staff Comments.

None.

Ite m 2.          Properties.

Facilities

At December 31, 2009, we operated 565 communities across 35 states, with the capacity to serve approximately 53,600 residents. Of the communities we operated at December 31, 2009, we owned 187, we leased 359 pursuant to operating and capital leases, and 19 were managed by us and fully or majority owned by third parties.

The following table sets forth certain information regarding our communities at December 31, 2009 :
 
 
Occupancy
Ownership Status
State
Units/Beds
Rate (1)
Owned
Leased
Managed
Total
Alabama
1,112
 
87.3%
 
2
 
5
 
-
 
7
 
Arizona
2,152
 
88.6%
 
3
 
11
 
2
 
16
 
California
3,297
 
89.9%
 
14
 
7
 
1
 
22
 
Colorado
2,954
 
88.3%
 
6
 
19
 
2
 
27
 
Connecticut
427
 
82.1%
 
2
 
2
 
-
 
4
 
Delaware
54
 
100.0%
 
1
 
-
 
-
 
1
 
Florida
9,123
 
84.7%
 
35
 
39
 
3
 
77
 
Georgia
525
 
86.5%
 
4
 
-
 
1
 
5
 
Idaho
228
 
94.1%
 
2
 
1
 
-
 
3
 
Illinois
2,465
 
90.5%
 
1
 
10
 
-
 
11
 
Indiana
1,321
 
81.1%
 
7
 
10
 
-
 
17
 
Iowa
139
 
89.2%
 
1
 
-
 
-
 
1
 
Kansas
1,405
 
85.7%
 
10
 
11
 
2
 
23
 
Kentucky
268
 
97.0%
 
-
 
1
 
-
 
1
 
Louisiana
84
 
94.2%
 
1
 
-
 
-
 
1
 
Massachusetts
280
 
86.8%
 
-
 
1
 
-
 
1
 
Michigan
2,575
 
92.1%
 
7
 
26
 
1
 
34
 
Minnesota
759
 
87.4%
 
-
 
16
 
1
 
17
 
Mississippi
54
 
46.9%
 
-
 
1
 
-
 
1
 
Missouri
928
 
88.6%
 
2
 
1
 
-
 
3
 
Nevada
306
 
86.8%
 
-
 
3
 
-
 
3
 
New Jersey
534
 
88.0%
 
2
 
6
 
-
 
8
 
New Mexico
432
 
88.8%
 
1
 
2
 
-
 
3
 
New York
1,196
 
92.8%
 
6
 
10
 
-
 
16
 
North Carolina
4,081
 
98.1%
 
4
 
50
 
-
 
54
 
Ohio
2,950
 
85.3%
 
20
 
19
 
-
 
39
 
Oklahoma
1,139
 
89.0%
 
2
 
24
 
1
 
27
 
Oregon
828
 
93.7%
 
4
 
8
 
-
 
12
 
Pennsylvania
998
 
86.8%
 
5
 
3
 
-
 
8
 
 
 
 
 
Occupancy
Ownership Status
State
Units/Beds
Rate (1)
Owned
Leased
Managed
Total
South Carolina
563
 
87.3%
 
4
 
7
 
-
 
11
 
Tennessee
1,414
 
89.4%
 
14
 
8
 
-
 
22
 
Texas
5,946
 
90.1%
 
18
 
33
 
5
 
56
 
Virginia
1,439
 
93.5%
 
3
 
3
 
-
 
6
 
Washington
1,176
 
88.2%
 
4
 
9
 
-
 
13
 
Wisconsin
474
 
94.1%
 
2
 
13
 
-
 
15
 
Total
53,626
 
88.9%
 
187
 
359
 
19
 
565
 

(1) Includes the impact of managed properties.

A significant majority of our owned properties are subject to mortgages.

Corporate Offices

Our main corporate offices are all leased, including our 55,296 square foot facility in Nashville, Tennessee, our 99,374 square foot facility in Milwaukee, Wisconsin and our 30,314 square foot facility in Chicago, Illinois.

Ite m 3.          Legal Proceedings.

The information contained in Note 23 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.

It em 4.          Submission of Matters to a Vote of Security Holders.

Not applicable.

Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers as of February 18, 2010:

Name
Age
Position
W.E. Sheriff
67
Chief Executive Officer
Mark W. Ohlendorf
49
Co-President and Chief Financial Officer
John P. Rijos
57
Co-President and Chief Operating Officer
T. Andrew Smith
49
Executive Vice President, General Counsel and Secretary
Bryan D. Richardson
51
Executive Vice President and Chief Administrative Officer
Kristin A. Ferge
36
Executive Vice President and Treasurer
George T. Hicks
52
Executive Vice President – Finance
H. Todd Kaestner
54
Executive Vice President – Corporate Development
Gregory B. Richard
55
Executive Vice President – Field Operations

W.E. Sheriff  has served as our Chief Executive Officer since February 2008 and as a member of our Board of Directors since January 2010.  He previously served as our Co-Chief Executive Officer from July 2006 until February 2008. Previously, Mr. Sheriff served as Chairman and Chief Executive Officer of ARC and its predecessors since April 1984 and as its President since November 2003. From 1973 to 1984, Mr. Sheriff served in various capacities for Ryder System, Inc., including as President and Chief Executive Officer of its Truckstops of America division. Mr. Sheriff also serves on the boards of various educational and charitable organizations and in varying capacities with several trade organizations. 

Mark W. Ohlendorf became our Co-President in August 2005 and our Chief Financial Officer in March 2007. Mr. Ohlendorf previously served as Chief Executive Officer and President of Alterra from December 2003 until August 2005. From January 2003 through December 2003, Mr. Ohlendorf served as Chief Financial Officer and President of Alterra, and from 1999 through 2002 he served as Senior Vice President and Chief Financial Officer of Alterra. Mr. Ohlendorf has over 25 years of experience in the health care and long-term care industries, having held leadership positions with such companies as Sterling House Corporation, Vitas Healthcare Corporation and


 
Horizon/CMS Healthcare Corporation. He is a member of the board of directors of the Assisted Living Federation of America.

John P. Rijos became our Co-President in August 2005 and our Chief Operating Officer in January 2008. Previously, Mr. Rijos served as President and Chief Operating Officer and as a director of BLC since August 2000. Prior to joining BLC in August 2000, Mr. Rijos spent 16 years with Lane Hospitality Group, owners and operators of over 40 hotels and resorts, as its President and Chief Operating Officer. From 1981 to 1985 he served as President of High Country Corporation, a Denver-based hotel development and management company. Prior to that time, Mr. Rijos was Vice President of Operations and Development of several large real estate trusts specializing in hotels. Mr. Rijos has over 25 years of experience in the acquisition, development and operation of hotels and resorts. He serves on many tourist-related operating boards and committees, as well as advisory committees for Holiday Inns, Sheraton Hotels and the City of Chicago and the Board of Trustees for Columbia College. Mr. Rijos is a certified hospitality administrator.

T. Andrew Smith became our Executive Vice President, General Counsel and Secretary in October 2006. Previously, Mr. Smith was with Bass, Berry & Sims PLC in Nashville, Tennessee from 1985 to 2006. Mr. Smith was a member of that firm’s corporate and securities group, and served as the chair of the firm’s healthcare group.

Bryan D. Richardson became our Executive Vice President in July 2006 and our Chief Administrative Officer in January 2008.  Mr. Richardson also served as our Chief Accounting Officer from September 2006 through April 2008.  Previously, Mr. Richardson served as Executive Vice President – Finance and Chief Financial Officer of ARC since April 2003 and previously served as its Senior Vice President – Finance since April 2000. Mr. Richardson was formerly with a national graphic arts company from 1984 to 1999 serving in various capacities, including Senior Vice President of Finance of a digital prepress division from May 1994 to October 1999, and Senior Vice President of Finance and Chief Financial Officer from 1989 to 1994. Mr. Richardson was previously with the national public accounting firm PriceWaterhouseCoopers.

Kristin A. Ferge became our Executive Vice President and Treasurer in August 2005.  Ms. Ferge also served as our Chief Administrative Officer from March 2007 through December 2007. She previously served as Vice President, Chief Financial Officer and Treasurer of Alterra from December 2003 until August 2005. From April 2000 through December 2003, Ms. Ferge served as Alterra’s Vice President of Finance and Treasurer. Prior to joining Alterra, she worked in the audit division of KPMG LLP. Ms. Ferge is a certified public accountant.

George T. Hicks became our Executive Vice President – Finance in July 2006. Previously, Mr. Hicks served as Executive Vice President – Finance and Internal Audit, Secretary and Treasurer of ARC since September 1993. Mr. Hicks had served in various capacities for ARC’s predecessors since 1985, including Chief Financial Officer from September 1993 to April 2003 and Vice President – Finance and Treasurer from November 1989 to September 1993.

H. Todd Kaestner became our Executive Vice President – Corporate Development in July 2006. Previously, Mr. Kaestner served as Executive Vice President – Corporate Development of ARC since September 1993. Mr. Kaestner served in various capacities for ARC’s predecessors since 1985, including Vice President – Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.

Gregory B. Richard has served as our Executive Vice President – Field Operations since January 2008.  He previously served as our Executive Vice President – Operations from July 2006 through December 2007. Previously, Mr. Richard served as Executive Vice President and Chief Operating Officer of ARC since January 2003 and previously served as its Executive Vice President-Community Operations since January 2000. Mr. Richard was formerly with a pediatric practice management company from May 1997 to May 1999, serving as President and Chief Executive Officer from October 1997 to May 1999. Prior to this, Mr. Richard was with Rehability Corporation, a publicly traded outpatient physical rehabilitation service provider, from July 1986 to October 1996, serving as Senior Vice President of Operations and Chief Operating Officer from September 1992 to October 1996.


 
PA RT II

Ite m 5.          Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information

Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol “BKD”.  The following table sets forth the range of high and low sales prices of our common stock and dividend information for each quarter for the last two fiscal years.

   
Fiscal 2009
   
High
   
Low
   
Dividends
Declared
First Quarter
  $ 7.16     $ 2.50     $ ―  
Second Quarter
  $ 14.87     $ 4.66     $ ―  
Third Quarter
  $ 20.41     $ 8.39     $ ―  
Fourth Quarter
  $ 20.69     $ 15.14     $ ―  

   
Fiscal 2008
   
High
   
Low
   
Dividends
Declared
First Quarter
  $ 28.29     $ 20.46     $ 0.25  
Second Quarter
  $ 27.22     $ 20.15     $ 0.25  
Third Quarter
  $ 27.05     $ 14.06     $ 0.25  
Fourth Quarter
  $ 21.84     $ 3.03     $ —  

The closing sale price of our common stock as reported on the NYSE on February 18, 2010 was $18.55 per share.  As of that date, there were approximately 515 holders of record of our common stock.

Dividend Policy

On December 30, 2008, our Board of Directors voted to suspend our quarterly cash dividend indefinitely.  Although we anticipate that, over the longer-term, we will pay regular quarterly dividends to the holders of our common stock, over the near term we are focused on preserving liquidity.  Accordingly, we do not expect to pay cash dividends on our common stock for the foreseeable future.  In addition, our amended credit facility currently prohibits us from paying dividends or making cash distributions on our common stock.

Our ability to pay and maintain cash dividends in the future will be based on many factors, including then-existing contractual restrictions or limitations, our ability to execute our growth strategy, our ability to negotiate favorable lease and other contractual terms, anticipated operating expense levels, the level of demand for our units/beds, occupancy rates, entrance fee sales results, the rates we charge, our liquidity position and actual results that may vary substantially from estimates. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain dividends. We can give no assurance as to our ability to pay or maintain dividends in the future. We also cannot assure you that the level of dividends will be maintained or increase over time or that increases in demand for our units/beds and monthly resident fees will increase our actual cash available for dividends to stockholders. As we have done in the past, we may also pay dividends in the future that exceed our net income for the relevant period as calculated in accordance with U.S. GAAP.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.


 
Ite m 6.          Selected Financial Data.

The selected financial data should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our historical consolidated financial statements and the related notes included elsewhere herein.  The consolidated financial data includes Brookdale Living Communities, Inc. and Alterra Healthcare Corporation for all periods presented and the acquisition of American Retirement Corporation, effective July 25, 2006.  Other acquisitions are discussed in Note 4 in the notes to the consolidated financial statements.  Our historical statement of operations data and balance sheet data as of and for each of the years in the five-year period ended December 31, 2009 have been derived from our audited financial statements.

   
For the Years Ended December 31, (1)
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
                               
Fiscal Year ended December 31,
(in thousands, except per share data)
                             
Total revenue
  $ 2,023,068     $ 1,928,054     $ 1,839,296     $ 1,309,913     $ 790,577  
Facility operating expense
    1,302,277       1,261,581       1,170,937       819,801       493,887  
General and administrative expense
    134,864       140,919       138,013       117,897       81,696  
Facility lease expense
    272,096       269,469       271,628       228,779       189,339  
Depreciation and amortization
    271,935       276,202       299,925       188,129       47,048  
Loss on sale of communities, net
    2,043       ―       ―       ―       ―  
Goodwill and asset impairment
    10,073       220,026       —       —       —  
Total operating expense
    1,993,288       2,168,197       1,880,503       1,354,606       811,970  
Income (loss) from operations
    29,780       (240,143 )     (41,207 )     (44,693 )     (21,393 )
Interest income
    2,354       7,618       7,519       6,810       3,788  
Interest expense:
                                       
Debt
    (128,869 )     (147,389 )     (143,991 )     (97,694 )     (46,248 )
Amortization of deferred financing costs and debt discount
    (9,505 )     (9,707 )     (7,064 )     (5,061 )     (2,835 )
Change in fair value of derivatives and amortization
    3,765       (68,146 )     (73,222 )     (38 )     3,992  
Loss on extinguishment of debt, net
    (1,292 )     (3,052 )     (2,683 )     (1,526 )     (3,996 )
Equity in earnings (loss) of unconsolidated ventures
    440       (861 )     (3,386 )     (3,705 )     (838 )
Other non-operating income
    4,146       1,708       402       —       —  
Loss before taxes
    (99,181 )     (459,972 )     (263,632 )     (145,907 )     (67,530 )
Benefit for income taxes
    32,926       86,731       101,260       38,491       97  
Loss from continuing operations
    (66,255 )     (373,241 )     (162,372 )     (107,416 )     (67,433 )
Loss on discontinued operations
    ―       —       —       —       (128 )
Net loss
    (66,255 )     (373,241 )     (162,372 )     (107,416 )     (67,561 )
Net loss (income) attributable to noncontrolling interest
    ―       —       393       (671 )     16,575  
Net loss attributable to common stockholders
  $ (66,255 )   $ (373,241 )   $ (161,979 )   $ (108,087 )   $ (50,986 )
                                         
                                         
Basic and diluted loss per share from operations attributable to common stockholders
  $ (0.60 )   $ (3.67 )   $ (1.60 )   $ (1.34 )   $ (1.35 )
Weighted average shares of common stock used in computing basic and diluted loss per share
    111,288       101,667       101,511       80,842       37,636  
Dividends declared per share of common stock
  $ ―     $ 0.75     $ 1.95     $ 1.55     $ 0.50  
 
 
 
For the Years Ended December 31, (1)
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Other Operating Data:
                                       
Total number of facilities (at end of period)
    565       548       550       546       383  
Total units/beds operated (2)
    53,626       51,804       52,086       51,271       30,057  
Occupancy rate at period end
    89.3 %     89.5 %     90.6 %     91.1 %     89.6 %
Average monthly revenue per unit/bed (3)
  $ 3,985     $ 3,791     $ 3,577     $ 3,247     $ 2,991  
 
 
   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
                               
Cash and cash equivalents
  $ 66,370     $ 53,973     $ 100,904     $ 68,034     $ 77,682  
Total assets
  $ 4,645,943     $ 4,449,258     $ 4,811,622     $ 4,756,000     $ 1,697,811  
Total debt
  $ 2,625,526     $ 2,552,929     $ 2,335,224     $ 1,874,939     $ 754,301  
Noncontrolling interest
  $ ―     $ ―     $ ―     $ 4,601     $ 36  
Total stockholders equity
  $ 1,086,582     $ 960,601     $ 1,419,538     $ 1,764,012     $ 630,403  
 
__________
 
 
(1)
Prior to October 1, 2006, the effective portion of the change in fair value of derivatives was recorded in other comprehensive income and the ineffective portion was included in the change in fair value of derivatives in the consolidated statements of operations.  On October 1, 2006, we elected to discontinue hedge accounting prospectively for the previously designated swap instruments.  Gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments are being amortized to interest expense over the life of the underlying hedged debt payments.  Although hedge accounting was discontinued on October 1, 2006, the swap instruments remained outstanding and are carried at fair value in the consolidated balance sheets and the change in fair value beginning October 1, 2006 has been included in the consolidated statements of operations.
 
 
(2)
Total units/beds operated represent the total units/beds operated as of the end of the period.
 
 
(3)
Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units/beds.
 
Ite m 7.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with our “Selected Financial Data” and our consolidated  financial statements and related notes, included elsewhere in this Annual Report on Form 10-K.   In addition to historical information, this discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations.  Please see additional risks and uncertainties described in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for more information. Factors that could cause such differences include those described in “Risk Factors” which appears elsewhere in this Annual Report on Form 10-K.

Executive Overview

During 2009, we continued to make progress in implementing our long-term growth strategy, integrating our previous acquisitions, and building a platform for future growth.  Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including expense control and the realization of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy and home health services); (iii) expansion of our existing communities; and (iv) acquisitions of additional operating companies and communities.

Our operating results for the year ended December 31, 2009 were favorably impacted by an increase in our total


 
revenues (primarily driven by an increase in average monthly revenue per unit/bed including an increase in our ancillary services revenue) and by the significant cost control measures that were implemented in recent periods.  The difficult operating environment during 2009 has resulted in slightly lower occupancy and diminished growth in the rates we charge our residents.  We responded by controlling our expenses and capital spending, and by increasing the reach of our ancillary services programs.  We also continue to aggressively focus on maintaining and increasing occupancy.

During the first half of the year, we took steps to preserve our liquidity and increase our financial flexibility.  For example, during the second quarter, we completed a public equity offering which yielded $163.8 million of net proceeds, which were primarily used to repay the $125.0 million of indebtedness which was outstanding under our credit facility.  Furthermore, we have extended the maturity of a number of mortgage loans and, factoring in contractual extension options, have no mortgage debt maturities until 2011 (other than periodic, scheduled principal payments).  Finally, we have taken steps to reduce materially our exposure to collateralization requirements associated with interest rate swaps.  As a result of these steps and our operating performance during the year ended December 31, 2009, we ended the year with $66.4 million of unrestricted cash and cash equivalents on our consolidated balance sheet.

As discussed in more detail under “Credit Facilities - 2010 Credit Facility” below, subsequent to December 31, 2009, we entered into a new revolving credit facility with General Electric Capital Corporation, as administrative agent. The new facility has a commitment of $100.0 million, with an option to increase the commitment to $120.0 million, and matures on June 30, 2013. The new facility replaced the $75.0 million revolving credit agreement with Bank of America, N.A. that was scheduled to expire in August 2010.

During the fourth quarter of 2009, we engaged in a limited and measured amount of acquisition activity.  We acquired 18 senior living communities from affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net purchase price of approximately $190.0 million.  The portfolio of 18 communities is comprised of a total of 1,197 units, including 92 independent living units, 746 assisted living units and 359 Alzheimer’s units.  We financed the transaction with approximately $98.8 million of non-recourse mortgage debt (substantially through the assumption of existing debt), with the balance of the purchase price paid from cash on hand.

We also acquired the remaining interest in three retirement center communities that were previously managed by us and in which we previously had a noncontrolling interest.  Our interest was accounted for under the equity method and had a carrying value of zero prior to the acquisition.  The aggregate purchase price for the communities was $102.0 million.  The portfolio of three communities is comprised of 642 total units, including 504 independent living units and 138 assisted living units.  We financed the transaction by obtaining a $75.4 million non-recourse mortgage loan with the balance of the purchase price paid from cash on hand.

The table below presents a summary of our operating results and certain other financial metrics for the years ended December 31, 2009 and 2008 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).

   
Years Ended
December 31,
   
Increase
(Decrease)
 
   
2009
   
2008
   
Amount
   
Percent
 
Total revenue
  $ 2,023.1     $ 1,928.1     $ 95.0       4.9 %
Net loss attributable to common stockholders (1)
  $ (66.3 )   $ (373.2 )   $ (306.9 )     (82.2 )%
Adjusted EBITDA
  $ 348.6     $ 302.6     $ 46.0       15.2 %
Cash From Facility Operations
  $ 196.8     $ 130.1     $ 66.7       51.3 %
Facility Operating Income
  $ 690.1     $ 637.5     $ 52.6       8.3 %

(1) Net loss for 2009 and 2008 includes non-cash impairment charges of $10.1 million and $220.0 million, respectively.

Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP Financial Measures” below for an explanation of how we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of


 
net cash provided by operating activities to Cash From Facility Operations.

Our revenues for the year ended December 31, 2009 increased to $2.0 billion, an increase of $95.0 million, or approximately 4.9%, over our revenues for the year ended December 31, 2008.  The increase in revenues in the current year period was primarily a result of an increase in the average revenue per unit/bed compared to the prior year period, including growing revenues from our ancillary services programs, partially offset by a decline in occupancy from the prior year period.  Our weighted average occupancy rate for the year ended December 31, 2009 was 88.8%, compared to 89.6% for the year ended December 31, 2008.

During the year ended December 31, 2009, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 15.2%, 51.3% and 8.3%, respectively, when compared to the year ended December 31, 2008.  Adjusted EBITDA and Cash From Facility Operations for the year ended December 31, 2008 were negatively impacted by $4.8 million of hurricane and named tropical storms expense and an $8.0 million charge to general and administrative expense relating to the establishment of a reserve for certain litigation.

During the year ended December 31, 2009, we continued to expand our ancillary services offerings.  As of December 31, 2009, we offered therapy services to approximately 36,000 of our units and home health services to approximately 23,000 of our units.   We continue to see positive results from the maturation of previously-opened therapy and home health clinics.  We also expect to continue to expand our ancillary services programs to additional units and to open or acquire additional home health agencies.

During the year ended December 31, 2009, we opened ten expansions with a total of 685 units.  Additionally, during the third and fourth quarters we opened the 240-unit independent living component and the 72-bed skilled nursing unit of our new entry fee CCRC in the Villages, Florida.

We believe that the deteriorating housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates and occupancy levels when compared to the prior year period.  We remain cautious about the economy and the adverse credit and financial markets and their effect on our customers and our business.  In addition, we continue to experience volatility in the entrance fee portion of our business.  The timing of entrance fee sales is subject to a number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively or negatively) when measured over the short-term.  These factors also impact our potential independent living customers to a significant extent.  We expect occupancy and entrance fee sales to normalize over the longer term.

Consolidated Results of Operations

Year Ended December 31, 2009 and 2008

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions that occurred during the respective reporting periods. 

Certain prior period amounts have been reclassified to conform to the current year presentation.


 
(dollars in thousands, except average monthly revenue per unit/bed)
 
Years Ended
December 31,
   
Increase
(Decrease)
 
   
2009
   
2008
   
Amount
   
Percent
 
Statement of Operations Data:
                       
Total revenue
                       
Resident fees
                       
Retirement Centers
  $ 496,744     $ 497,453     $ (709 )     (0.1 %)
Assisted Living
    925,917       890,075       35,842       4.0 %
CCRCs
    593,688       533,532       60,156       11.3 %
Total resident fees
    2,016,349       1,921,060       95,289       5.0 %
Management fees
    6,719       6,994       (275 )     (3.9 %)
Total revenue
    2,023,068       1,928,054       95,014       4.9 %
Expense
                               
Facility operating expense (1)
                               
Retirement Centers
    283,136       286,035       (2,899 )     (1.0 %)
Assisted Living
    600,948       590,644       10,304       1.7 %
CCRCs
    418,193       384,902       33,291       8.6 %
Total facility operating expense
    1,302,277       1,261,581       40,696       3.2 %
General and administrative expense
    134,864       140,919       (6,055 )     (4.3 %)
Facility lease expense
    272,096       269,469       2,627       1.0 %
Depreciation and amortization
    271,935       276,202       (4,267 )     (1.5 %)
Loss on sale of communities, net
    2,043       ―       2,043       100.0 %
Goodwill and asset impairment
    10,073       220,026       (209,953 )     (95.4 %)
Total operating expense
    1,993,288       2,168,197       (174,909 )     (8.1 %)
Income (loss) from operations
    29,780       (240,143 )     269,923       112.4 %
Interest income
    2,354       7,618       (5,264 )     (69.1 %)
Interest expense:
                               
Debt
    (128,869 )     (147,389 )     18,520       12.6 %
Amortization of deferred financing costs and debt discount
    (9,505 )     (9,707 )     202       2.1 %
Change in fair value of derivatives and amortization
    3,765       (68,146 )     71,911       105.5 %
Loss on extinguishment of debt, net
    (1,292 )     (3,052 )     1,760       57.7 %
Equity in earnings (loss) of unconsolidated ventures
    440       (861 )     1,301       151.1 %
Other non-operating income
    4,146       1,708       2,438       142.7 %
Loss before income taxes
    (99,181 )     (459,972 )     360,791       78.4 %
Benefit for income taxes
    32,926       86,731       (53,805 )     (62.0 %)
Net loss
  $ (66,255 )   $ (373,241 )   $ (306,986 )     (82.2 %)
Selected Operating and Other Data:
                               
Total number of communities (at end of period)
    565       548       17       3.1 %
Total units/beds operated (2)
    53,626       51,804       1,822       3.5 %
Owned/leased communities units/beds
    49,838       47,455       2,383       5.0 %
Owned/leased communities occupancy rate (weighted average)
    88.8 %     89.6 %     (0.8 %)     (0.9 %)
Average monthly revenue per unit/bed (3)
  $ 3,985     $ 3,791       194       5.1 %
Selected Segment Operating and Other Data
                               
Retirement Centers
                               
Number of communities (period end)
    80       77       3       3.9 %
Total units/beds (2)
    14,867       14,229       638       4.5 %
Occupancy rate (weighted average)
    88.8 %     90.3 %     (1.5 %)     (1.7 %)
Average monthly revenue per unit/bed (3)
  $ 3,285     $ 3,171       114       3.6 %
Assisted Living
                               
Number of communities (period end)
    430       417       13       3.1 %
Total units/beds (2)
    22,954       22,043       911       4.1 %
Occupancy rate (weighted average)
    90.3 %     89.9 %     0.4 %     0.4 %
Average monthly revenue per unit/bed (3)
  $ 3,890     $ 3,752       138       3.7 %
 
 
 
(dollars in thousands, except average monthly revenue per unit/bed)
 
Years Ended
December 31,
   
Increase
(Decrease)
 
   
2009
   
2008
   
Amount
   
Percent
 
CCRCs
                               
Number of communities (period end)
    36       32       4       12.5 %
Total units/beds (2)
    12,017       11,183       834       7.5 %
Occupancy rate (weighted average)
    85.7 %     87.9 %     (2.2 %)     (2.5 %)
Average monthly revenue per unit/bed (3)
  $ 5,139     $ 4,759       380       8.0 %
Management Services
                               
Number of communities (period end)
    19       22       (3 )     (13.6 %)
Total units/beds (2)
    3,788       4,349       (561 )     (12.9 %)
Occupancy rate (weighted average)
    84.8 %     84.9 %     (0.1 %)     (0.1 %)
 
Selected Entrance Fee Data:
             
2009
             
      Q1       Q2       Q3       Q4    
YTD
 
Non-refundable entrance fees sales
  $ 4,872     $ 5,718     $ 12,635     $ 15,264     $ 38,489  
Refundable entrance fees sales (4)
    3,638       4,098       9,296       13,354       30,386  
Total entrance fee receipts (5)
    8,510       9,816       21,931       28,618       68,875  
Refunds
    (5,836 )     (6,357 )     (4,649 )     (6,074 )     (22,916 )
Net entrance fees
  $ 2,674     $ 3,459     $ 17,282     $ 22,544     $ 45,959  
 
                        2008                  
      Q1       Q2       Q3       Q4    
YTD
 
Non-refundable entrance fees sales
  $ 2,780     $ 5,177     $ 7,253     $ 7,391     $ 22,601  
Refundable entrance fees sales (4)
    3,492       7,420       4,273       4,686       19,871  
Total entrance fee receipts
    6,272       12,597       11,526       12,077       42,472  
Refunds
    (3,632 )     (4,843 )     (5,856 )     (4,819 )     (19,150 )
Net entrance fees
  $ 2,640     $ 7,754     $ 5,670     $ 7,258     $ 23,322  
 
__________
 
 
(1)
Segment facility operating expense for the year ended December 31, 2008 includes hurricane and named tropical storms expense totaling $4.8 million consisting of $1.3 million for Retirement Centers, $2.0 million for Assisted Living and $1.5 million for CCRCs.
 
(2)
Total units/beds operated represent the total units/beds operated as of the end of the period.
 
(3)
Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units/beds.
 
(4)
Refundable entrance fee sales for the years ended December 31, 2009 and 2008 include amounts received from residents participating in the MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee.  MyChoice amounts received from existing residents totaled $0.6 million, $0.1 million and $0.4 million in the first, third and fourth quarters of 2009, respectively, and $0.4 million, $0.8 million, $0.6 million and $0.5 million in the first, second, third and fourth quarters of 2008, respectively.  My Choice amounts for the second quarter of 2009 were not material.
 
(5)
Includes $25.7 million of first generation entrance fee receipts which represent initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt.


 
As of December 31, 2009, our total operations included 565 communities with a capacity to serve 53,626 residents.  During 2009, our total portfolio increased by 17 communities, net with our resident capacity increasing by 1,912 units, net as a result of current year acquisitions offset by the disposition of two communities.

Our 2009 results were also affected by our continuing implementation of our ancillary services programs at a number of our locations as described above.

Resident Fees

Total resident fees increased over the prior-year primarily due to an increase in average monthly revenue per unit/bed during the current year which includes an increase in our ancillary services revenue as we continue to roll out therapy and home health services to many of our communities.  This increase was partially offset by a decrease in occupancy in the Retirement Centers and CCRCs segments.  During the current year, same-store revenues grew 4.1% at the 514 properties we operated in both years with a 4.9% increase in the average monthly revenue per unit/bed and a 0.7% decrease in occupancy.

Retirement Center revenue decreased slightly, primarily due to a decrease in occupancy at the communities we operated during both years, partially offset by an increase in the average monthly revenue per unit/bed at those same communities year over year.

Assisted Living revenue increased $35.8 million, or 4.0%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both years as well as an increase in revenues related to the expansion of our ancillary service programs.

CCRCs revenue increased $60.2 million, or 11.3%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both years as well as an increase in revenues related to increased capacity in the current year and the expansion of our ancillary services.  This increase was partially offset by a decrease in occupancy at our same-store communities year over year.

Management Fees

Management fees decreased year over year as one management agreement terminated early in the current year, which was partially offset by the acquisition of a new management agreement mid-year in the current year.

Facility Operating Expense

Facility operating expense increased over the prior-year primarily due to an increase in salaries and wages, increased insurance expense, higher deferred community fee expense recognition, and additional current year expense incurred in connection with the continued expansion of our ancillary services programs during 2009.  These increases were partially offset by significant cost control measures that were implemented in recent periods.  Facility operating expense during the year ended December 31, 2008 was negatively impacted by hurricane and named tropical storms expense.

Retirement Center operating expenses decreased $2.9 million, or 1.0%, primarily due to cost control measures implemented in recent periods, including reductions in overtime hours worked and reduced advertising.  These decreases were offset by additional expense incurred in connection with the continued expansion of our ancillary services programs, higher deferred community fee expense recognition and an increase in insurance expense in the current year.  Also, facility operating expense during the year ended December 31, 2008 was negatively impacted by hurricane and named tropical storms expense.

Assisted Living operating expenses increased $10.3 million, or 1.7%, due to an increase in expense incurred in connection with the continued rollout of our ancillary services program, increased occupancy in the current year, an increase in salaries and wages related to normal salary increases, increased employee hours worked and reduced open positions, higher deferred community fee expense recognition and increased insurance costs.  These increases were partially offset by cost control measures implemented in recent periods, including reductions in overtime hours worked and public relations and travel expenses.  Also, facility operating expense during the year ended December 31, 2008 was negatively impacted by hurricane and named tropical storms expense.


 
CCRCs operating expenses increased $33.3 million, or 8.6%, primarily due to an increase in expense incurred in connection with the continued expansion of our ancillary services programs, increased salaries and wages due to filling vacant positions and wage rate increases, higher deferred community fee expense recognition and an increase in insurance costs.  These increases were partially offset by significant cost control measures that were implemented in recent periods.  Also, facility operating expense during the year ended December 31, 2008 was negatively impacted by hurricane and named tropical storms expense.

General and Administrative Expense

General and administrative expense decreased $6.1 million, or 4.3%, primarily as a result of a decrease in non-controllable expenses related to the $8.0 million reserve established for certain litigation during the year ended December 31, 2008, as well as a decrease in non-cash stock-based compensation expense in connection with restricted stock grants and cost control measures implemented in recent periods.  These decreases were partially offset by increased bonus expense and transaction-related costs in the current year.  General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage, was 4.7% and 4.5% for the years ended December 31, 2009 and 2008, respectively, calculated as follows (dollars in thousands):

   
Year Ended December 31,
 
   
2009
   
2008
 
                         
Resident fee revenues
  $ 2,016,349       92.7 %   $ 1,921,060       92.6 %
Resident fee revenues under management
    157,618       7.3 %     152,970       7.4 %
Total
  $ 2,173,967       100 %   $ 2,074,030       100.0 %
General and administrative expenses (excluding non-cash compensation, integration and transaction-related costs)
  $ 101,676       4.7 %   $ 92,473       4.5 %
Non-cash compensation expense
    26,935       1.2 %     28,937       1.4 %
Integration and transaction-related costs
    6,253       0.3 %     19,509       0.9 %
General and administrative expenses (including non-cash compensation, integration and transaction-related costs)
  $ 134,864       6.2 %   $ 140,919       6.8 %
 
Facility Lease Expense

Facility lease expense increased by $2.6 million, or 1.0%, primarily due to the impact of lease escalators.

Depreciation and Amortization

Depreciation and amortization expense decreased by $4.3 million, or 1.5%, primarily as a result of resident in-place lease intangibles becoming fully amortized during late 2008.

Goodwill and Asset Impairment

During the year we recognized $10.1 million of impairment charges related to asset impairments for property, plant and equipment and leasehold intangibles for certain communities within the Assisted Living segment.  The non-cash impairment charges are primarily due to lower than expected performance of the underlying communities.  During 2008 we recognized $220.0 million of impairment charges mainly related to the CCRCs operating segment.  The non-cash charges consisted of $215.0 million of goodwill impairment related to the CCRCs segment and $5.0 million of asset impairment for property, plant and equipment and leasehold intangibles for certain communities within the Assisted Living segment.  The impairment charge was primarily driven by adverse equity market conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and our stock price at December 31, 2008 compared with our stock price at September 30, 2008.


 
Interest Income

Interest income decreased $5.3 million, or 69.1%, primarily due to the recognition of interest income upon collection of a long-term note receivable, which interest income had been deferred as the interest was accumulating unpaid, during the year ended December 31, 2008.

Interest Expense

Interest expense decreased $90.6 million, or 40.2%, primarily due to the change in fair value of our interest rate swaps and caps.  During the year ended December 31, 2009, we recognized approximately $3.8 million of interest income on our interest rate swaps and caps due to favorable changes in the LIBOR yield curve which resulted in a change in the fair value of the swaps and caps, as compared to approximately $68.1 million of interest expense on our interest rate swaps and caps for the year ended December 31, 2008.  Interest expense on our mortgage debt and credit facility also decreased due to a decline in market interest rates period over period as well as the payoff of the credit facility during 2009.

Income Taxes

The reduction in the income tax benefit over the same prior year period is due to an increase in the effective tax rate from 18.9 % in 2008 to 33.2% in 2009.  This increase is primarily due to the impact of the impairment charge taken for financial statement purposes in 2008, which was not deductible for tax purposes. The rate was also impacted by our stock based compensation tax deduction as compared to the financial expense for 2009 and by an increase in nondeductible officer’s compensation recorded in the year.

Year Ended December 31, 2008 and 2007

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions that occurred during the respective reporting periods.

Certain prior period amounts have been reclassified to conform to the current year presentation.
 
(dollars in thousands, except average monthly revenue per unit/bed)
 
Years Ended
December 31,
   
Increase
(Decrease)
 
   
2008
   
2007
   
Amount
   
Percent
 
Statement of Operations Data:
                       
Total revenue
                       
Resident fees
                       
Retirement Centers
  $ 497,453     $ 489,931     $ 7,522       1.5 %
Assisted Living
    890,075       841,819       48,256       5.7 %
CCRCs
    533,532       500,757       32,775       6.5 %
Total resident fees
    1,921,060       1,832,507       88,553       4.8 %
Management fees
    6,994       6,789       205       3.0 %
Total revenue
    1,928,054       1,839,296       88,758       4.8 %
Expense
                               
Facility operating expense (1)
                               
Retirement Centers
    286,035       273,350       12,685       4.6 %
Assisted Living
    590,644       539,866       50,778       9.4 %
CCRCs
    384,902       357,721       27,181       7.6 %
Total facility operating expense
    1,261,581       1,170,937       90,644       7.7 %
General and administrative expense
    140,919       138,013       2,906       2.1 %
Facility lease expense
    269,469       271,628       (2,159 )     (0.8 %)
Depreciation and amortization
    276,202       299,925       (23,723 )     (7.9 %)
 
 
 
(dollars in thousands, except average monthly revenue per unit/bed)
 
Years Ended
December 31,
   
Increase
(Decrease)
 
   
2008
   
2007
   
Amount
   
Percent
 
 
                               
Goodwill and asset impairment
    220,026       —       220,026       100.0 %
Total operating expense
    2,168,197       1,880,503       287,694       15.3 %
Loss from operations
    (240,143 )     (41,207 )     (198,936 )     (482.8 %)
Interest income
    7,618       7,519       99       1.3 %
Interest expense:
                               
Debt
    (147,389 )     (143,991 )     (3,398 )     (2.4 %)
Amortization of deferred financing costs
    (9,707 )     (7,064 )     (2,643 )     (37.4 %)
Change in fair value of derivatives and amortization
    (68,146 )     (73,222 )     5,076       6.9 %
Loss on extinguishment of debt, net
    (3,052 )     (2,683 )     (369 )     (13.8 %)
Equity in loss of unconsolidated ventures
    (861 )     (3,386 )     2,525       74.6 %
Other non-operating income
    1,708       402       1,306       324.9 %
Loss before income taxes
    (459,972 )     (263,632 )     (196,340 )     (74.5 %)
Benefit for income taxes
    86,731       101,260       (14,529 )     (14.3 %)
Net loss
    (373,241 )     (162,372 )     (210,869 )     (129.9 %)
Net loss attributable to noncontrolling interest
    —       393       (393 )     (100.0 %)
Net loss attributable to common stockholders
  $ (373,241 )   $ (161,979 )   $ (211,262 )     (130.4 %)
Selected Operating and Other Data:
                               
Total number of communities (at end of period)
    548       550       (2 )     (0.4 %)
Total units/beds operated (2)
    51,804       52,086       (282 )     (0.5 %)
Owned/leased communities units/beds
    47,455       47,670       (215 )     (0.5 %)
Owned/leased communities occupancy rate (weighted average)
    89.6 %     90.7 %     (1.1 %)     (1.2 %)
Average monthly revenue per unit/bed (3)
  $ 3,791     $ 3,577       214       6.0 %
Selected Segment Operating and Other Data
                               
Retirement Centers
                               
Number of communities (period end)
    77       79       (2 )     (2.5 %)
Total units/beds (2)
    14,229       14,802       (573 )     (3.9 %)
Occupancy rate (weighted average)
    90.3 %     92.5 %     (2.2 %)     (2.4 %)
Average monthly revenue per unit/bed (3)
  $ 3,171     $ 3,012       159       5.3 %
Assisted Living
                               
Number of communities (period end)
    417       417       —       —  
Total units/beds (2)
    22,043       22,015       28       0.1 %
Occupancy rate (weighted average)
    89.9 %     89.8 %     0.1 %     0.1 %
Average monthly revenue per unit/bed (3)
  $ 3,752     $ 3,553       199       5.6 %
CCRCs
                               
Number of communities (period end)
    32       32       —       —  
Total units/beds (2)
    11,183       10,853       330       3.0 %
Occupancy rate (weighted average)
    87.9 %     90.0 %     (2.1 %)     (2.3 %)
Average monthly revenue per unit/bed (3)
  $ 4,759     $ 4,481       278       6.2 %
Management Services
                               
Number of communities (period end)
    22       22       —       —  
Total units/beds (2)
    4,349       4,416       (67 )     (1.5 %)
Occupancy rate (weighted average)
    84.9 %     87.1 %     (2.2 %)     (2.5 %)
 

 
Selected Entrance Fee Data:
             
2008
             
      Q1       Q2       Q3       Q4    
YTD
 
Non-refundable entrance fees sales
  $ 2,780     $ 5,177     $ 7,253     $ 7,391     $ 22,601  
Refundable entrance fees sales (4)
    3,492       7,420       4,273       4,686       19,871  
Total entrance fee receipts
    6,272       12,597       11,526       12,077       42,472  
Refunds
    (3,632 )     (4,843 )     (5,856 )     (4,819 )     (19,150 )
Net entrance fees
  $ 2,640     $ 7,754     $ 5,670     $ 7,258     $ 23,322  
                        2007                  
      Q1       Q2       Q3       Q4    
YTD
 
Non-refundable entrance fees sales
  $ 3,916     $ 4,726     $ 5,673     $ 5,015     $ 19,330  
Refundable entrance fees sales (4)
    4,258       4,064       8,696       8,901       25,919  
Total entrance fee receipts
    8,174       8,790       14,369       13,916       45,249  
Refunds
    (6,315 )     (4,089 )     (5,084 )     (4,069 )     (19,557 )
Net entrance fees
  $ 1,859     $ 4,701     $ 9,285     $ 9,847     $ 25,692  
 
__________
 
 
(1)
Segment facility operating expense for the year ended December 31, 2008 includes hurricane and named tropical storms expense totaling $4.8 million consisting of $1.3 million for Retirement Centers, $2.0 million for Assisted Living and $1.5 million for CCRCs.  There was no hurricane and named tropical storms expense in 2007.  Facility operating expense for the year ended December 31, 2007 includes $7.0 million of charges comprised of $5.9 million of estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
 
(2)
Total units/beds operated represent the total units/beds operated as of the end of the period.
 
(3)
Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units/beds.
 
(4)
Refundable entrance fee sales for the years ended December 31, 2008 and 2007 include amounts received from residents participating in the MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee.  MyChoice amounts received from existing residents totaled $0.4 million, $0.8 million, $0.6 million and $0.5 million in the first, second, third and fourth quarters of 2008, respectively, and $0.2 million, $3.6 million and $4.7 million in the second, third and fourth quarters of 2007, respectively.  We did not receive any MyChoice amounts from existing residents during the first quarter of 2007.
 
As of December 31, 2008, our total operations included 548 communities with a capacity to serve 51,804 residents.  During 2008, our total portfolio decreased by two communities with our resident capacity decreasing by 282 units as a result of a terminated management agreement and the consolidation of two communities into one.

Our 2008 results were also affected by our continuing implementation of our ancillary services programs at a number of our locations as described above.

Resident Fees

The increase in resident fees occurred across all business segments.  Resident fees increased over 2007 primarily due to an increase in average monthly revenue per unit/bed during 2008 which includes an increase in our ancillary services revenue as we continued to roll out therapy and home health services to many of our communities.  This increase was partially offset by a decrease in occupancy in the Retirement Centers and CCRCs segments.  During 2008, same-store revenues grew 4.4% at the 515 properties we operated in both years with a 6.0% increase in the average monthly revenue per unit/bed and a 1.4% decrease in occupancy.


 
Retirement Centers revenue increased $7.5 million, or 1.5%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both years as well as an increase in revenues related to the expansion of our ancillary service.  This increase was partially offset by a decrease in occupancy at our same-store communities year over year.

Assisted Living revenue increased $48.3 million, or 5.7%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both years as well as an increase in revenues relate to the expansion of our ancillary service programs.  Occupancy at our same-store communities was approximately flat year over year.

CCRCs revenue increased $32.8 million, or 6.5%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both years as well as an increase in revenues related to the expansion of our ancillary services.  This increase was partially offset by a decrease in occupancy at our same-store communities year over year.

Management Fees

Management fees were comparable year over year as the number of management contracts maintained was largely consistent during both years.

Facility Operating Expense

Facility operating expense increased over 2007 primarily due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, as well as an increase in expenses incurred in connection with the continued rollout of our ancillary services program during 2008.

Retirement Centers operating expenses increased $12.7 million, or 4.6%, primarily due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, $1.3 million of expense incurred in connection with hurricanes and other named tropical storms, an increase in insurance and utility expenses period over period as well as an increase in expense incurred in connection with the continued rollout of our ancillary services program.

Assisted Living operating expenses increased $50.8 million, or 9.4%, due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, $2.0 million of expense incurred in connection with hurricanes and other named tropical storms as well as an increase in expense incurred in connection with the continued rollout of our ancillary services program.

CCRCs operating expenses increased $27.2 million, or 7.6%, due to an increase in salaries, wages and benefits due to normal salary increases and increased employee count, increased pharmacy, medical, and other health care supplies, as well as $1.5 million of expense incurred in connection with hurricanes and other named tropical storms.

General and Administrative Expense

General and administrative expense increased $2.9 million, or 2.1%, primarily as a result of an increase in non-controllable expenses related to the $8.0 million reserve established for certain litigation during the second quarter of 2008 and non-cash stock-based compensation expense in connection with restricted stock grants period over period offset by a decrease in integration and merger costs that were significantly higher in the prior year.  General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage, was 4.5% and 5.0% for the years ended December 31, 2008 and 2007, respectively, calculated as follows (dollars in thousands):
 
 

   
Year Ended December 31,
 
   
2008
   
2007
 
                         
Resident fee revenues
  $ 1,921,060       92.6 %   $ 1,832,507       92.4 %
Resident fee revenues under management
    152,970       7.4 %     150,204       7.6 %
Total
  $ 2,074,030       100.0 %   $ 1,982,711       100.0 %
General and administrative expenses (excluding non-cash compensation, integration and acquisition-related costs)
  $ 92,473       4.5 %   $ 98,858       5.0 %
Non-cash compensation expense
    28,937       1.4 %     20,113       1.0 %
Integration and acquisition-related costs
    19,509       0.9 %     19,042       1.0 %
General and administrative expenses (including non-cash compensation, integration and acquisition-related costs)
  $ 140,919       6.8 %   $ 138,013       7.0 %
 
Facility Lease Expense

Facility lease expense decreased by $2.2 million, or 0.8%, primarily as a result of lower variable interest rates within certain lease agreements.

Depreciation and Amortization

Depreciation and amortization expense decreased by $23.7 million, or 7.9%, primarily as a result of resident in-place lease intangibles becoming fully amortized during the year ended December 31, 2008, which was partially offset by an increase in depreciation expense related to depreciation on capital expenditures that we made during the latter part of 2007.

Goodwill and Asset Impairment

During 2008, we recognized $220.0 million of impairment charges mainly related to the CCRCs operating segment.  The non-cash charges consisted of $215.0 million of goodwill impairment related to the CCRCs segment and $5.0 million of asset impairment for property, plant and equipment and leasehold intangibles for certain communities within the Assisted Living segment.  The impairment charge was primarily driven by adverse equity market conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and our stock price at December 31, 2008 compared with our stock price at September 30, 2008.

Interest Income

Interest income remained relatively constant year over year.

Interest Expense

Interest expense remained relatively constant period over period.  During the year ended December 31, 2008, we recognized approximately $68.1 million of interest expense on our interest rate swaps due to unfavorable changes in the LIBOR yield curve which resulted in a change in the fair value of the swaps, as compared to approximately $73.2 million of interest expense on our interest rate swaps for the year ended December 31, 2007.  Interest expense incurred on debt remained relatively consistent year over year as interest from additional borrowings was offset by a reduction in interest from refinancing outstanding debt at a more favorable rate as well as the payoff of certain debt during the current year.

Income Taxes

The decrease in the income tax benefit over the same prior year period is due to a decrease in the effective tax rate from 38.4 % in 2007 to 18.9 % in 2008.  This decrease is primarily due to the impact of the impairment charge taken for financial statement purposes, which is not deductible for tax. The rate was also impacted by


 
our stock based compensation tax deduction as compared to the financial expense for 2008, and for an additional valuation allowance recorded in the year.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates that could have been selected, could have a material impact on our consolidated results of operations or financial condition. We have identified the following critical accounting policies that affect significant estimates and judgments.

Revenue Recognition and Assumptions at Entrance Fee Communities

Our eleven entrance fee communities provide housing and healthcare services through entrance fee agreements with residents. Under certain of these agreements, residents pay an entrance fee upon entering into the contract and are contractually guaranteed certain limited lifecare benefits in the form of healthcare discounts. The recognition of entrance fee income requires the use of various actuarial estimates. We recognize this revenue by recording the nonrefundable portion of the residents’ entrance fees as deferred entrance fee income and amortizing it into revenue using the straight-line method over the estimated remaining life expectancy of each resident or couple.  In addition, certain entrance fee agreements entitle the resident to a refund of the original entrance fee paid plus a percentage of the appreciation of the unit contingent upon resale.  We estimate the portion of such entrance fees that will be repaid to the resident from other contingently refundable entrance fees received or non-refundable entrance fees received and record that portion as deferred revenue with the remainder classified as refundable entrance fees.  The portion recorded as deferred revenue is amortized over the life of the entrance fee building.   We periodically assess the reasonableness of these mortality tables and other actuarial assumptions, and measurement of future service obligations.

Obligation to Provide Future Services

Annually, we calculate the present value of the net cost of future services and the use of communities to be provided to current residents of certain of our CCRCs and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the net cost of future services and the use of communities exceeds the non-refundable deferred revenue from entrance fees, a liability is recorded (obligation to provide future services and use of communities) with a corresponding charge to income.

Self-Insurance Liability Accruals

We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and professional liability insurance policies for our owned, leased and managed communities under a master insurance program, our current policy provides for deductibles for each and every claim ($3.0 million on or prior to December 31, 2008, $250,000 effective January 1, 2009 and $150,000 effective January 1, 2010).  The amount of liquid assets separately available to satisfy these deductible obligations is $10.9 million (classified as cash and escrow deposits – restricted in the consolidated balance sheets).  As a result, we are effectively self-insured for claims that are less than $150,000.  In addition, we maintain a self-insured workers compensation program (with excess loss coverage generally above $0.5 million per individual claim on or prior to December 31, 2009 and $1.0 million effective January 1, 2010) and a self-insured employee medical program (with excess loss coverage above $0.3 million per individual claim). We are self-insured for amounts below these excess loss coverage amounts.  We have formed a wholly-owned “captive” insurance company, Senior Services Insurance Limited (“SSIL”) for the purpose of insuring certain portions of our risk retention under our general and professional liability insurance programs.  SSIL issues policies of insurance to and receives premiums from Brookdale Senior Living Inc. that are reimbursed through expense allocation to each operated community and us. SSIL pays the costs for each claim above a deductible up to a per claim limit. Third-party insurers are responsible for claim costs above this limit. These third-party insurers carry an A.M. Best rating of A-/VII or better.

The cost of our employee health and dental benefits, net of employee contributions, is shared by us and our communities based on the respective number of participants working directly either at our corporate headquarters


 
or at the communities. Cash received is used to pay the actual costs of administering the program which include paid claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by us.  Claims are paid as they are submitted to the plan administrator.

Outstanding losses and expenses for general liability and professional liability and workers compensation are estimated based on the recommendations of independent actuaries and management’s estimates.  Outstanding losses and expenses for our self-insured medical program are estimated based on the recommendation of our third party administrator.

We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel and industry data, and adjust accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Income Taxes

We account for income taxes under the provisions of ASC 740 Income Taxes . Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. As of December 31, 2009 and 2008, we have a valuation allowance against deferred tax assets of approximately $10.7 million and $9.7 million, respectively. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected in income.  This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized.

Lease Accounting

We determine whether to account for our leases as either operating or capital leases depending on the underlying terms. As of December 31, 2009, we operated 359 communities under long-term leases with operating, capital and financing lease obligations. The determination of this classification is complex and in certain situations requires a significant level of judgment. Our classification criteria is based on estimates regarding the fair value of the leased communities, minimum lease payments, effective cost of funds, the economic life of the community and certain other terms in the lease agreements as stated in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Communities under operating leases are accounted for in our statement of operations as lease expenses for actual rent paid plus or minus straight-line adjustments for fixed or estimated minimum lease escalators and amortization of deferred gains. For communities under capital lease and lease financing obligation arrangements, a liability is established on our balance sheet and a corresponding long-term asset is recorded. Lease payments are allocated between principal and interest on the remaining base lease obligations and the lease asset is depreciated over the shorter of its useful life or the term of the lease. In addition, we amortize leasehold improvements purchased during the term of the lease over the shorter of their economic life or the lease term. Sale-leaseback transactions are recorded as lease financing obligations when the transactions include a form of continuing involvement, such as purchase options.

One of our leases provides for various additional lease payments based on changes in the interest rates on the debt underlying the lease. All of our leases contain fixed or formula based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease. In addition, we recognize all rent-free or rent holiday periods in operating leases on a straight-line basis over the lease term, including the rent holiday period.

For leases in which the Company is involved with the construction of the building, the Company accounts for the lease during the construction period under the provisions of ASC 840.  If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation for the amount of total project costs related to construction in progress and the pre-existing asset.  Once construction is complete, the Company considers the requirements under ASC 840-40 – Leases – Sale-Leaseback Transactions .  If the


 
arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation and depreciate the building over the lease term.

Allowance for Doubtful Accounts

Accounts receivable are reported net of an allowance for doubtful accounts, and represent our estimate of the amount that ultimately will be realized in cash. The allowance for doubtful accounts was $10.6 million, and $13.3 million as of December 31, 2009 and 2008, respectively.  The adequacy of our allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Changes in legislation are not expected to have a material impact on collections; however, changes in economic conditions could have an impact on the collection of existing receivable balances or future allowance considerations.

Approximately 83.0% and 86.2% of the Company’s resident and healthcare revenues for the year ended December 31, 2009 and 2008, respectively, were derived from private pay customers and 17.0% and 13.8% of the Company’s resident and healthcare revenues for the year ended December 31, 2009 and 2008, respectively, were derived from services covered by various third-party payor programs, including Medicare and Medicaid.  Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any, under reimbursement programs. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. We accrue contractual or cost related adjustments from Medicare or Medicaid when assessed (without regard to when the assessment is paid or withheld), even if we have not agreed to or are appealing the assessment. Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.

Long-Lived Assets, Goodwill and Purchase Accounting

As of December 31, 2009 and 2008, our long-lived assets were comprised primarily of $3.9 billion and $3.7 billion, respectively, of property, plant and equipment and leasehold intangibles. In accounting for our long-lived assets, other than goodwill, we apply the provisions of ASC 360 Property, Plant and Equipment .  In connection with our formation transactions, for financial reporting purposes we recorded the non-controlling stockholders’ interest at fair value. Acquisitions are accounted for using the purchase method of accounting and the purchase prices are allocated to acquired assets and liabilities based on their estimated fair values. Goodwill associated with our acquisition of ARC and our formation transactions was allocated to the reportable segment and included in our application of the provisions of ASC 350 Intangibles – Goodwill and Other .  We account for goodwill under the provisions of ASC 350.  During the year ended December 31, 2008, we recorded a $215.0 million goodwill impairment charge in connection with our annual impairment test.  The impairment charge was primarily driven by adverse equity market conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and our stock price at December 31, 2008 compared with our stock price at September 30, 2008.  As of December 31, 2009 and 2008, we had $109.8 million and $110.0 million of goodwill, respectively.

We test long-lived assets other than goodwill for recoverability annually during our fourth quarter or whenever changes in circumstances indicate the carrying value may not be recoverable. Recoverability of an asset group is estimated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If this comparison indicates that the carrying value of an asset group is not recoverable, we are required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds its estimated fair value. When an impairment loss is recognized for assets to be held and used, the carrying amount of those assets is permanently adjusted and depreciated over its remaining useful life.  During the years ended December 31, 2009 and 2008, we evaluated long-lived depreciable assets using the same cash flow data used to evaluate goodwill and determined that the undiscounted cash flows exceeded the carrying value of these assets for all except for a small number of communities.  As a result, we recorded a non-cash asset impairment charge of $10.1 million and $5.0 million for the quarters ended December 31, 2009 and 2008, respectively, for five and four communities, respectively, within the Retirement Center and Assisted Living segment.
 
Goodwill is not amortized, but is subject to annual or more frequent impairment testing.  We test goodwill for impairment annually during our fourth quarter, or whenever indicators exist that our goodwill may not be


 
recoverable.  The recoverability of goodwill is required to be assessed using a two-step process. The first step requires a comparison of the estimated fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, the second step requires a comparison of the implied fair value of goodwill (based on a putative purchase price allocation methodology) with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
In estimating the fair value of a reporting unit or long-lived assets other than goodwill, we generally use the income approach.  The income approach utilizes future cash flow projections that are developed internally.  Any estimates of future cash flow projections necessarily involve predicting an unknown future and require significant management judgments and estimates.   In arriving at our cash flow projections, we consider  our historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors.  Future events may indicate differences from management’s current judgments and estimates, which could, in turn, result in future impairments.  Future events that may result in impairment charges include increases in interest rates, which could impact discount rates, differences in the projected occupancy rates and changes in the cost structure of existing communities.

In using the income approach to estimate fair value of a reporting unit or long-lived assets other than goodwill, we make certain key assumptions.  Those assumptions include assumptions related to future revenues, future facility operating expenses, future cash flows that we would receive upon a future sale of the communities using estimated cap rates. We attempt to corroborate the cap rates we use in these calculations with cap rates observable from recent market transactions.

Where required, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
 
Although we make every reasonable effort to ensure the accuracy of our estimate of the fair value of our reporting units, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss.

Hedging

We periodically enter into certain interest rate swap or cap agreements to effectively convert floating rate debt to a fixed rate basis or to hedge anticipated future financings. Amounts paid or received under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. For effective cash flow hedges, settlement amounts paid or received in connection with settled or unwound interest rate swap agreements are deferred and recorded to accumulated other comprehensive income. For effective fair value hedges, changes in the fair value of the derivative will be offset against the corresponding change in fair value of the hedged asset or liability through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized in earnings. All derivative instruments are recorded at fair value. Derivatives that do not qualify for hedge accounting are recorded at fair value through earnings.

On October 1, 2006, we elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently, the net gain accumulated in other comprehensive income at that date of approximately $1.3 million related to the previously designated swap instruments is being reclassified to interest expense over the life of the underlying hedged debt. In the future, if the underlying hedged debt is extinguished or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income.

In measuring our derivative instruments at fair value, we have considered nonperformance risk in our valuation.  In so doing, we review the netting arrangement and collateral requirements of each instrument and counterparty to determine appropriate reductions of credit exposure.  Remaining credit exposure is estimated by reference to market prices for credit default swaps and/or other methods of estimating probabilities of default.


 
Stock-Based Compensation

We adopted ASC 718 Compensation – Stock Compensation in connection with initial grants of restricted stock effective August 2005, which were converted into shares of our restricted stock on September 30, 2005 in connection with our formation transaction. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred.

Certain of our employee stock awards vest only upon the achievement of performance targets.  ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, our determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, we must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Litigation
 
Litigation is inherently uncertain and the outcome of individual litigation matters is not predictable with assurance.  We are involved in various legal actions and claims incidental to the conduct of our business which are comparable to other companies in the senior living industry, some for specific matters as described in Note 23 to the consolidated financial statements and others arising in the ordinary course of business. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. In other instances, we may not be able to make a reasonable estimate of any liability because of uncertainties related to the outcome and/or the amount or range of losses. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

New Accounting Pronouncements

The information required by this Item is provided in Note 2 of the notes to the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data”.

Liquidity and Capital Resources

The following is a summary of cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows (dollars in thousands):

   
Year Ended
December 31,
 
   
2009
   
2008
 
Cash provided by operating activities
  $ 237,220     $ 136,767  
Cash used in investing activities
    (351,432 )     (166,439 )
Cash provided by (used in) financing activities
    126,609       (17,259 )
Net increase (decrease) in cash and cash equivalents
    12,397       (46,931 )
Cash and cash equivalents at beginning of year
    53,973       100,904  
Cash and cash equivalents at end of year
  $ 66,370     $ 53,973  

The increase in cash provided by operating activities was attributable to improved operating performance period over period, working capital management and increased proceeds from deferred revenue related to the opening of a new entrance fee community in the third quarter of 2009, partially offset by security deposits returned to prospective residents on a discontinued development project.

The increase in cash used in investing activities was primarily attributable to an increase in cash used to acquire assets in two acquisition transactions which closed in the fourth quarter of 2009, restricted cash balances funded (in order to reduce our letter of credit needs) related to the renegotiation of the line of credit in the current year which was partially offset by a reduction of spending on property, plant and equipment and leasehold improvements period over period, as well as cash received on a sale-leaseback transaction and for the sale of a joint venture interest in the current period.  The prior year period also includes a cash payment received on


 
outstanding notes receivable.

The increase in cash provided by financing activities period over period was primarily attributable to proceeds received from the public equity offering in the current period as well as a decrease in dividend payments due to the suspension of the dividend during the fourth quarter of 2008 and a decrease in swap termination payments during the current period, partially offset by a decrease in net borrowings in the current year period.

Our principal sources of liquidity have historically been from:
 
·
cash balances on hand;
 
·
cash flows from operations;
 
·
proceeds from our credit facilities;
 
·
proceeds from mortgage financing or refinancing of various assets;
·
funds generated through joint venture arrangements or sale-leaseback transactions; and
·
with somewhat lesser frequency, funds raised in the debt or equity markets and proceeds from the selective disposition of underperforming assets.
 
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.  

Our liquidity requirements have historically arisen from:

 
·
working capital;
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
acquisition consideration and transaction costs;
 
·
cash collateral postings required in connection with our interest rate swaps and related financial instruments;
 
·
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
 
·
dividend payments;
 
·
purchases of common stock under our previous share repurchase authorization; and
 
·
other corporate initiatives (including integration and branding).

Over the near-term, we expect that our liquidity requirements will primarily arise from:

 
·
working capital;
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
 
·
other corporate initiatives (including information systems);
 
·
acquisition consideration and transaction costs; and
 
·
to a lesser extent, cash collateral required to be posted in connection with our interest rate swaps and related financial instruments.

We are highly leveraged and have significant debt and lease obligations.  As of February 26, 2010, we have two principal corporate-level debt obligations:  our $100.0 million revolving credit facility and our secured and unsecured facilities providing for up to $78.5 million of letters of credit in the aggregate.  The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.

During the year ended December 31, 2009, we completed a public equity offering which yielded $163.8 million of net proceeds.  In conjunction with the completion of the offering, we entered into an amendment to our previous credit facility which, among other things, reduced the maximum revolving loan commitment to $75.0


 
million as discussed below under “Credit Facilities – 2009 Credit Facility”.  Proceeds from the offering were primarily used to repay the $125.0 million of indebtedness which was outstanding under the previous credit facility.

At December 31, 2009, we had $2.3 billion of debt outstanding, excluding our line of credit and capital lease obligations, at a weighted-average interest rate of 3.85%.  At December 31, 2009, we had $351.7 million of capital and financing lease obligations, there were no borrowings on the revolving loan facility, $17.3 million of letters of credit had been issued under the credit facility, and $48.8 million of letters of credit had been issued under separate secured and unsecured letter of credit facilities.  Approximately $166.2 million of our debt obligations are due on or before December 31, 2010.  Although these debt obligations are scheduled to mature on or prior to December 31, 2010, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $126.0 million of non-recourse mortgages payable included in such debt until 2011.  We also have substantial operating lease obligations and capital expenditure requirements.  For the year ending December 31, 2010, we will be required to make approximately $265.5 million of payments in connection with our existing operating leases.

We had $66.4 million of cash and cash equivalents at December 31, 2009, excluding cash and escrow deposits-restricted and lease security deposits of $200.7 million.  Additionally, as of December 31, 2009, we had $57.7 million available under our previous credit facility, of which $7.7 million could be drawn as letters of credit.

In late 2008, we began replacing some of our outstanding letters of credit with restricted cash deposits in order to reduce our letter of credit needs.

At December 31, 2009, we had $371.9 million of negative working capital, which includes the classification of $216.3 million of refundable entrance fees, $13.5 million in tenant deposits and $126.0 million of debt for which we have extension rights as current liabilities. Based upon our historical operating experience, we anticipate that only 9.0% to 12.0% of those entrance fee liabilities will actually come due, and be required to be settled in cash, during the next 12 months. We expect that any entrance fee liabilities due within the next 12 months will be fully offset by the proceeds generated by subsequent entrance fee sales.  Entrance fee sales, net of refunds paid, provided $46.0 million of cash for the year ended December 31, 2009.  This includes $25.7 million of first generation entrance fee receipts which represent initial entrance fees received from the sale of units at a newly opened entrance fee CCRC.

For the year ending December 31, 2010, we anticipate that we will make investments of approximately $75.0 million to $100.0 million for capital expenditures, comprised of approximately $25.0 million to $35.0 million of net recurring capital expenditures and approximately $50.0 million to $65.0 million of expenditures relating to other major projects (including corporate initiatives).  These major projects include unusual or non-recurring capital projects, projects which create new or enhanced economics, such as major renovations or repositioning projects at our communities (including deferred expenditures in connection with recently acquired communities), integration related expenditures (including the cost of developing information systems), and expenditures supporting the expansion of our ancillary services programs.  We do not anticipate material expenditures in 2010 in connection with our community expansion and development program.  For the year ended December 31, 2009, we spent approximately $19.5 million for net recurring capital expenditures, approximately $22.2 million for expenditures relating to other major projects and corporate initiatives and had a net receipt of cash of approximately $7.1 million (consisting of $73.1 million for capital expenditures net of $80.2 million that had been reimbursed as of December 31, 2009) in connection with our expansion and development program.

During 2010, we anticipate that our capital expenditures will be funded from cash on hand, cash flows from operations, and amounts drawn on our new credit facility.

Through 2007, we focused on growth primarily through acquisition, spending approximately $2.2 billion during 2007 and 2006 on acquiring communities and companies, excluding fees, expenses and assumption of debt. Given the market environment during 2008 and the first half of 2009, we focused on integrating previous acquisitions and on the significant organic growth opportunities inherent in our growth strategy and engaged in a reduced level of acquisition activity.  As noted elsewhere, we completed two separate acquisitions during the fourth quarter of 2009.  As opportunities arise, we plan to continue to take advantage of the fragmented continuing care, independent living and assisted living sectors by selectively purchasing existing operating companies, asset portfolios, home health agencies and communities. We may also seek to acquire the fee interest


 
in communities that we currently lease or manage.

In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk.  We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis.  Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds.  In periods of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are required to post can change significantly.  We have recently taken a number of steps to reduce our collateral posting risk.  In particular, during 2008 and the year ended December 31, 2009,  we terminated a number of interest rate swaps with an aggregate notional amount of $1.1 billion and purchased and assumed $140.8 million in aggregate notional amount of interest rate caps, which do not require the posting of cash collateral.  Furthermore, during 2008, we obtained $37.6 million of swaps that are secured by underlying mortgaged assets and, hence, do not require cash collateralization. As of December 31, 2009, we have $811.4 million in aggregate notional amount of interest rate caps, $37.6 million in aggregate notional amount of swaps secured by underlying mortgaged assets, $314.2 million in aggregate notional amount of swaps that require cash collateralization and $111.0 million of variable rate debt that is not subject to any cap or swap agreements.

We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically.  If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all (particularly given current market conditions). If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our business development activities, any of which could reduce the growth of our business.

During late 2008 and the first half of 2009, we took steps to preserve our liquidity and increase our financial flexibility. For example, we suspended our quarterly dividend payments, terminated our share repurchase program and initiated a number of cost control measures (including limitations on our capital expenditures). In addition, we completed the public equity offering described above and repaid the outstanding borrowings on our previous credit facility. We currently estimate that our existing cash flows from operations, together with existing working capital, amounts available under our new credit facility and, to a lesser extent, proceeds from anticipated financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming that the overall economy does not substantially deteriorate further.

Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, the actual level of capital expenditures, our expansion, development and acquisition activity, general economic conditions and the cost of capital.  Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies.  The current volatility in the credit and financial markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing.  As a result, this may impact our ability to grow our business, maintain capital spending levels, expand certain communities, or execute other aspects of our business strategy.  In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding.  There can be no assurance that any such additional financing will be available or on terms that are acceptable to us (particularly in light of current adverse conditions in the credit market).

As of December 31, 2009, we are in compliance with the financial covenants of our outstanding debt and lease agreements.

Credit Facilities

As of January 1, 2009, we had an available secured line of credit of $245.0 million (including a $70.0 million letter of credit sublimit), an associated letter of credit facility of up to $80.0 million, and separate letter of credit facilities of up to $42.5 million in the aggregate.  The line of credit bore interest at the base rate plus 3.0% or LIBOR plus 4.0%, at our election, and was scheduled to mature on May 15, 2009.  We were required to pay fees ranging from 2.5% to 4.0% of the amount of any outstanding letters of credit issued under the associated letter of credit facility and were required to pay a fee of 2.5% of the amount of any outstanding letters of credit issued


 
under the separate letter of credit facilities.

2009 Credit Facility

During late 2008 and early 2009, we entered into unsecured facilities with a financial institution, maturing in November 2011, providing for up to $48.5 million of letters of credit in the aggregate and entered into a Second Amended and Restated Credit Agreement, dated February 27, 2009, with Bank of America, N.A., as administrative agent, Banc of America Securities LLC, as sole lead arranger and book manager, and the several lenders from time to time parties thereto. The amended credit agreement amended and restated the $245.0 million secured line of credit and terminated the associated $80.0 million letter of credit facility.

The amended credit agreement initially consisted of a $230.0 million revolving loan facility with a $25.0 million letter of credit sublimit and was scheduled to mature on August 31, 2010.

Pursuant to the terms of the amended credit agreement, certain of our subsidiaries, as guarantors, guaranteed our obligations under the amended credit agreement and the other loan documents.  Further, in connection with the amended credit agreement, (i) the company and certain guarantors executed and delivered a Pledge Agreement in favor of the administrative agent for the banks and other financial institutions from time to time parties to the amended credit agreement, pursuant to which such guarantors pledged certain assets for the benefit of the secured parties as collateral security for the payment and performance of our obligations under the amended credit agreement and the other loan documents and (ii) certain guarantors granted mortgages and executed and delivered a Security Agreement, in each case, in favor of the administrative agent for the banks and other financial institutions from time to time parties to the amended credit agreement encumbering certain real and personal property of such guarantors.  The collateral included, among other things, certain real property and related personal property owned by the guarantors, equity interests in certain of our subsidiaries, all related books and records and, to the extent not otherwise included, all proceeds and products of any and all of the foregoing.

At our option, amounts drawn under the revolving loan facility initially bore interest at either (i) LIBOR plus a margin of 7.0% or (ii) the greater of (a) the Bank of America prime rate or (b) the Federal Funds rate plus 0.5%, plus a margin of 7.0%.  For purposes of determining the interest rate, in no event was the base rate or LIBOR to be less than 3.0%.  In connection with the loan commitments, we paid a quarterly commitment fee of 1.0% per annum on the average daily amount of undrawn funds.  We were initially required to pay a fee equal to 7.0% of the amount of any issued and outstanding letters of credit; provided, with respect to drawable amounts that were cash collateralized, the letter of credit fee was payable at a rate per annum equal to 2.0%.

The amended credit agreement contained typical representations and covenants for loans of this type, including restrictions on our ability to pay dividends, make distributions, make acquisitions, incur capital expenditures, incur new liens, or repurchase shares of our common stock. The amended credit agreement also contained financial covenants, including covenants with respect to maximum consolidated adjusted leverage, minimum consolidated fixed charge coverage, minimum tangible net worth, and maximum total capital expenditures.

On June 1, 2009, in connection with the equity offering described above, we entered into the First Amendment to the Second Amended and Restated Credit Agreement (the “First Amendment”) pursuant to which the maximum revolving loans that could be outstanding at any time under the amended credit agreement was reduced to $75.0 million.  In addition, the interest rate margin on loans, as well as fees on letters of credit, as a result of the maximum amount of the facility having been reduced to $75.0 million, was reduced to 6.0%.

Pursuant to the First Amendment, we were given greater flexibility to make acquisitions by increasing aggregate permitted cash consideration from $10.0 million to $100.0 million, to make capital expenditures up to $30.0 million per quarter and to incur an additional $20.0 million in liens and letters of credit.

As of December 31, 2009, we had an available secured line of credit of $75.0 million (including a $25.0 million letter of credit sublimit) and secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  As of December 31, 2009, there were no borrowings under the revolving loan facility, $17.3 million of letters of credit has been issued under the amended credit facility, and $48.8 million of letters of credit had been issued under our secured and unsecured letter of credit facilities.


 
2010 Credit Facility

Effective February 23, 2010, we terminated the $75.0 million revolving credit facility with Bank of America, N.A. and entered into a credit agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The new facility has a commitment of $100.0 million, with an option to increase the commitment to $120.0 million, and is scheduled to mature on June 30, 2013.

The revolving line of credit may be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.

The new facility is secured by a first priority lien on certain of our communities.  The availability under the line may vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility will bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event shall LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  We are also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

The credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth.  A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the credit agreement and all amounts owing under the credit agreement and certain other loan agreements becoming immediately due and payable.

After giving effect to the new credit facility, as of February 26, 2010, we have an available secured line of credit with a $100.0 million commitment and separate letter of credit facilities of up to $78.5 million in the aggregate.

Contractual Commitments

The following table presents a summary of our material indebtedness, including the related interest payments, lease and other contractual commitments, as of December 31, 2009.

         
Payments Due by Twelve Months Ending December 31,
 
   
Total
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
 
   
(dollars in thousands)
 
Contractual Obligations:
                                         
Long-term debt obligations (1)(2)
  $ 2,623,836     $ 120,535     $ 497,004     $ 947,166     $ 668,628     $ 155,446     $ 235,057  
Capital lease obligations (1)
    572,425       51,109       52,528       52,888       50,529       51,844       313,527  
Operating lease obligations (3)
    2,272,452       265,471       266,679       263,842       253,526       227,845       995,089  
Refundable entrance fee obligations (4)
    216,256       27,032       27,032       27,032       27,032       27,032       81,096  
Total contractual obligations
  $ 5,684,969     $ 464,147     $ 843,243     $ 1,290,928     $ 999,715     $ 462,167     $ 1,624,769  
                                                         
Total commercial construction commitments
  $ 4,998     $ 4,998     $ —     $ —     $ —     $ ―     $ —  

 
(1)
Includes contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31, 2009 rate after giving effect to in-place interest rate swaps.
 
(2)
$126.0 million has been classified beyond its 2010 initial maturity date to 2011 due to our option to extend the initial maturity date to 2011, subject to the satisfaction of customary conditions (such as the absence of a material adverse change).
 
(3)
Reflects future cash payments after giving effect to non-contingent lease escalators and assumes payments on variable rate instruments at the December 31, 2009 rate.
 


 
(4)
Future refunds of entrance fees are estimated based on historical payment trends. These refund obligations are generally offset by proceeds received from resale of the vacated apartment units. Historically, proceeds from resales of entrance fee units each year generally offset refunds paid and generate excess cash to us.

The foregoing amounts exclude outstanding letters of credit of $66.1 million as of December 31, 2009.

Company Indebtedness, Long-term Leases and Hedging Agreements

Indebtedness

As of February 26, 2010, we have two principal corporate-level debt obligations:  our $100.0 million revolving credit facility and separate letter of credit facilities of up to $78.5 million in the aggregate.  The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.

As of December 31, 2009, 2008 and 2007, our outstanding property-level secured debt and capital leases were $2.6 billion, $2.4 billion, and $2.1 billion, respectively.

During 2009, we incurred $157.0 million of additional property-level debt primarily related to the financing of acquisitions, the expansion of certain communities and the releveraging of certain assets.  Approximately $53.0 million of the new debt was issued at a variable interest rate and the remaining $104.0 million was issued at a fixed interest rate.  Refer to the notes to the consolidated financial statements for a detailed discussion of the new debt and related terms.

We have secured our self-insured retention risk under our workers’ compensation and general liability and professional liability programs and our lease security deposits with cash and letters of credit aggregating $13.9 million and $46.5 million, and $10.9 and $64.3 million as of December 31, 2009 and 2008, respectively.

As of December 31, 2009, we are in compliance with the financial covenants of our outstanding debt, including those covenants measuring facility operating income to gauge debt coverage.

Long-Term Leases

As of December 31, 2009, we have 359 communities operated under long-term leases. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index.

Two portfolio leases have or had a floating-rate debt component built into the lease payments.  We acquired one of the portfolios on December 30, 2005.  Prior to the acquisition, the lease payment was a pass through of debt service, which includes $100.8 million of floating rate tax-exempt debt that was credit enhanced by Fannie Mae.  Our variable rate exposure under this lease is partially hedged through an interest rate cap.  The second lease includes $80.0 million of variable rate mortgages and/or tax exempt debt that is credit enhanced by Freddie Mac.

For the year ended December 31, 2009, our minimum annual cash lease payments for our capital/financing leases and operating leases were $46.8 million and $258.9 million, respectively.

As of December 31, 2009, we are in compliance with the financial covenants of our capital and operating leases, including those covenants measuring facility operating income to gauge lease coverage.

Hedging

In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk.  We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis.  Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds.  In periods of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are required to post can change significantly.  We have recently taken a number of steps to reduce our collateral posting risk.  In particular, during 2008 and the year ended December 31, 2009,  we terminated a number of interest rate swaps with an aggregate notional amount of $1.1 billion and purchased and assumed $140.8 million in aggregate notional amount of interest rate caps, which do not require the posting of


 
cash collateral.  Furthermore, during 2008, we obtained $37.6 million of swaps that are secured by underlying mortgaged assets and, hence, do not require cash collateralization. As of December 31, 2009, we have $811.4 million in aggregate notional amount of interest rate caps, $37.6 million in aggregate notional amount of swaps secured by underlying mortgaged assets, $314.2 million in aggregate notional amount of swaps that require cash collateralization and $111.0 million of variable rate debt that is not subject to any cap or swap agreements.

All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value.

The following table summarizes the Company’s swap instruments at December 31, 2009 (dollars in thousands):

Current notional balance
  $ 351,840  
Highest possible notional
  $ 351,840  
Lowest interest rate
    3.24 %
Highest interest rate
    4.47 %
Average fixed rate
    3.74 %
Earliest maturity date
    2011  
Latest maturity date
    2014  
Weighted average original maturity
 
4.7 years
 
Estimated liability fair value (included in other liabilities at December 31, 2009)
  $ (16,950 )
Estimated liability fair value (included in other liabilities at December 31, 2008)
  $ (20,931 )
Estimated asset fair value (included in other assets at December 31, 2009)
  $ —  
Estimated asset fair value (included in other assets at December 31, 2008)
  $ —  

The following table summarizes the Company’s cap instruments at December 31, 2009 (dollars in thousands):

Current notional balance
  $ 811,365  
Highest possible notional
  $ 811,365  
Lowest interest cap rate
    4.96 %
Highest interest cap rate
    6.50 %
Average fixed cap rate
    5.94 %
Earliest maturity date
    2011  
Latest maturity date
    2012  
Weighted average original maturity
 
3.6 years
 
Estimated liability fair value (included in other liabilities at December 31, 2009)
  $ —  
Estimated liability fair value (included in other liabilities at December 31, 2008)
  $ —  
Estimated asset fair value (included in other assets at December 31, 2009)
  $ 1,221  
Estimated asset fair value (included in other assets at December 31, 2008)
  $ 350  

Impacts of Inflation

Resident fees from the communities we own or lease and management fees from communities we manage for third parties are our primary sources of revenue. These revenues are affected by the amount of monthly resident fee rates and community occupancy rates. The rates charged are highly dependent on local market conditions and the competitive environment in which our communities operate. Substantially all of our retirement center, assisted living, and CCRC residency agreements allow for adjustments in the monthly fee payable thereunder not less frequently than every 12 or 13 months thereby enabling us to seek increases in monthly fees due to inflation, increased levels of care or other factors. Any pricing increase would be subject to market and competitive conditions and could result in a decrease in occupancy in the communities. We believe, however, that we would be able to periodically adjust the monthly fee serves to reduce the adverse effect of inflation. In addition, employee compensation expense is a principal cost element of facility operations and is also dependent upon local market conditions. There can be no assurance that resident fees will increase or that costs will not increase due to inflation or other causes.


 
At December 31, 2009, approximately $1.3 billion of our indebtedness, excluding our line of credit, bears interest at floating rates. We have mitigated our exposure to floating rates by using interest rate swaps and interest rate caps under our debt/lease arrangements. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on our line of credit.

Off-Balance Sheet Arrangements

The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures that are not considered VIEs as we do not possess a controlling financial interest. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-GAAP financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.

Adjusted EBITDA

Definition of Adjusted EBITDA

We define Adjusted EBITDA as follows:

Net income (loss) before:

 
·
provision (benefit) for income taxes;

 
·
non-operating (income) expense items;
 
 
·
loss on sale of communities;

 
·
depreciation and amortization (including non-cash impairment charges);

 
·
straight-line rent expense (income);

 
·
amortization of deferred gain;

 
·
amortization of deferred entrance fees;

 
·
non-cash compensation expense; and
 
 
·
change in future service obligation;

and including:

 
·
entrance fee receipts and refunds (excluding first generation entrance fee receipts on a newly opened entrance fee CCRC).

In the current year, we clarified the definition of Adjusted EBITDA to exclude (a) initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt, (b) the change in liability for the obligation to provide future services under existing lifecare contracts and (c) loss on sale of communities.


 
Management’s Use of Adjusted EBITDA

We use Adjusted EBITDA to assess our overall financial and operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a monthly basis.  Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.

Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

 
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
 
 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
 
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of our net loss to Adjusted EBITDA for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
 
 
 

   
Years Ended December 31, (1)
 
   
2009
   
2008
   
2007 (2)(3)
 
Net loss
  $ (66,255 )   $ (373,241 )   $ (162,372 )
Benefit for income taxes
    (32,926 )     (86,731 )     (101,260 )
Other non-operating income
    (4,146 )     (1,708 )     (402 )
Equity in (earnings) loss of unconsolidated ventures
    (440 )     861       3,386  
Loss on extinguishment of debt, net
    1,292       3,052       2,683  
Interest expense:                        
Debt
    99,653       119,853       114,518  
Capitalized lease obligation
    29,216       27,536       29,473  
Amortization of deferred financing costs and debt discount
    9,505       9,707       7,064  
Change in fair value of derivatives and amortization
    (3,765 )     68,146       73,222  
Interest income
    (2,354 )     (7,618 )     (7,519 )
Income (loss) from operations
    29,780       (240,143 )     (41,207 )
Loss on sale of communities, net
    2,043       ―       ―  
Depreciation and amortization
    271,935       276,202       299,925  
Goodwill and asset impairment
    10,073       220,026       —  
Straight-line lease expense
    15,851       20,585       25,439  
Amortization of deferred gain
    (4,345 )     (4,342 )     (4,342 )
Amortization of entrance fees
    (21,661 )     (22,025 )     (19,241 )
Non-cash compensation expense
    26,935       28,937       20,113  
Change in future service obligation
    (2,342 )     ―       ―  
Entrance fee receipts (4)
    68,875       42,472       45,249  
First generation entrance fees received (5)
    (25,673 )     ―       ―  
Entrance fee disbursements
    (22,916 )     (19,150 )     (19,557 )
Adjusted EBITDA
  $   348,555     $   302,562     $   306,379  
 
__________
 
(1)
The calculation of Adjusted EBITDA includes transaction-related costs for the year ended December 31, 2009 of $5.8 million.  Integration and hurricane and named tropical storms expense as well as other non-recurring costs were $24.3 million and $19.0 million for the year ended December 31, 2008 and December 31, 2007, respectively.  The amount for the year ended December 31, 2008 includes the effect of an $8.0 million reserve established for certain litigation.
(2)
Adjusted EBITDA for the year ended December 31, 2007 includes a non-cash benefit of $0.3 million related to a reversal of an accrual established in connection with Alterra’s emergence from bankruptcy in December 2003.
(3)
Adjusted EBITDA for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter ended December 31, 2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million related to estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
(4)
Includes the receipt of refundable and nonrefundable entrance fees.
(5)
First generation entrance fees received represents initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt.

Cash From Facility Operations

Definition of Cash From Facility Operations

We define Cash From Facility Operations (CFFO) as follows:


 
Net cash provided by (used in) operating activities adjusted for:

 
·
changes in operating assets and liabilities;
 
 
·
deferred interest and fees added to principal;
 
 
·
refundable entrance fees received;
 
 
·
first generation entrance fee receipts on a newly opened entrance fee CCRC;
 
 
·
entrance fee refunds disbursed;
 
 
·
lease financing debt amortization with fair market value or no purchase options;
 
 
·
other; and
 
 
·
recurring capital expenditures.

In the current year, we clarified the definition of CFFO to exclude initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt. 

Recurring capital expenditures include expenditures capitalized in accordance with GAAP that are funded from CFFO. Amounts excluded from recurring capital expenditures consist primarily of unusual or non-recurring capital items (including integration capital expenditures), community purchases and/or major projects or renovations that are funded using financing proceeds and/or proceeds from the sale of communities that are held for sale.

Management’s Use of Cash From Facility Operations

We use CFFO to assess our overall liquidity.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  CFFO is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding indebtedness (including our credit facilities and long-term leases), (ii) to review our ability to pay dividends to stockholders, (iii) to review our ability to make regular recurring capital expenditures to maintain and improve our communities on a period-to-period basis, (iv) for planning purposes, including preparation of our annual budget, (v) in making compensation determinations for certain of our associates (including our named executive officers) and (vi) in setting various covenants in our credit agreements.  These agreements generally require us to escrow or spend a minimum of between $250 and $450 per unit/bed per year.  Historically, we have spent in excess of these per unit/bed amounts; however, there is no assurance that we will have funds available to escrow or spend these per unit/bed amounts in the future.  If we do not escrow or spend the required minimum annual amounts, we would be in default of the applicable debt or lease agreement which could trigger cross default provisions in our outstanding indebtedness and lease arrangements.

Limitations of Cash From Facility Operations

CFFO has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations.  CFFO does not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary expenditures not reflected in the measure.  Material limitations in making the adjustment to our cash flow from operations to calculate CFFO, and using this non-GAAP financial measure as compared to GAAP operating cash flows, include:

 
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
 


 
 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
 
We believe CFFO is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our ability to make regular recurring capital expenditures to maintain and improve our communities.

CFFO is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on CFFO as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of CFFO to GAAP net cash provided by (used in) operating activities, along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to varying calculations, the CFFO measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net cash provided by operating activities to CFFO for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):

   
Years Ended December 31, (1)
 
   
2009
   
2008
   
2007 (2)(3)
 
Net cash provided by operating activities
  $ 237,220     $ 136,767     $ 199,662  
Changes in operating assets and liabilities
    4,532       25,865       (36,571 )
Refundable entrance fees received (4)(5)
    30,386       19,871       25,919  
First generation entrance fees received (6)
    (25,673 )     ―       ―  
Entrance fee refunds disbursed
    (22,916 )     (19,150 )     (19,557 )
Recurring capital expenditures
    (19,522 )     (27,312 )     (25,048 )
Lease financing debt amortization with fair market value or no purchase options
    (7,195 )     (6,691 )     (5,594 )
Reimbursement of operating expenses and other
    ―       794       4,430  
Cash From Facility Operations
  $ 196,832     $ 130,144     $ 143,241  
 
__________
 
(1)
The calculation of CFFO includes transaction-related costs for the year ended December 31, 2009 of $5.8 million.  Integration and hurricane and named tropical storms expense as well as other non-recurring costs were $24.3 million and $19.0 million for the year ended December 31, 2008 and December 31, 2007, respectively.  The amount for the year ended December 31, 2008 includes the effect of an $8.0 million reserve established for certain litigation.
(2)
The December 31, 2007 amounts have been reclassified to conform to the modified definition of CFFO used during the year ended December 31, 2009 and 2008.
(3)
CFFO for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter ended December 31, 2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million of estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
(4)
Entrance fee receipts include promissory notes issued to the Company by the resident in lieu of a portion of the entrance fees due.  Notes issued (net of collections) for the year ended December 31, 2009 were $9.3 million.  Notes issued (net of collections) for the years ended December 31, 2008 and 2007 were not material.
(5)
Total entrance fee receipts for the year ended December 31, 2009, 2008 and 2007 were $68.9 million, $42.5 million and $45.2 million, respectively, including $38.5 million, $22.6 million and $19.3 million, respectively, of nonrefundable entrance fee receipts included in net cash provided by operating activities.
(6)
First generation entrance fees received represents initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt.
 


 
Facility Operating Income

Definition of Facility Operating Income

We define Facility Operating Income as follows:

Net income (loss) before:

 
·
provision (benefit) for income taxes;
 
 
·
non-operating (income) expense items;
 
 
·
loss on sale of communities;
 
 
·
depreciation and amortization (including non-cash impairment charges);
 
 
·
facility lease expense;
 
 
·
general and administrative expense, including non-cash stock compensation expense;
 
 
·
change in future service obligation;
 
 
·
amortization of deferred entrance fee revenue; and
 
 
·
management fees.

In the current year, we clarified the definition of Facility Operating Income to exclude (a) the change in the liability for the obligation to provide future services under existing lifecare contracts and (b) loss on sale of communities.

Management’s Use of Facility Operating Income

We use Facility Operating Income to assess our facility operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility operations.  This measure provides an assessment of revenue generation and expense management and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal facility financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Facility Operating Income is one of the metrics used by our senior management and board of directors to review the financial performance of the business on a monthly basis.  Facility Operating Income is also used by research analysts and investors to evaluate the performance of and value companies in our industry by investors, lenders and lessors.  In addition, Facility Operating Income is a common measure used in the industry to value the acquisition or sales price of communities and is used as a measure of the returns expected to be generated by a community.

A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages.  The debt or lease coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as determined on an accrual basis in accordance with GAAP).  For purposes of the coverage calculation, the lender or lessor will further require a pro forma adjustment to facility operating income to include a management fee (generally 4% to 5% of operating revenue) and an annual capital reserve (generally $250 to $450 per unit/bed).  An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position, particularly on a facility-by-facility basis.


 
Limitations of Facility Operating Income

Facility Operating Income has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

 
·
interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
 
 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
 
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-facility basis.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Facility Operating Income as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Facility Operating Income to GAAP net income (loss), along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Facility Operating Income is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Facility Operating Income measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Facility Operating Income for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):

   
Years Ended December 31,
 
   
2009
   
2008
   
2007 (1)(2)
 
Net loss
  $ (66,255 )   $ (373,241 )   $ (162,372 )
Benefit for income taxes
    (32,926 )     (86,731 )     (101,260 )
Other non-operating income
    (4,146 )     (1,708 )     (402 )
Equity in (earnings) loss of unconsolidated ventures
    (440 )     861       3,386  
Loss on extinguishment of debt, net
    1,292       3,052       2,683  
Interest expense:
                       
Debt
    99,653       119,853       114,518  
Capitalized lease obligation
    29,216       27,536       29,473  
Amortization of deferred financing costs and debt discount
    9,505       9,707       7,064  
Change in fair value of derivatives and amortization
    (3,765 )     68,146       73,222  
Interest income
    (2,354 )     (7,618 )     (7,519 )
Income (loss) from operations
    29,780       (240,143 )     (41,207 )
Loss on sale of communities, net
    2,043       ―       ―  
Depreciation and amortization
    271,935       276,202       299,925  
Goodwill and asset impairment
    10,073       220,026       —  
Facility lease expense
    272,096       269,469       271,628  
General and administrative (including non-cash stock compensation expense)
    134,864       140,919       138,013  
Change in future service obligation
    (2,342 )     ―       ―  
Amortization of entrance fees
    (21,661 )     (22,025 )     (19,241 )
Management fees
    (6,719 )     (6,994 )     (6,789 )
Facility Operating Income
  $ 690,069     $ 637,454     $ 642,329  
 
 
__________

 
(1)
Facility Operating Income for the year ended December 31, 2007 includes a non-cash benefit of $0.3 million related to a reversal of an accrual established in connection with Alterra’s emergence from bankruptcy in December 2003.
 
(2)
Facility operating income for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter ended December 31, 2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million of estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
 
Ite m 7A.          Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks from changes in interest rates charged on our credit facilities, other floating-rate indebtedness and lease payments subject to floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates and prices. As of December 31, 2009, we had approximately $993.6 million of long-term fixed rate debt, $1.1 billion of long-term variable rate debt and $351.7 million of capital and financing lease obligations. As of December 31, 2009, our total fixed-rate debt and variable-rate debt outstanding had weighted-average interest rates of 3.85%.

We enter into certain interest rate swap agreements with major financial institutions to manage our risk on variable rate debt.  Additionally, during 2009 and 2008, we entered into certain cap agreements to effectively manage our risk above certain interest rates.  As of December 31, 2009, $1.4 billion, or 59.4%, of our debt, excluding capital and financing lease obligations, either has fixed rates or variable rates that are subject to swap agreements.  As of December 31, 2009, $811.4 million, or 35.7%, of our debt, excluding capital and financing lease obligations, is subject to cap agreements.  The remaining $111.0 million, or 4.9%, of our debt is variable rate debt, not subject to any cap or swap agreements.  A change in interest rates would have impacted our interest rate expense related to all outstanding variable rate debt, excluding capital and financing lease obligations, as follows: a one, five and ten percent change in interest rates would have an impact of $8.4 million, $44.0 million and $59.1 million, respectively.

As noted above, we have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds a specified threshold.



 
Ite m 8.          Financial Statements and Supplementary Data.

BROOKDALE SENIOR LIVING INC.

INDEX TO FINANCIAL STATEMENTS

 
 
PAGE
Report of Independent Registered Public Accounting Firm
71
   
Report of Independent Registered Public Accounting Firm
72
   
Consolidated Balance Sheets as of December 31, 2009 and 2008
73
   
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
74
   
Consolidated Statements of Equity for the Years Ended December 31, 2009, 2008 and 2007
75
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
76
   
Notes to Consolidated Financial Statements
78
   
Schedule II — Valuation and Qualifying Accounts
109



 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of Brookdale Senior Living Inc.


We have audited the accompanying consolidated balance sheets of Brookdale Senior Living Inc. (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the accompanying index to the financial statements.  These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.



   
/s/ Ernst & Young LLP
 
Chicago, Illinois
     
25 February, 2010
     




 
Report of Independent Registered Public Accounting Firm
 
 
 
The Board of Directors and Shareholders of Brookdale Senior Living Inc.


We have audited Brookdale Senior Living Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on   the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2009 and 2008 and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2009, and our report dated February 25, 2010 expressed an unqualified opinion thereon.



   
/s/ Ernst & Young LLP
 
Chicago, Illinois
     
25 February, 2010
     




 
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)

   
December 31,
 
   
2009
   
2008
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 66,370     $ 53,973  
Cash and escrow deposits – restricted
    109,977       86,723  
Accounts receivable, net
    82,604       91,646  
Deferred tax asset
    7,688       14,677  
Prepaid expenses and other current assets, net
      50,782         33,766  
Total current assets
      317,421         280,785  
Property, plant and equipment and leasehold intangibles, net
    3,857,774       3,697,834  
Cash and escrow deposits – restricted
    73,090       29,988  
Investment in unconsolidated ventures
    20,512       28,420  
Goodwill
    109,835       109,967  
Other intangible assets, net
    198,043       231,589  
Other assets, net
      69,268         70,675  
Total assets
  $   4,645,943     $   4,449,258  
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 166,185     $ 158,476  
Current portion of line of credit
    ―       4,453  
Trade accounts payable
    51,612       29,105  
Accrued expenses
    170,044       170,366  
Refundable entrance fees and deferred revenue
    287,953       256,080  
Tenant security deposits
      13,515         29,965  
Total current liabilities
      689,309         648,445  
Long-term debt, less current portion
    2,459,341       2,235,000  
Line of credit, less current portion
    ―       155,000  
Deferred entrance fee revenue
    72,026       73,977  
Deferred liabilities
    148,690       135,947  
Deferred tax liability
    140,313       178,647  
Other liabilities
      49,682         61,641  
Total liabilities
      3,559,361         3,488,657  
Commitments and contingencies
               
                 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2009 and 2008; no shares issued and outstanding
    ―       —  
Common stock, $0.01 par value, 200,000,000 shares authorized at December 31, 2009 and 2008; 124,417,940 and 106,467,764 shares issued and 123,206,639 and 105,256,463 shares outstanding (including 3,915,330 and 3,542,801 unvested restricted shares), respectively
    1,232       1,053  
Additional paid-in-capital
    1,882,377       1,690,851  
Treasury stock, at cost; 1,211,301 shares at December 31, 2009 and 2008
    (29,187 )     (29,187 )
Accumulated deficit
    (766,975 )     (700,720 )
Accumulated other comprehensive loss
    (865 )     (1,396 )
Total stockholders’ equity
      1,086,582         960,601  
Total liabilities and stockholders’ equity
  $   4,645,943     $   4,449,258  

See accompanying notes to consolidated financial statements.


 
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
For the Years Ended
December 31,
 
   
2009
   
2008
   
2007
 
Revenue
                 
Resident fees
  $ 2,016,349     $ 1,921,060     $ 1,832,507  
Management fees
    6,719       6,994       6,789  
Total revenue
    2,023,068       1,928,054       1,839,296  
Expense
                       
Facility operating expense (excluding depreciation and amortization of $184,780, $195,517 and $222,315, respectively)
    1,302,277       1,256,781       1,170,937  
General and administrative expense (including non-cash stock-based compensation expense of $26,935, $28,937 and $20,113, respectively)
    134,864       140,919       138,013  
Hurricane and named tropical storms expense
    ―       4,800       —  
Facility lease expense
    272,096       269,469       271,628  
Depreciation and amortization
    271,935       276,202       299,925  
Loss on sale of communities, net
    2,043       ―       ―  
Goodwill and asset impairment
    10,073       220,026       —  
Total operating expense
    1,993,288       2,168,197       1,880,503  
Income (loss) from operations
    29,780       (240,143 )     (41,207 )
                         
Interest income
    2,354       7,618       7,519  
Interest expense:
                       
Debt
    (128,869 )     (147,389 )     (143,991 )
Amortization of deferred financing costs  and debt discount
    (9,505 )     (9,707 )     (7,064 )
Change in fair value of derivatives and amortization
    3,765       (68,146 )     (73,222 )
Loss on extinguishment of debt, net
    (1,292 )     (3,052 )     (2,683 )
Equity in earnings (loss) of unconsolidated ventures
    440       (861 )     (3,386 )
Other non-operating income
    4,146       1,708       402  
Loss before income taxes
    (99,181 )     (459,972 )     (263,632 )
Benefit for income taxes
    32,926       86,731       101,260  
Net loss
    (66,255 )     (373,241 )     (162,372 )
Net loss attributable to noncontrolling interest
    ―       —       393  
Net loss attributable to common stockholders
  $ (66,255 )   $ (373,241 )   $ (161,979 )
 
Basic and diluted net loss per share attributable to common stockholders
  $ (0.60 )   $ (3.67 )   $ (1.60 )
Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders
    111,288       101,667       101,511  
Dividends declared per share
  $ ―     $ 0.75     $ 1.95  


See accompanying notes to consolidated financial statements.


  BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
 For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)

                                 
Accumulated
                   
               
Additional
               
Other
   
Total
             
   
Common Stock
   
Paid-In-
   
Treasury
   
Accumulated
   
Comprehensive
   
Stockholders
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit
   
Loss
   
Equity
   
Interest
   
Equity
 
Balances at January 1, 2007
    104,543     $ 1,046     $ 1,934,570     $ —     $ (170,713 )   $ (891 )   $ 1,764,012     $ 4,601     $ 1,768,613  
Dividends
    —       —       (202,136 )     —       —       —       (202,136 )     —       (202,136 )
Compensation expense related to restricted stock grants
    —       —       20,113       —       —       —       20,113       —       20,113  
Net loss
    —       —       —       —       (161,979 )     —       (161,979 )     (393 )     (162,372 )
Purchase of noncontrolling interest
    —       —       —       —       —       —       —       (4,208 )     (4,208 )
Reclassification of net gains on derivatives into earnings
    —       —       —       —       —       (1,680 )     (1,680 )     —       (1,680 )
Amortization of payments from settlement of forward interest rate swaps
    —       —       —       —       —       376       376       —       376  
Unrealized loss on derivative, net of tax
    —       —       —       —       —       125       125       —       125  
Other
      419         4         34         —         —         669         707         —         707  
Balances at December 31, 2007
    104,962       1,050       1,752,581       —       (332,692 )     (1,401 )     1,419,538       —       1,419,538  
Dividends
    —       —       (77,559 )     —       —       —       (77,559 )     —       (77,559 )
Compensation expense related to restricted stock grants
    —       —       28,937       —       —       —       28,937       —       28,937  
Net loss
    —       —       —       —       (373,241 )     —       (373,241 )     —       (373,241 )
Reclassification of net gains on derivatives into earnings
    —       —       —       —       —       262       262       —       262  
Amortization of payments from settlement of forward interest rate swaps
    —       —       —       —       —       376       376       —       376  
Purchase of Treasury Stock
    —       —       —       (29,187 )     —       —       (29,187 )     —       (29,187 )
Deconsolidation of an entity pursuant to FIN 46(R)
    —       —       (13,287 )     —       5,212       —       (8,075 )     —       (8,075 )
Other
      294         3         179         —         1       (633 )     (450 )       —       (450 )
Balances at December 31, 2008
    105,256       1,053       1,690,851       (29,187 )     (700,720 )     (1,396 )     960,601       —       960,601  
Compensation expense related to restricted stock and restricted stock unit grants
    ―       ―       26,935       ―       ―       ―       26,935       —       26,935  
Net loss
    ―       ―       ―       ―       (66,255 )     ―       (66,255 )     —       (66,255 )
Issuance of common stock under Associate Stock Purchase Plan
    109       1       1,006       ―       ―       ―       1,007       —       1,007  
Restricted stock, net
    1,794       18       (18 )     ―       ―       ―       ―       ―       ―  
Reclassification of net loss on derivatives into earnings
    ―       ―       ―       ―       ―       493       493       —       493  
Amortization of payments from settlement of forward interest rate swaps
    ―       ―       ―       ―       ―       376       376       —       376  
Issuance of common stock from equity offering, net
    16,047       160       163,611       ―       ―       ―       163,771       —       163,771  
Other
      ―         ―       (8 )       ―         ―       (338 )     (346 )       —       (346 )
Balances at December 31, 2009
      123,206     $   1,232     $   1,882,377     $ (29,187 )   $ (766,975 )   $ (865 )   $   1,086,582     $   —     $   1,086,582  

See accompanying notes to consolidated financial statements.

 
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
   
For the Years Ended
December 31,
 
   
2009
   
2008
   
2007
 
Cash Flows from Operating Activities
                 
Net loss
  $ (66,255 )   $ (373,241 )   $ (162,372 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Non-cash portion of loss on extinguishment of debt
    1,292       3,052       2,683  
Depreciation and amortization
    281,440       285,909       306,989  
Goodwill and asset impairment
    10,073       220,026       —  
Gain on sale of assets
    (2,241 )     (2,131 )     (457 )
Equity in (earnings) loss of unconsolidated ventures
    (440 )     861       3,386  
Distributions from unconsolidated ventures from cumulative share of net earnings
    405       3,752       1,521  
Amortization of deferred gain
    (4,345 )     (4,342 )     (4,342 )
Amortization of entrance fees
    (21,661 )     (22,025 )     (19,241 )
Proceeds from deferred entrance fee revenue
    38,489       22,601       19,330  
Deferred income tax benefit
    (31,684 )     (89,498 )     (103,180 )
Change in deferred lease liability
    15,851       20,585       25,439  
Change in fair value of derivatives and amortization
    (3,765 )     68,146       73,222  
Change in future service obligation
    (2,342 )     ―       ―  
Non-cash stock-based compensation
    26,935       28,937       20,113  
Changes in operating assets and liabilities:
                       
Accounts receivable, net
    11,784       (25,150 )     (6,134 )
Prepaid expenses and other assets, net
    (28,426 )     (12,664 )     3,333  
Accounts payable and accrued expenses
    21,287       15,428       21,512  
Tenant refundable fees and security deposits
    (16,770 )     (1,293 )     6,410  
Deferred revenue
    7,593       (2,186 )     11,450  
Net cash provided by operating activities
    237,220       136,767       199,662  
Cash Flows from Investing Activities
                       
Decrease in lease security deposits and lease acquisition deposits, net
    2,441       3,481       2,620  
Increase in cash and escrow deposits – restricted
    (64,540 )     (21,760 )     (15,002 )
Net proceeds from sale of assets
    14,941       2,935       6,700  
Distributions received from unconsolidated ventures
    1,061       3,916       2,038  
Additions to property, plant and equipment, and leasehold intangibles, net of related payables
    (117,453 )     (189,028 )     (169,556 )
Acquisition of assets, net of related payables and cash received
    (204,137 )     (6,731 )     (172,101 )
(Issuance of) payment on notes receivable, net
    (508 )     39,362       (11,133 )
Investment in unconsolidated ventures
    (1,246 )     (2,779 )     (1,985 )
Proceeds from sale leaseback transaction
    9,166       ―       ―  
Proceeds from sale of unconsolidated venture
    8,843       4,165       —  
Net cash used in investing activities
    (351,432 )     (166,439 )     (358,419 )
Cash Flows from Financing Activities
                       
Proceeds from debt
    157,039       511,344       591,524  
Repayment of debt and capital lease obligation
    (32,587 )     (255,489 )     (115,253 )
Buyout of capital lease obligation
    ―       —       (51,114 )
Proceeds from line of credit
    60,446       339,453       671,500  
Repayment of line of credit
    (219,899 )     (378,000 )     (637,000 )
Payment of dividends
    ―       (129,455 )     (196,827 )
Payment of financing costs, net of related payables
    (8,700 )     (14,292 )     (14,012 )
Proceeds from public equity offering, net
    163,771       ―       ―  
Cash portion of loss on extinguishment of debt
    ―       (1,240 )     (2,040 )
Other
    (931 )     (2,974 )     (1,010 )
Refundable entrance fees:
                       
 
 
 
Proceeds from refundable entrance fees
    30,386       19,871       25,919  
Refunds of entrance fees
    (22,916 )     (19,150 )     (19,557 )
Recouponing and payment of swap termination
    ―       (58,140 )     (60,503 )
Purchase of treasury stock
    ―       (29,187 )     —  
Net cash provided by (used in) financing activities
    126,609       (17,259 )     191,627  
Net increase (decrease) in cash and cash equivalents
    12,397       (46,931 )     32,870  
Cash and cash equivalents at beginning of year
    53,973       100,904       68,034  
Cash and cash equivalents at end of year
  $ 66,370     $ 53,973     $ 100,904  


See accompanying notes to consolidated financial statements.



 
BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.          Description of Business and Organization

Brookdale Senior Living Inc. (“Brookdale”, “BSL” or the “Company”) is a leading owner and operator of senior living communities throughout the United States.  The Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest quality service, care and living accommodations for residents.  The Company owns, leases and operates retirement centers, assisted living and dementia-care communities and continuing care retirement centers (“CCRCs”).

The Company was formed as a Delaware corporation on June 28, 2005. Under its Certificate of Incorporation, the Company was initially authorized to issue up to 5,000,000 shares of common stock and 5,000,000 shares of preferred stock. On September 30, 2005, the Company’s Certificate of Incorporation was amended and restated to authorize up to 200,000,000 shares of common stock and 50,000,000 shares of preferred stock.

2.          Summary of Significant Accounting Policies

The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”).  The significant accounting policies are summarized below:

Principles of Consolidation

The consolidated financial statements include BSL and its wholly-owned subsidiaries Brookdale Living Communities, Inc. (“BLC”), Brookdale Senior Living Communities, Inc. (formerly known as Alterra Healthcare Corporation) (“Alterra”), Fortress CCRC Acquisition LLC (“Fortress CCRC”) and American Retirement Corporation (“ARC”). In December 2003, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 810 - Consolidation of Variable Interest Entities (“ASC 810”).  ASC 810 addresses the consolidation by business enterprises of primary beneficiaries in variable interest entities (“VIE”) as defined in the guidance.  A company that holds variable interests in an entity will need to consolidate the entity if its interest in the VIE is such that it will absorb a majority of the VIE’s losses and/or receive a majority of expected residual returns, if they occur. As of December 31, 2009 and 2008, the Company had no communities considered VIEs which were consolidated pursuant to ASC 810.  Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence over governance and operations, are accounted for by the equity method.

The results of facilities and companies acquired are included in the consolidated financial statements from the effective date of the respective acquisition. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates are used for, but not limited to, the evaluation of goodwill and asset impairments, the accounting for future service obligations, self-insurance reserves, performance-based compensation, the allowance for doubtful accounts, depreciation and amortization, income taxes and other contingencies.  Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates.


 
Revenue Recognition

Resident Fees

Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.

Entrance Fees

Certain of the Company’s communities have residency agreements which require the resident to pay an upfront fee prior to occupying the community.  In addition, in connection with the Company’s MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return for a reduced monthly service fee.  The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation.  The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or upon the sale of the unit, or in certain agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit.  In such instances the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.

Certain contracts require the refundable portion of the entrance fee plus a percentage of the appreciation of the unit, if any, to be refunded only upon resale of a comparable unit (“contingently refundable”).  Upon resale the Company may receive reoccupancy proceeds in the form of additional contingently refundable fees, refundable fees, or non-refundable fees.  The Company estimates the amount of reoccupancy proceeds to be received from additional contingently refundable fees or non-refundable fees and records such amount as deferred revenue.  The deferred revenue is amortized over the life of the community and was approximately $61.8 million and $63.4 million at December 31, 2009 and 2008, respectively.  All remaining contingently refundable fees not recorded as deferred revenue and amortized are included in refundable entrance fees and deferred revenue.

All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue, are classified as current liabilities.

The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability.  The balance of the non-refundable portion is recorded as a long-term liability.

Community Fees

Substantially all community fees received are non-refundable and are recorded initially as deferred revenue.  The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the implied contractual terms of the resident lease.

Management Fees

Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage of gross revenues (as defined).

Purchase Accounting

In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities assumed, the Company makes estimates of the fair value of the tangible and intangible assets acquired and liabilities assumed using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. The Company allocates the purchase price of communities to net tangible and identified intangible assets acquired and liabilities assumed based on their fair values in accordance with the provisions of ASC 805 - Business Combinations (“ASC 805”) .   The determination of fair value involves the use of significant judgment and estimation. The Company determines fair


 
values as follows:

Current assets and current liabilities assumed are valued at carryover basis which approximates fair value.

Property, plant and equipment are valued utilizing discounted cash flow projections that assume certain future revenue and costs, and consider capitalization and discount rates using current market conditions.

The Company allocates a portion of the purchase price to the value of resident leases acquired based on the difference between the communities valued with existing in-place leases adjusted to market rental rates and the communities valued with current leases in place based on current contractual terms. Factors management considers in its analysis include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar resident leases. In estimating carrying costs, management includes estimates of lost rentals during the lease-up period and estimated costs to execute similar leases. The value of in-place leases is amortized to expense over the remaining initial term of the respective leases.

Leasehold operating intangibles are valued utilizing discounted cash flow projections that assume certain future revenues and costs over the remaining lease term. The value assigned to leasehold operating intangibles is amortized on a straight-line basis over the lease term.

Community purchase options are valued at the estimated value of the underlying community less the cost of the option payment discounted at current market rates.  Management contracts and other acquired contracts are valued at a multiple of management fees and operating income and amortized over the estimated term of the agreement.

Long-term debt assumed is recorded at fair market value based on the current market rates and collateral securing the indebtedness.  Any debt premium or discount recorded is amortized over the related debt maturity period.

Capital lease obligations are valued based on the present value of the minimum lease payments applying a discount rate equal to the Company’s estimated incremental borrowing rate at the date of acquisition.

Deferred entrance fee revenue is valued at the estimated cost of providing services to residents over the terms of the current contracts to provide such services. Refundable entrance fees are valued at cost pursuant to the resident lease plus the resident's share of any appreciation of the community unit at the date of acquisition, if applicable.

A deferred tax liability is recognized at statutory rates for the difference between the book and tax bases of the acquired assets and liabilities.

The excess of the fair value of liabilities assumed and cash paid over the fair value of assets acquired is allocated to goodwill.

Deferred Costs

Deferred financing and lease costs are recorded in other assets and amortized on a straight-line basis, which approximates the level yield method, over the term of the related debt or lease.

Income Taxes

Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent the Company’s valuation allowance is reduced or eliminated as a result of a business combination, the reduction in the valuation allowance is recorded as part of the purchase price allocation.

Fair Value of Financial Instruments

Cash and cash equivalents, cash and escrow deposits-restricted and derivative financial instruments are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably


 
approximate fair value.  Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness.  The Company had outstanding debt with a carrying value of $2.6 billion as of December 31, 2009 and 2008.  As of December 31, 2009 and 2008, the fair value of debt was $2.6 billion and $2.4 billion, respectively.

ASC 820 - Fair Value Measurement (“ASC 820”) 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. A financial instrument’s 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 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations (Note 18).

Cash and Cash Equivalents

The Company defines cash and cash equivalents as cash and investments with maturities of 90 days or less when purchased.

Cash and Escrow Deposits - Restricted

Cash and escrow deposits - restricted consist principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and consist of the following (dollars in thousands):

   
December 31,
 
   
2009
   
2008
 
Current:
           
Real estate taxes
  $ 26,909     $ 35,855  
Tenant security deposits
    6,861       10,175  
Insurance reserves
    7,578       ―  
Replacement reserve and other
    68,629       40,693  
Subtotal
    109,977       86,723  
Long term:
               
Insurance reserves
    6,865       11,346  
Debt service and other deposits
    66,225       18,642  
Subtotal
    73,090       29,988  
Total
  $ 183,067     $ 116,711  

As of December 31, 2009 and 2008, ten communities located in Illinois are required to make escrow deposits under the Illinois Life Care Facility Act.  As of December 31, 2009 and 2008, required deposits were $16.5 million and $20.8 million, respectively, all of which were made in the form of letters of credit.


 
Accounts Receivable

Accounts receivable are reported net of an allowance for doubtful accounts, to represent the Company’s estimate of the amount that ultimately will be realized in cash. The allowance for doubtful accounts was $10.6 million and $13.3 million as of December 31, 2009 and 2008, respectively.  The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.

Approximately 83.0% and 86.2% of the Company’s resident and healthcare revenues for the year ended December 31, 2009 and 2008, respectively, were derived from private pay customers and 17.0% and 13.8% of the Company’s resident and healthcare revenues for the year ended December 31, 2009 and 2008, respectively, were derived from services covered by various third-party payor programs, including Medicare and Medicaid.  Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any, under reimbursement programs. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid or withheld).  Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.

Property, Plant and Equipment and Leasehold Intangibles

Property, plant and equipment and leasehold intangibles, which include amounts recorded under capital leases, are recorded at cost.  Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:

Asset Category
Estimated
Useful Life
(in years)
Buildings and improvements
40
Leasehold improvements
1 – 18
Furniture and equipment
3 – 7
Resident lease intangibles
1 – 4
Leasehold operating intangibles
1 – 18

Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements, which improve and/or extend the useful life of the asset, are capitalized and depreciated over their estimated useful life, or if the renovations or improvements are made with respect to communities subject to an operating lease, over the shorter of the estimated useful life of the renovations or improvements, or the term of the operating lease. Facility operating expense excludes depreciation and amortization directly attributable to the operation of the facility.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of long-lived assets held for use are assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset.  If estimated future undiscounted net cash flows are less than the carrying amount of the asset then the fair value of the asset is estimated.  The impairment expense is determined by comparing the estimated fair value of the asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.

Goodwill and Intangible Assets

Goodwill is not amortized but is reviewed for impairment annually or more frequently if indicators arise.  The evaluation is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit’s carrying value.  The fair values used in this evaluation are estimated based upon discounted future cash flow projections for the reporting unit.  These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates and discount rates.  Acquired intangible assets are initially valued at fair market value using generally accepted valuation


 
methods appropriate for the type of intangible asset.  Intangible assets with definite lives are amortized over their estimated useful lives and all intangible assets are reviewed for impairment if indicators of impairment arise.  The evaluation of impairment is based upon a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset.  If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then the fair value of the asset is estimated.  The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.

Amortization of the Company’s definite lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:

Asset Category
Estimated
Useful Life
(in years)
Facility purchase options
40
Management contracts and other
3 – 5

Stock-Based Compensation

The Company adopted the FASB guidance on Accounting for Share-based Payments in connection with initial grants of restricted stock effective August 2005, which were converted into shares of the Company’s restricted stock on September 30, 2005 in connection with the Company’s formation transaction. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. Such cost is recognized as compensation expense ratably over the employee’s requisite service period.  Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred.

Certain of the Company’s employee stock awards vest only upon the achievement of performance targets. ASC 718 - Stock Compensation (“ASC 718”) requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, the Company must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Derivative Financial Instruments

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The change in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive income (loss) depending upon whether it has been designated and qualifies as an accounting hedge.

Prior to October 1, 2006, the Company qualified for hedge accounting on designated swap instruments pursuant to ASC 815 - Derivatives and Hedging (“ASC 815”) with the effective portion of the change in fair value of the derivative recorded in other comprehensive income and the ineffective portion included in the change in fair value of derivatives in the statement of operations.

On October 1, 2006, the Company elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently, the net gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments are being amortized to interest expense over the life of the underlying hedged debt payments. In the future, if the underlying hedged debt is extinguished or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income. Although hedge accounting was discontinued on October 1, 2006, some of the swap instruments remain outstanding and are carried at fair value in the consolidated balance sheet and the change in fair value beginning October 1, 2006 has been included in the statements of operations.



Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors.

Obligation to Provide Future Services

Annually, the Company calculates the present value of the estimated net cost of future services and the use of communities to be provided to current residents of certain of its CCRCs and compares that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the estimated net cost of future services and the use of communities exceeds the non-refundable deferred revenue from entrance fees, a liability is recorded (obligation to provide future services and use of communities) with a corresponding charge to income.

Self-Insurance Liability Accruals

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company’s current policy provides for deductibles for each and every claim ($3.0 million on or prior to December 31, 2008, $250,000 effective January 1, 2009 and $150,000 effective January 1, 2010).  As a result, the Company is, in effect, self-insured for claims that are less than $150,000.  In addition, the Company maintains a self-insured workers compensation program and a self-insured employee medical program for amounts below excess loss coverage amounts, as defined. The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Community Leases

The Company, as lessee, makes a determination with respect to each of the community leases whether each should be accounted for as operating leases or capital leases. The classification criteria is based on estimates regarding the fair value of the leased community, minimum lease payments, effective cost of funds, the economic life of the community and certain other terms in the lease agreements. In a business combination, the Company assumes the lease classification previously determined by the prior lessee absent a modification, as determined by ASC 840 – Leases (“ASC 840”), in the assumed lease agreement. Payments made under operating leases are accounted for in the Company’s statement of operations as lease expense for actual rent paid plus or minus a straight-line adjustment for estimated minimum lease escalators and amortization of deferred gains in situations where sale-leaseback transactions have occurred. For communities under capital lease and lease financing obligation arrangements, a liability is established on the Company’s balance sheet representing the present value of the future minimum lease payments and a corresponding long-term asset is recorded in property, plant and equipment and leasehold intangibles in the consolidated balance sheet. The asset is depreciated over the remaining lease term unless there is a bargain purchase option in which case the asset is depreciated over the useful life. Leasehold improvements purchased during the term of the lease are amortized over the shorter of their economic life or the lease term.

All of the Company’s leases contain fixed or formula based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease. In addition, all rent-free or rent holiday periods are recognized in lease expense on a straight-line basis over the leased term, including the rent holiday period.

Sale-leaseback accounting is applied to transactions in which an owned community is sold and leased back from the buyer. Under sale-leaseback accounting, the Company removes the community and related liabilities from the balance sheet. Gain on the sale is deferred and recognized as a reduction of rent expense for operating leases and a reduction of interest expense for capital leases.


 
For leases in which the Company is involved with the construction of the building, the Company accounts for the lease during the construction period under the provisions of ASC 840.  If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation for the amount of total project costs related to construction in progress.  Once construction is complete, the Company considers the requirements under ASC 840-40 – Leases – Sale-Leaseback Transactions .  If the arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation and depreciate the building over the lease term.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.

Dividends

On December 30, 2008, the Company’s board of directors voted to suspend the Company’s quarterly cash dividend indefinitely.

New Accounting Pronouncements

The Company follows accounting standards set by the FASB.  The FASB sets GAAP that the Company follows to ensure consistent reporting of its financial condition, results of operations and cash flows.  References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.  The FASB finalized the Codification effective for periods ending on or after September 15, 2009.  The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made.  

ASC 805 was effective for business combinations with an acquisition date on or after January 1, 2009 and is to be applied prospectively.  The guidance was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  It establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  For the year ended December 31, 2009 the Company recognized approximately $4.9 million of acquisition-related costs as general and administrative expense in the consolidated statement of operations which would previously have been capitalizable as part of the acquisition purchase price.

The Company adopted ASC 810 – Consolidations (“ASC 810”) relating to the accounting for noncontrolling interests on January 1, 2009.  This guidance amends previous authoritative guidance by requiring companies to report a noncontrolling interest in a subsidiary as equity in its consolidated financial statements.  Disclosure of the amounts of consolidated net income attributable to the parent and the noncontrolling interest are required.  This guidance also clarifies that transactions that result in a change in a parent’s ownership interest in a subsidiary that do not result in deconsolidation will be treated as equity transactions, while a gain or loss will be recognized by the parent when a subsidiary is deconsolidated.   The adoption had an impact on the presentation of prior year consolidated financial statements included herein.

In February 2008, the FASB issued ASC 820 – Fair Value Measurements and Disclosures (“ASC 820”) on Fair Value Measurements for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The guidance partially defers the effective date of the FASB guidance to fiscal years beginning after November 15, 2008 and as a result was effective for the Company beginning January 1, 2009.  Other than the required disclosures, the adoption of the guidance had no impact on the consolidated financial statements.  

The Company adopted the provision of the ASC 815 relating to derivatives and hedging on January 1, 2009.  This guidance requires entities to provide enhanced disclosures about how and why an entity uses derivative


 
instruments, how derivative instruments and related hedge items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.  Other than the required disclosures, the adoption had an immaterial impact on the consolidated financial statements.

The Company adopted the provisions of ASC 250 – Intangibles—Goodwill and Other (“ASC 250”) relating to the Determination of the Useful Life of Intangible Assets on January 1, 2009.  This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and provides for enhanced disclosures regarding intangible assets.  The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.  The disclosure provisions are effective as of the adoption date and the guidance for determining the useful life applies prospectively to all intangible assets acquired after the effective date.  The adoption had an immaterial impact on the consolidated financial statements.

The Company adopted the provisions of ASC 260 – Earnings per Share (“ASC 260”) as they relate to the Emerging Issues Task Force (“EITF”) guidance on Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities on January 1, 2009.  ASC 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share.  The adoption did not have a material impact on the consolidated financial statements.

The Company adopted ASC 825 – Financial Instruments (“ASC 825”) relating to Interim Disclosures about Fair Value of Financial Instruments on June 1, 2009.  This guidance requires disclosures about fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements.  Other than the required disclosures, the adoption had no impact on the consolidated financial statements.
 
The Company adopted the provisions of ASC 805 relating to the Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies effective January 1, 2009.  The guidance amends and clarifies guidance previously issued on Business Combinations and addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  The Company adopted this guidance in the current year and accordingly accounted for the current-year acquisitions under the provisions of the guidance.
 
In June 2009, the FASB issued guidance which amends previously issued guidance on the Consolidation of Variable Interest Entities.  This guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impacts the entity’s economic performance.  The guidance is effective for the Company beginning January 1, 2010.  The Company is currently evaluating the impact its provisions will have on its consolidated financial statements.

In January 2010, the FASB issued Accounting Standard Updated (“ASU”) 2010-6, Improving Disclosures About Fair Value Measurements (“ASU 2010-6”), which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of ASU 2010-6 to have a material impact on its consolidated financial statements.


 
Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s consolidated financial position or results of operations.  Operating results of communities are reflected in the results of the segment in which they are classified as of the end of the period.  Prior period results are recast to conform to the current period-end roll-up of communities by segment.

3.          Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents.  For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding.  Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock.  Potentially dilutive common stock equivalents include unvested restricted stock and restricted stock units.

During fiscal 2009, 2008 and 2007, the Company reported a consolidated net loss.  As a result of the net loss, unvested restricted stock awards and restricted stock units were antidilutive for the year and were not included in the computation of diluted weighted average shares.  The weighted average unrestricted restricted stock grants and restricted stock units excluded from the calculations of diluted net loss per share was 1.3 million, 1.7 million and 1.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

4.          Acquisitions

The Company’s financial results are impacted by the timing, size and number of acquisitions and leases the Company completes in a period. The number of facilities owned or leased by the Company increased by a net 20 communities during the year ended December 31, 2009.  The results of facilities and companies acquired are included in the consolidated financial statements from the effective date of the acquisition.  

2009 Acquisitions

Effective November 18, 2009, the Company acquired 18 senior living communities in an asset acquisition from affiliates of Sunrise Senior Living, Inc. (“Sunrise”).  The aggregate net purchase price for the 18 communities acquired was $190.0 million.  Transaction expenses of approximately $2.4 million were incurred and were recorded as general and administrative expense in the current year.  In connection with the acquisition, the Company assumed approximately $98.8 million of non-recourse mortgage debt which had an acquisition date fair value of approximately $92.0 million, with the balance of the purchase price paid from cash on hand.  The results of operations of the acquired communities are included in the Assisted Living segment.

Effective December 17, 2009, the Company acquired the remaining interest in three retirement center communities that were previously managed by the Company and in which the Company previously had a noncontrolling interest.  The Company’s interest was previously accounted for under the equity method and had a fair value and carrying value of zero prior to the acquisition.  The aggregate purchase price for the communities was $102.0 million.  Transaction expenses of $0.3 million were incurred and were recorded as general and administrative expense in the current year.  The Company financed the transaction by obtaining a $75.4 million non-recourse mortgage loan with the balance of the purchase price paid from cash on hand.  The mortgage debt has a ten year term and bears interest at a fixed rate of 6.09%.  The results of operations of the acquired communities are included in the Retirement Center segment.

During the year ended December 31, 2009, the Company purchased three home health agencies as part of its growth strategy for an aggregate purchase price of approximately $1.5 million.  The entire purchase price of the acquisitions has been ascribed to an indefinite useful life intangible and recorded on the consolidated balance sheet under other intangible assets, net.


 
2008 Acquisitions

During the year ended December 31, 2008, the Company purchased 11 home health agencies as part of its growth strategy for an aggregate purchase price of approximately $6.7 million.  The entire purchase price of the acquisitions has been ascribed to an indefinite useful life intangible and recorded on the consolidated balance sheet under other intangible assets, net.

5.          Investment in Unconsolidated Ventures

The Company had investments in unconsolidated joint ventures of 20% in each of five entities at December 31, 2009.  The Company sold its 10% investment in one joint venture during the first quarter of 2009 for $14.3 million.  During the fourth quarter of 2009 the Company purchased the majority interest of one of its joint ventures from the other partner (Note 4).

At December 31, 2008, the Company had investments in unconsolidated joint ventures ranging from 10% to 25% in seven entities.  The Company sold its 49% investment in one joint venture during the third quarter of 2008 for $4.2 million, the loss on sale of which is reported in other non-operating income in the consolidated statements of operations.

Combined summarized financial information of the unconsolidated joint ventures accounted for using the equity method as of December 31, and for the years then ended are as follows (including the results of acquired joint venture prior to the effective date of the acquisition and divested joint venture through the effective date of the divestiture) (dollars in thousands):

   
2009
   
2008
   
2007
 
Statement of Operations Data
                 
Total revenue
  $ 100,854     $ 113,246     $ 133,103  
Expense
                       
Facility operating expense
    63,068       73,126       88,641  
Depreciation and amortization
    15,726       17,186       21,557  
Interest expense
    19,616       17,975       22,347  
Other expense
    1,684       2,475       2,959  
Total expense
    100,094       110,762       135,504  
Interest income
    3,834       3,932       1,717  
Net income (loss)
  $ 4,594     $ 6,416     $ (684 )


   
2009
   
2008
 
Balance Sheet Data
           
Cash and cash equivalents
  $ 1,912     $ 5,662  
Property, plant and equipment, net
    327,914       492,920  
Other
    120,356       132,261  
Total assets
  $ 450,182     $ 630,843  
Accounts payable and accrued expenses
  $ 47,412     $ 108,441  
Long-term debt
    267,173       335,678  
Members’ equity
    135,597       186,724  
Total liabilities and members’ equity
  $ 450,182     $ 630,843  
Members’ equity consists of:
               
Invested capital
  $ 281,077     $ 288,376  
Cumulative net (loss) income
    (17,288 )     16,572  
Cumulative distributions
    (128,192 )     (118,224 )
Members’ equity
  $ 135,597     $ 186,724  



 
6.          Property, Plant and Equipment and Leasehold Intangibles, Net

As of December 31, 2009 and 2008, net property, plant and equipment and leasehold intangibles, which include assets under capital leases, consisted of the following (dollars in thousands):

   
2009
   
2008
 
Land
  $ 272,737     $ 253,453  
Buildings and improvements
    2,968,659       2,626,079  
Furniture and equipment
    334,553       277,680  
Resident and operating lease intangibles
    599,618       607,256  
Construction in progress
    17,702       98,418  
Assets under capital and financing leases
    606,224       555,872  
      4,799,493       4,418,758  
Accumulated depreciation and amortization
    (941,719 )     (720,924 )
Property, plant and equipment and leasehold intangibles, net
  $ 3,857,774     $ 3,697,834  

Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives and are tested for impairment whenever indicators of impairment arise.

During the years ended December 31, 2009 and 2008, the Company evaluated property, plant and equipment and leasehold intangibles for impairment.  Through December 31, 2009 and 2008, $10.1 million and $5.0 million, respectively, of non-cash charges were recorded in the Company’s operating results and shown within goodwill and asset impairment in the accompanying consolidated statements of operations.  These charges are reflected as a decrease to the gross carrying value of the asset.  The impairment charges are primarily due to lower than expected performance of the underlying business.  Fair value of the assets was determined based upon estimates of future cash flows developed by management using Level 3 inputs or based on an estimated fair value per unit of the underlying communities.

For the years ended December 31, 2009, 2008 and 2007, the Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $233.9 million, $242.8  million and $251.2 million, respectively.

Future amortization expense for resident and operating lease intangibles is estimated to be as follows (dollars in thousands):
 
Year Ending December 31,
 
Future Amortization
 
2010
  $ 50,106  
2011
    42,098  
2012
    41,213  
2013
    39,415  
2014
    35,495  
Thereafter
    126,841  
Total
  $ 335,168  

7.          Goodwill and Other Intangible Assets, Net

The Company adopted ASC 350 - Goodwill and Other Intangible Assets , on October 1, 2002 and tests goodwill for impairment annually or whenever indicators of impairment arise.  During 2009, the Company performed its annual impairment review of goodwill allocated to its operating segments and determined that no impairment charge was necessary.  As a result of the 2008 annual impairment review, the Company recorded a charge of $215.0 million related to goodwill recorded on the CCRC segment which is recorded as a component of operating results and shown within goodwill and asset impairment in the accompanying consolidated statement of operations.  The impairment charge is non-cash in nature.  The Company determined the fair value of the reporting unit based on estimates of future cash flows developed by management.  In determining the amount of goodwill impairment, the Company estimated fair value using estimated cash flows of the underlying businesses


 
to value significant assets of the reporting unit.  The impairment charge was primarily driven by adverse equity market conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and the Company’s stock price at December 31, 2008 compared with the Company’s stock price at September 30, 2008.  During the year ended December 31, 2007 no goodwill impairment was recognized.

Following is a summary of changes in the carrying amount of goodwill for the year ended December 31, 2009 and 2008 presented on an operating segment basis (dollars in thousands):
 
   
December 31, 2009
   
December 31, 2008
 
   
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment and Other Charges
   
Net
   
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment and Other Charges
   
Net
 
Retirement Centers
  $ 7,642     $ —     $ (487 )   $ 7,155     $ 7,642     $ (487 )   $ —     $ 7,155  
Assisted Living
    102,812       (132 )     —       102,680       102,812       —       —       102,812  
CCRCs
    214,999       —       (214,999 )     —       214,999       —       (214,999 )     —  
Total
  $ 325,453     $ (132 )   $ (215,486 )   $ 109,835     $ 325,453     $ (487 )   $ (214,999 )   $ 109,967  

Intangible assets with definite useful lives are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise. The following is a summary of other intangible assets at December 31, 2009 and 2008 (dollars in thousands):

   
December 31, 2009
   
December 31, 2008
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Community purchase options
  $ 147,682     $ (10,169 )   $ 137,513     $ 147,682     $ (6,457 )   $ 141,225  
Management contracts and other
    158,041       (109,323 )     48,718       158,041       (77,807 )     80,234  
Home health licenses
    11,812       —       11,812       10,130       —       10,130  
Total
  $ 317,535     $ (119,492 )   $ 198,043     $ 315,853     $ (84,264 )   $ 231,589  

Amortization expense related to definite-lived intangible assets for the twelve months ended December 31, 2009, 2008 and 2007 was $35.2 million, $35.7 million and $34.5 million, respectively.

Estimated amortization expense related to intangible assets with definite lives at December 31, 2009, for each of the years in the five-year period ending December 31, 2014 and thereafter is as follows (dollars in thousands):

Year Ending December 31,
 
Future Amortization
 
2010
  $ 34,829  
2011
    21,268  
2012
    3,690  
2013
    3,690  
2014
    3,690  
Thereafter
    119,064  
Total
  $ 186,231  



 
8.          Other Assets

Other assets consist of the following components as of December 31, (dollars in thousands):

   
2009
   
2008
 
Notes receivable
  $ 24,418     $ 22,168  
Deferred costs
    21,635       23,729  
Lease security deposits
    17,603       19,561  
Other
    5,612       5,217  
Total
  $ 69,268     $ 70,675  
 
9.          Sale-Leaseback Transaction
 
On March 2, 2009, the Company entered into a sale-leaseback transaction with a third party lessor for the sale and leaseback of one of its skilled nursing facilities.  The Company sold the facility for a total of $10.0 million and immediately leased the facility back.  Under the terms of the lease agreement, the Company will continue to operate the facility until December 31, 2019.  The lease is accounted for as an operating lease.

10.          Debt

Long-term Debt, Capital Leases and Financing Obligations

Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):

   
December 31,
 
   
2009
   
2008
 
Mortgage notes payable due 2010 through 2039; weighted average interest at rates of 4.70% in 2009 (weighted average interest rate 5.33% in 2008)
  $ 1,416,732     $ 1,246,204  
$150,000 Series A notes payable, secured by five facilities, bearing interest at LIBOR plus 0.88% effective August 2006 (3.05% prior to that date), payable in monthly installments of interest only until August 2011 and payable in monthly installments of principal and interest through maturity in August 2013, and secured by a $7.0 million guaranty by BLC and a $3.0 million letter of credit
    150,000       150,000  
Mortgages payable due 2012, weighted average interest rate of 5.64% in 2009 (weighted average interest rate of 5.64% in 2008), payable interest only through July 2010 and payable in monthly installments of principal and interest through maturity in July 2012 secured by the underlying assets of the portfolio
    212,407       212,407  
Discount mortgage note payable due 2013, weighted average interest rate of 2.45%, net of debt discount of $6.8 million
    78,631       —  
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae (weighted average interest rates of 1.84% and 4.40% at December 31, 2009 and 2008, respectively), due 2032 secured by the underlying assets of the portfolio, payable interest only until maturity
    100,841       100,841  
Capital and financing lease obligations payable through 2020; weighted average interest rate of 8.74% in 2009 (weighted average interest rate of 8.84% in 2008)
    351,735       318,440  
Mortgage note, bearing interest at a variable rate of LIBOR plus 0.70%, payable interest only through maturity in August 2012. The note is secured by 15 of the Company’s facilities and a $11.5 million guaranty by the Company
    315,180       315,180  
Construction financing due 2011 through 2023; weighted average interest rate of 5.12% in 2009 (weighted average interest rate of 6.02% in 2008)
      ―         50,404  
Total debt
    2,625,526       2,393,476  
Less current portion
      166,185         158,476  
Total long-term debt
  $   2,459,341     $   2,235,000  



 
The annual aggregate scheduled maturities of long-term debt obligations outstanding as of December 31, 2009 are as follows (dollars in thousands):

Year Ending December 31,
 
Long-term
Debt
   
Capital and Financing Lease
Obligations
   
Total Debt
 
2010
  $ 147,476     $ 51,109     $ 198,585  
2011
    287,027       52,528       339,555  
2012
    884,970       52,888       937,858  
2013
    642,392       50,529       692,921  
2014
    141,820       51,844       193,664  
Thereafter
    176,797       313,527       490,324  
Total obligations
    2,280,482       572,425       2,852,907  
Less amount representing debt discount
    (6,691 )     ―       (6,691 )
Less amount representing interest (8.74%)
    ―       (220,690 )     (220,690 )
Total
  $ 2,273,791     $ 351,735     $ 2,625,526  

In accordance with applicable accounting pronouncements, as of December 31, 2009, the Company’s consolidated financial statements reflect approximately $166.2 million of non-recourse debt obligations due within the next 12 months.

Although certain of the Company’s debt obligations are scheduled to mature on or prior to December 31, 2010, the Company has the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $126.0 million of certain non-recourse mortgages payable included in current maturities of debt until 2011, as the instruments associated with these mortgages payable provide that the Company can extend the respective maturity dates for one 12 month term each from the existing maturity dates.

Credit Facilities

As of December 31, 2008, the Company had an available secured line of credit of $245.0 million (including a $70.0 million letter of credit sublimit), an associated letter of credit facility of up to $80.0 million, and separate letter of credit facilities of up to $42.5 million in the aggregate.  The line of credit bore interest at the base rate plus 3.0% or LIBOR plus 4.0%, at the Company’s election, and was scheduled to mature on May 15, 2009.  The Company was required to pay fees ranging from 2.5% to 4.0% of the amount of any outstanding letters of credit issued under the associated letter of credit facility and is required to pay a fee of 2.5% of the amount of any outstanding letters of credit issued under the separate letter of credit facilities.

As of December 31, 2008, $159.5 million was drawn on the revolving loan facility and $149.7 million of letters of credit had been issued under letter of credit facilities.  Included in the $149.7 million of letters of credit outstanding at December 31, 2008 was $32.2 million of duplicative letters of credit posted with counterparties that were in process of being returned.  As of December 31, 2009, these duplicative letters of credit were returned and are no longer outstanding.

On February 27, 2009, the Company entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, Banc of America Securities LLC, as sole lead arranger and book manager, and the several lenders from time to time parties thereto. The amended credit agreement amended and restated the Company’s $245.0 million secured line of credit and terminated the associated $80.0 million letter of credit facility.

The amended credit agreement initially consisted of a $230.0 million revolving loan facility with a $25.0 million letter of credit sublimit and is scheduled to mature on August 31, 2010.

Pursuant to the terms of the amended credit agreement, certain of the Company’s subsidiaries, as guarantors, will guarantee obligations under the amended credit agreement and the other loan documents.  Further, in connection with the amended credit agreement, (i) the Company and certain guarantors executed and delivered a Pledge Agreement in favor of the administrative agent for the banks and other financial institutions from time to time


 
parties to the amended credit agreement, pursuant to which such guarantors pledged certain assets for the benefit of the secured parties as collateral security for the payment and performance of the Company’s obligations under the amended credit agreement and the other loan documents and (ii) certain guarantors granted mortgages and executed and delivered a Security Agreement, in each case, in favor of the administrative agent for the banks and other financial institutions from time to time parties to the amended credit agreement encumbering certain real and personal property of such guarantors.  The collateral includes, among other things, certain real property and related personal property owned by the guarantors, equity interests in certain of the Company’s subsidiaries, all related books and records and, to the extent not otherwise included, all proceeds and products of any and all of the foregoing.

At the option of the Company, amounts drawn under the revolving loan facility initially bore interest at either (i) LIBOR plus a margin of 7.0% or (ii) the greater of (a) the Bank of America prime rate or (b) the Federal Funds rate plus 0.5%, plus a margin of 7.0%.  For purposes of determining the interest rate, in no event shall the base rate or LIBOR be less than 3.0%.  In connection with the loan commitments, the Company will pay a quarterly commitment fee of 1.0% per annum on the average daily amount of undrawn funds.  The Company was initially required to pay a fee equal to 7.0% of the amount of any issued and outstanding letters of credit; provided, with respect to drawable amounts that have been cash collateralized, the letter of credit fee shall be payable at a rate per annum equal to 2.0%.

The amended credit agreement contains typical representations and covenants for loans of this type, including restrictions on the Company’s ability to pay dividends, make distributions, make acquisitions, incur capital expenditures, incur new liens or repurchase shares of the Company’s common stock. The amended credit agreement also contains financial covenants, including covenants with respect to maximum consolidated adjusted leverage, minimum consolidated fixed charge coverage, minimum tangible net worth, and maximum total capital expenditures.  A violation of any of these covenants (including any failure to remain in compliance with any financial covenants contained therein) could result in a default under the amended credit agreement, which would result in termination of all commitments and loans under the amended credit agreement and all other amounts owing under the amended credit agreement and certain other loan agreements becoming immediately due and payable.

On June 1, 2009, in connection with the equity offering described in Note 17, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement (the “First Amendment”) pursuant to which the maximum revolving loans that can be outstanding at any time under the amended credit agreement was reduced to $75.0 million.  In addition, the interest rate margin on loans, as well as fees on letters of credit, as a result of the maximum amount of the facility having been reduced to $75.0 million, was reduced to 6.0%.

Pursuant to the First Amendment, the Company has been given greater flexibility to make acquisitions by increasing aggregate permitted cash consideration from $10.0 million to $100.0 million, to make capital expenditures up to $30.0 million per quarter and to incur an additional $20.0 million in liens and letters of credit.

On December 7, 2009, the Company entered into an agreement to establish a letter of credit facility for up to $30.0 million.  The facility expires on May 31, 2012.  The Company is required to pay a fee of 0.75% of the amount of any letters of credit issued and is required to cash collateralize any outstanding letters of credit issued under the facility.

As of December 31, 2009, the Company has an available secured line of credit of $75.0 million (including a $25.0 million letter of credit sublimit) and separate secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  As of December 31, 2009, there were no borrowings under the revolving loan facility, $17.3 million of letters of credit had been issued under the amended credit facility, and $48.8 million of letters of credit had been issued under the separate secured and unsecured letter of credit facilities.

In late 2008, the Company began replacing some of its outstanding letters of credit with restricted cash deposits in order to reduce the Company’s letter of credit needs.

Effective February 23, 2010, the Company entered into a new revolving credit facility. The new facility has a commitment of $100.0 million, with an option to increase the commitment to $120.0 million.  Refer to Note 26 for additional disclosure.


 
Financings

On January 30, 2009, the Company amended and restated a $52.6 million first mortgage loan, secured by the underlying properties, which was payable interest only through maturity in March 2009.  Pursuant to the amendment, the maturity date has been extended to March 31, 2011.  The amended and restated loan bears interest at LIBOR plus 4.0% and requires principal amortization.  In connection with the amendment, the Company made a $3.0 million payment to reduce the outstanding principal amount of the loan.

On February 25, 2009, the Company amended a $41.0 million first mortgage loan, secured by the underlying properties, which was payable interest only through maturity in June 2009.  Pursuant to the amendment, the maturity date has been extended to June 2011.  The amended loan is evidenced by two promissory notes, the first of which is in the principal amount of $26.0 million and bears interest at LIBOR plus 3.0%.  The second promissory note is in the amount of $15.0 million and bears interest at LIBOR plus 5.6%.  Both notes require principal amortization.  In connection with the amendment, the Company made a $2.0 million payment to reduce the outstanding principal amount of the $26.0 million loan.

Effective May 11, 2009, the Company exercised its option to extend the maturity date of $131.0 million of mortgage notes from May 11, 2009 to May 11, 2010.  No other terms of the notes were changed in connection with the extension.

On November 17, 2009, the Company entered into a Participation and Servicing Agreement whereby the Company acquired an undivided participation interest of 16.95% in a $29.5 million loan where the Company is the borrower under the loan.  In 2009, the Company paid $3.5 million to obtain its 16.95% interest, representing unpaid principal of $5.0 million, thereby recognizing a gain on extinguishment of debt of $1.5 million.

On November 18, 2009, the Company assumed $98.8 million of debt in connection with the acquisition of 18 senior living communities.  The Company recorded a debt discount of $6.8 million in connection with the acquisition as the debt assumed had a fair value of approximately $92.0 million at the acquisition date.  Approximately $13.4 million of the debt matures in June 2010 and $78.6 million of the debt matures in June 2013.

On December 7, 2009, the Company entered into two Note Modification Agreements which extended the maturity date on the aggregate debt of $47.3 million due on January 25, 2011 to January 25, 2013.

On December 18, 2009, the Company obtained $75.4 million of first mortgage financing on three communities that bears interest at 6.09%.  The debt matures on December 18, 2019 and is secured by the underlying properties.  The net proceeds from the transaction were used to acquire the remaining interest in three retirement center communities that were previously managed by the Company and in which the Company had a noncontrolling interest.

As of December 31, 2009, the Company is in compliance with the financial covenants of its outstanding debt.

Interest Rate Swaps and Caps

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. Interest rate protection and swap agreements were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. Pursuant to the hedge agreements, the Company is required to secure its obligation to the counterparty if the fair value liability exceeds a specified threshold. Cash collateral pledged to the Company’s counterparties was $16.2 million and $13.9 million as of December 31, 2009 and 2008, respectively.

All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value. The change in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive loss depending upon whether it has been designated and qualifies as an accounting hedge.

Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other


 
factors.  Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.

The following table summarizes the Company’s swap instruments at December 31, 2009 (dollars in thousands):

Current notional balance
  $ 351,840  
Highest possible notional
  $ 351,840  
Lowest interest rate
    3.24 %
Highest interest rate
    4.47 %
Average fixed rate
    3.74 %
Earliest maturity date
    2011  
Latest maturity date
    2014  
Weighted average original maturity
 
4.7 years
 
Estimated liability fair value (included in other liabilities at December 31, 2009)
  $ (16,950 )
Estimated liability fair value (included in other liabilities at December 31, 2008)
  $ (20,931 )
Estimated asset fair value (included in other assets at December 31, 2009)
  $ —  
Estimated asset fair value (included in other assets at December 31, 2008)
  $ —  

The following table summarizes the Company’s cap instruments at December 31, 2009 (dollars in thousands):

Current notional balance
  $ 811,365  
Highest possible notional
  $ 811,365  
Lowest interest cap rate
    4.96 %
Highest interest cap rate
    6.50 %
Average fixed cap rate
    5.94 %
Earliest maturity date
    2011  
Latest maturity date
    2012  
Weighted average original maturity
 
3.6 years
 
Estimated liability fair value (included in other liabilities at December 31, 2009)
  $ —  
Estimated liability fair value (included in other liabilities at December 31, 2008)
  $ —  
Estimated asset fair value (included in other assets at December 31, 2009)
  $ 1,221  
Estimated asset fair value (included in other assets at December 31, 2008)
  $ 350  

Prior to October 1, 2006, the Company qualified for hedge accounting on designated swap instruments pursuant to ASC 815, with the effective portion of the change in fair value of the derivative recorded in other comprehensive income and the ineffective portion included in the change in fair value of derivatives in the statement of operations.

On October 1, 2006, the Company elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently, the net gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments are being amortized to interest expense over the life of the underlying hedged debt payments. In the future, if the underlying hedged debt is extinguished or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income. Although hedge accounting was discontinued on October 1, 2006, some of the swap instruments remain outstanding and are carried at fair value in the consolidated balance sheet and the change in fair value beginning October 1, 2006 has been included in the statements of operations.

During the year ended December 31, 2009, the Company purchased and assumed $140.8 million in aggregate notional amount of interest rate caps.  In conjunction with these transactions, $0.1 million was paid to the counterparty.
 


 
11.          Accrued Expenses

Accrued expenses consist of the following components as of December 31, (dollars in thousands):

   
2009
   
2008
 
Salaries and wages
  $ 50,385     $ 43,346  
Insurance reserves
    30,036       27,516  
Real estate taxes
    23,480       30,829  
Vacation
    20,033       18,504  
Lease payable
    8,350       7,952  
Interest
    6,878       7,397  
Income taxes
    1,519       2,005  
Other
    29,363       32,817  
Total
  $ 170,044     $ 170,366  

12.          Facility Operating Leases

The Company has entered into sale leaseback and lease agreements with certain real estate investment trusts (REITs). Under these agreements communities are either sold to the REIT and leased back or a long-term lease agreement is entered into for the communities. The initial lease terms vary from 10 to 20 years and include renewal options ranging from 5 to 30 years.  The Company is responsible for all operating costs, including repairs, property taxes and insurance. The substantial majority of the Company’s lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease.  The Company typically guarantees its performance and the lease payments under the master lease and is subject to net worth, minimum capital expenditure requirements per community per annum and minimum lease coverage ratios.  Failure to comply with these covenants could result in an event of default.  Certain leases contain cure provisions generally requiring the posting of an additional lease security deposit if the required covenant is not met.

As of December 31, 2009 and 2008, the Company operated 359 and 358 communities, respectively, under long-term leases (298 operating leases and 61 capital and financing leases at December 31, 2009).  The remaining base lease terms vary from 4 months to 38 years and generally provide for renewal, extension and purchase options. The Company expects to renew, extend or exercise purchase options in the normal course of business; however, there can be no assurance that these rights will be exercised in the future.

One lease required posting of a lease security deposit in an interest bearing account at closing.  The lease security deposit will be released upon achieving certain lease coverage ratios.  The Company agreed to spend a minimum of $450 per unit per year on capital improvements of which the lessor will reduce the security deposit by the same amount up to $600 per unit, or $2.7 million per year. For the years ended December 31, 2009, 2008 and 2007, a release of $2.2 million, $2.7 million and $2.4 million, respectively, was received from the lease security deposit.

A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows (dollars in thousands):

   
For the Years Ended
December 31,
 
   
2009
   
2008
   
2007
 
Cash basis payment
  $ 260,590     $ 253,226     $ 250,531  
Straight-line expense
    15,851       20,585       25,439  
Amortization of deferred gain
    (4,345 )     (4,342 )     (4,342 )
Facility lease expense
  $ 272,096     $ 269,469     $ 271,628  

13.          Self-Insurance

The Company obtains various insurance coverages from commercial carriers at stated amounts as defined in the applicable policy. Losses related to deductible amounts are accrued based on the Company’s estimate of expected losses plus incurred but not reported claims. As of December 31, 2009 and 2008, the Company accrued $59.2


 
million and $56.7 million for the self-insured portions of programs of which $29.2 million is classified as long-term for both December 31, 2009 and 2008.  During 2007, the Company received a $4.2 million collateral recovery from an insurance carrier relating to an adjustment of an Alterra bankruptcy preconfirmation contingency.

The Company has secured self-insured retention risk under workers’ compensation and general liability and professional liability programs with cash and letters of credit aggregating $13.9 million and $33.7 million, and $10.9 million and $64.3 million as of December 31, 2009 and 2008, respectively.

14.          Retirement Plans

The Company maintains 401(k) Retirement Savings Plans for all employees that meet minimum employment criteria. The plan provides that the participants may defer eligible compensation on a pre-tax basis subject to certain Internal Revenue Code maximum amounts.  For the year ended December 31, 2008, the Company made matching contributions in amounts equal to 50% of the employee’s contribution to the plan, up to a maximum of 4.0% of contributed compensation.  Employees are always 100% vested in their own contributions and vest in the Company’s contributions over five years.  Contributions to these plans were $4.8 million and $3.6 million for the years ended December 31, 2008 and 2007, respectively.  These amounts are included in facility operating expense and general and administrative expense in the accompanying consolidated statements of operations.  In 2009, the Company suspended the matching contribution.  Effective January 1, 2010, the Company began making matching contributions in amounts equal to 12.5% of the employee’s contribution to the plan, up to a maximum of 4.0% of contributed compensation.  An additional matching contribution of 12.5%, subject to the same limit on contributed compensation, may be made at the discretion of the board of directors, based upon the Company’s performance.

15.          Related Party Transactions

Pursuant to the terms of his employment agreement, in October 2000, BLC loaned approximately $2.0 million to Mark J. Schulte, the Company’s former Co-Chief Executive Officer and a current member of the Company’s Board of Directors.  In exchange, BLC received a ten-year, secured, non-recourse promissory note, which note bears interest at a rate of 6.09% per annum, 2.0% of which is payable in cash and the remainder of which accrues and is due at maturity on October 2, 2010. The note is secured by a portion of the Company’s common stock owned by Mr. Schulte. There has been no modification to the terms of the loan since the date of enactment of the Sarbanes-Oxley Act of 2002.

During 2008, the Company learned that certain funds affiliated with Fortress Investment Group LLC became participating lenders under the Company’s previous revolving credit facility.  Immediately prior to the date that the Company entered into an amended and restated credit facility on February 27, 2009, such funds, in the aggregate, were committed for $136.4 million of the $245.0 million line of credit limit.  Based on actual borrowings in effect immediately prior to the date that the Company entered into the 2009 amended and restated credit facility, the Company was indebted to these funds in the aggregate amount of $108.6 million.  These Fortress funds were also participating lenders under the Company’s 2009 amended and restated credit facility.  In the aggregate, as of December 31, 2009, these funds were committed for approximately $32.4 million of the $75.0 million line of credit limit.  As of December 31, 2009, there were no outstanding borrowings under the revolving loan facility and $17.3 million of letters of credit had been issued under the credit facility.

Under the terms of the registration rights provisions of the Company’s Stockholders Agreement, the Company is generally obligated to pay all fees and expenses incurred in connection with certain public offerings by affiliates of Fortress (other than underwriting discounts, commissions and transfer taxes).  In connection with the Company’s obligations thereunder, the Company incurred approximately $0.8 million of expenses in the fourth quarter of 2009 related to a public equity offering by Fortress affiliates.

16.          Stock-Based Compensation

In December 2004, the FASB issued guidance on accounting for share-based payment transactions, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.   This guidance requires measurement of the cost of employee services received in


 
exchange for stock compensation based on the grant-date fair value of the employee stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. The Company adopted this guidance in connection with its initial grants of restricted stock effective August 2005, which were converted into BSL restricted stock on September 30, 2005.

On August 5, 2005, BLC and Alterra adopted employee restricted stock plans to attract, motivate, and retain key employees. The plans provide for the grant of restricted securities to those participants selected by their board of directors. At September 30, 2005 these restricted shares were converted into a total of 2.6 million shares of restricted stock in BSL at a value of $19.00 per share.  Pursuant to the plans, the awards vest through 2010.  As of December 31, 2009, 255,000 shares of unvested restricted stock issued under the plans were outstanding.

On October 14, 2005, the Company adopted a new equity incentive plan for its employees, the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (“Incentive Plan”), which was approved by its stockholders on October 14, 2005. A total of 2,000,000 shares of common stock were initially reserved for issuance under the Incentive Plan; provided, however, that commencing on the first day of the fiscal year beginning in calendar year 2006, the number of shares reserved and available for issuance was increased by an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of common stock on the last day of the immediately preceding fiscal year.  The maximum aggregate number of shares subject to stock options or stock appreciation rights that may be granted to any individual during any fiscal year may not exceed 500,000, and the maximum aggregate number of shares that will be subject to awards of restricted stock, deferred shares, unrestricted shares or other stock-based awards that may be granted to any individual during any fiscal year will be 500,000.

In connection with the ARC Merger, the Company’s board of directors approved an amendment to the Incentive Plan (the “Plan Amendment”) to reserve an additional 2,500,000 shares of common stock for issuance thereunder to satisfy (i) obligations to provide for certain purchases of common stock by ARC officers and employees and (ii) obligations to make corresponding grants of restricted shares of common stock under the Incentive Plan to those ARC officers and employees who purchased such shares of common stock pursuant to employment agreements and optionee agreements entered into in connection with the ARC Merger, and for such other grants that may be made from time to time pursuant to the Incentive Plan. Upon completion of the ARC Merger, the Company issued 475,681 shares of common stock to certain officers of ARC at $38.07 per share for aggregate proceeds of $18.1 million and granted the officers 475,681 shares of restricted stock at $48.00 per share. On May 12, 2006, funds managed by affiliates of Fortress Investment Group, which then held approximately 65% of the Company’s common stock, executed a written consent approving the Plan Amendment effective upon consummation of the ARC Merger. This consent constituted the consent of a majority of the total number of shares of outstanding common stock and was sufficient to approve the Plan Amendment.

On June 15, 2006, the Company registered 2,900,000 shares of common stock (2,500,000 shares of common stock in connection with the ARC Merger and 400,000 shares of common stock resulting from the automatic annual increase for fiscal year 2006), under the Incentive Plan.  On June 26, 2008, the Company registered an additional 800,000 shares under the Incentive Plan (representing the automatic annual increases that occurred on January 1, 2007 and January 1, 2008).  On June 23, 2009, the Company registered an additional 6,400,000 shares under the Incentive Plan (representing a 6,000,000 share increase approved by the Company’s stockholders on June 23, 2009 and the automatic annual increase that occurred on January 1, 2009).

Certain participants received dividends on unvested shares. Where participants did not receive dividends on unvested shares during the vesting period, the grant-date per share fair value was reduced for the present value of the expected dividend stream during the vesting period. The shares are subject to certain transfer restrictions and may be forfeited upon termination of a participant's employment for any reason, absent a change in control of the Company.

On September 15, 2006, the Company entered into Separation and General Release Agreements (“Agreements”) with two officers that accelerated the vesting provision of a portion of their restricted stock grants upon satisfying certain conditions. As a result of the modification, the previous compensation expense related to these grants was reversed and a charge based on the fair value of the stock at the modification date will be recorded over the modified vesting period. The net impact of the adjustment was $4.1 million of additional expense for the year ended December 31, 2007.

On February 7, 2008, the Company entered into a Separation Agreement and General Release with an officer that accelerated the vesting provision of his restricted stock grants as of March 3, 2008 upon satisfying certain


 
conditions.  As a result of the modification, the previous compensation expense related to these grants was reversed and a charge based on the fair value of the stock at the modification date was recorded over the modified vesting period.  The net impact of the adjustment was $2.7 million of additional expense for the year ended December 31, 2008.

For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period.  For graded-vesting awards with performance-based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of achievement.  Performance goals are evaluated quarterly.  If such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed. During the current year the Company reversed approximately $0.1 million of previously recognized compensation expense related to performance-based awards granted in 2007.

During the current year, the Company issued restricted stock units to its Chief Executive Officer.  Under the terms of the award agreement, upon vesting, each restricted stock unit represents the right to receive one share of the Company’s common stock.

The following table sets forth information about the Company’s restricted stock awards (excludes restricted stock units) (amounts in thousands):

   
Number of Shares
 
   
2009
   
2008
   
2007
 
Outstanding on January 1,
    3,543       3,020       3,282  
Granted
    2,326       1,975       662  
Vested
    (1,321 )     (944 )     (680 )
Cancelled/forfeited
    (633 )     (508 )     (244 )
Outstanding on December 31,
    3,915       3,543       3,020  

The weighted-average grant-date fair value of restricted shares and restricted stock units granted during the years 2009, 2008, and 2007 was $9.55, $16.10, and $35.92, respectively.  As of December 31, 2009, there was $39.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted.  That cost is expected to be recognized over a period of 2.6 years.

Current year grants of restricted shares and restricted stock units under the Company’s Omnibus Stock Incentive Plan were as follows (amounts in thousands except for value per share):

   
Shares/Restricted
Stock Units
Granted
   
Value Per Share
   
Total Value
 
Three months ended March 31, 2009
    84     $ 3.48 – 6.15     $ 301  
Three months ended June 30, 2009
    2,562     $ 5.14 – 9.39     $ 24,030  
Three months ended September 30, 2009
    65     $ 9.83 – 10.71     $ 694  
Three months ended December 31, 2009
    115     $ 16.84 – 18.46     $ 1,988  

Compensation expense of $26.9 million, $28.9 million and $20.1 million in connection with the grants of restricted stock and restricted stock units was recorded for the years ended December 31, 2009, 2008 and 2007, respectively.  For the years ended December 31, 2009, 2008 and 2007 compensation expense was calculated net of forfeitures estimated from 0% - 5%, 0% - 6% and 5%, respectively, of the shares granted.

The Company has an employee stock purchase plan for all eligible employees.  The plan became effective on October 1, 2008.  Under the plan, eligible employees of the Company can purchase shares of the Company’s common stock on a quarterly basis at a discounted price through accumulated payroll deductions.  Each eligible employee may elect to deduct up to 15% of his or her base pay each quarter.  Subject to certain limitations specified in the plan, on the last trading date of each calendar quarter, the amount deducted from each participant’s pay over the course of the quarter will be used to purchase whole shares of the Company’s common


 
stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that date.  Initially, the Company has reserved 1,000,000 shares of common stock for issuance under the plan.  The employee stock purchase plan also contains an “evergreen” provision that automatically increases the number of shares reserved for issuance under the plan by 200,000 shares on the first day of each calendar year beginning January 1, 2010.  The impact on the Company’s current year consolidated financial statements is de minimis.

17.          Stockholders’ Equity

On June 8, 2009, the Company completed a public equity offering of 16,046,512 shares of common stock.  The offering yielded net proceeds of approximately $163.8 million which was used primarily to repay the $125.0 million of indebtedness which was outstanding under the Company’s amended credit facility.

18.          Fair Value Measurements

The following table provides the Company’s derivative assets and liabilities carried at fair value as measured on a recurring basis as of December 31, 2009 (dollars in thousands):

   
Total Carrying
Value at
December 31,
2009
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
 
Derivative assets
  $ 1,221     $ —     $ 1,221     $ —  
Derivative liabilities
    (16,950 )     —       (16,950 )     —  
    $ (15,729 )   $ —     $ (15,729 )   $ —  

The Company’s derivative assets and liabilities include interest rate caps and interest rate swaps that effectively convert a portion of the Company’s variable rate debt to fixed rate debt.   The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations.

19.          Share Repurchase Program

On March 19, 2008, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $150.0 million in the aggregate of the Company’s common stock.  Purchases could be made from time to time using a variety of methods, which could include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations.  The size, scope and timing of any purchases was to be based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability.  The repurchase program did not obligate the Company to acquire any particular amount of common stock and the program could be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. Shares of stock repurchased under the program were to be held as treasury shares.

On February 25, 2009, the Company’s board of directors terminated this share repurchase authorization. 


 
20.          Income Taxes

The benefit for income taxes is comprised of the following (dollars in thousands):

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Federal
                 
Current
  $ 2,795     $ (77 )   $ (339 )
Deferred
    31,684       89,498       103,180  
      34,479       89,421       102,841  
State:
                       
Current
  $ (1,553 )   $ (2,690 )   $ (1,581 )
Deferred (included in Federal above)
    ―       —       —  
      (1,553 )     (2,690 )     (1,581 )
Total
  $ 32,926     $ 86,731     $ 101,260  

A reconciliation of the benefit for income taxes to the amount computed at the U.S. Federal statutory rate of 35% is as follows (dollars in thousands):
 
   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Tax benefit at U.S. statutory rate
  $ 34,713     $ 160,990     $ 92,271  
State taxes, net of federal income tax
    3,002       16,449       9,521  
Credits
    2,088       —       —  
FIN 48
    1,892       —       —  
Goodwill impairment
    ―       (83,850 )     —  
Stock compensation
    (5,550 )     (3,682 )     —  
Officer’s compensation
    (2,147 )     —       —  
Valuation allowance
    (973 )     (3,328 )     —  
Other, net
    (99 )     152       (532 )
Total
  $ 32,926     $ 86,731     $ 101,260  

The Company adopted ASC 810 as of December 31, 2003 and consolidated the VIEs for financial reporting purposes. For federal and state income tax purposes, the Company is not the legal owner of the entities and is not entitled to receive tax benefits generated from the losses associated with these VIEs.  By December 31, 2007, all of these entities had been acquired by the Company.



Significant components of the Company’s deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):

   
2009
   
2008
 
Deferred income tax assets:
           
Operating loss carryforwards
  $ 197,520     $ 183,331  
Capital lease obligations
    100,551       106,872  
Prepaid revenue
    42,604       43,693  
Deferred lease liability
    42,048       35,988  
Accrued expenses
    40,788       49,816  
Deferred gain on sale leaseback
    14,312       15,755  
Tax credits
    8,048       5,239  
Fair value of interest rate swaps
    5,884       8,339  
Other
    ―       2,407  
Total gross deferred income tax asset
    451,755       451,440  
Valuation allowance
    (10,708 )     (9,735 )
Net deferred income tax assets
    441,047       441,705  
Deferred income tax liabilities:
               
Property, plant and equipment
    (564,868 )     (602,913 )
Other
    (8,804 )     (2,762 )
Total gross deferred income tax liability
    (573,672 )     (605,675 )
Net deferred tax liability
  $ (132,625 )   $ (163,970 )

A reconciliation of the net deferred tax liability to the consolidated balance sheets at December 31 is as follows (dollars in thousands):

   
2009
   
2008
 
Deferred tax asset – current
  $ 7,688     $ 14,677  
Deferred tax liability – noncurrent
    (140,313 )     (178,647 )
Net deferred tax liability
  $ (132,625 )   $ (163,970 )

In connection with Alterra’s emergence from bankruptcy in December 2003, its assets and liabilities were recorded at their respective fair market values. Deferred tax assets and liabilities were recognized for the tax effect of the difference between the fair values and the tax bases of Alterra’s assets and liabilities. In addition, deferred tax assets were recognized for the future use of net operating losses. The valuation allowance established to reduce deferred tax assets as of December 31, 2004 was $28.4 million. The reduction in this valuation allowance relating to net deferred tax items existing at the Effective Date will increase additional paid in capital.

At December 31, 2004, Alterra increased additional paid-in capital by $4.8 million as a result of a reduction in valuation allowance related to net deferred tax assets not benefited under fresh-start accounting, but realized in the year ended December 31, 2004. During 2005, Alterra reduced additional paid-in capital by $0.9 million due to a reversal of the valuation allowance, related to net deferred tax asset.

As of December 31, 2009 and 2008, the Company had net operating loss carryforwards of approximately $504.9 million and $468.6 million, respectively, which are available to offset future taxable income through 2029.  The Company believes it is more likely than not that it will utilize all of its federal losses prior to expiration.  The Company has recorded valuation allowances of $8.5 million and $8.2 million at December 31, 2009 and 2008, respectively against its state net operating losses, as the Company anticipates these losses will not be utilized prior to expiration.  The carryforward period for some states is considerably shorter than the period which is allowed for Federal purposes.  The Company also recorded valuation allowances of $2.2 million and $1.5 million at December 31, 2009 and 2008, respectively, against 2008 state credits.  Included in the Company’s net operating loss carryforward is $10.8 million of losses relating to restricted stock grants. Under ASC 718-10, this


 
loss will be recorded in additional paid-in capital in the period in which the loss is effectively used to reduce taxes payable.  The impact to the income tax expense relating to the dividends on the unvested shares for the period ended December 31, 2008 is now included in the stock based compensation computation under ASC 718-10.   No dividends were paid in 2009.

The formation of BSL, reorganization of Alterra, and the acquisitions of ARC and SALI constitute ownership changes under Section 382 of the Internal Revenue Code, as amended. As a result, BSL’s ability to utilize the net operating loss carryforward to offset future taxable income is subject to certain limitations and restrictions.

The Company adopted ASC 740 - Income Taxes (“ASC 740”) as of January 1, 2007.  At December 31, 2009, the Company had gross tax affected unrecognized tax benefits of $2.4 million, which, if recognized, would result in an income tax benefit in accordance with ASC 805.  Interest and penalties related to these tax positions are classified as tax expense in the Company’s financial statements.  Total interest and penalties reserved is $1.6 million at December 31, 2009.   Tax returns for years 2007 through 2008 are subject to future examination by tax authorities.  In addition, tax returns are open from 1999 through 2006 to the extent of the net operating losses generated during those periods.  The Company does not expect that unrecognized tax benefits for tax positions taken with respect to 2009 and prior years will significantly change in 2010.

A reconciliation of the unrecognized tax benefits for the year 2009 is as follows (dollars in thousands):

Balance at January 1, 2009
  $ 4,424  
Additions for tax positions related to the current year
    —  
Additions for tax positions related to prior years
    464  
Reductions for tax positions related to prior years
    (2,351 )
Settlements
    (139 )
Balance at December 31, 2009
  $ 2,398  

21.          Supplemental Disclosure of Cash Flow Information

(dollars in thousands)
 
For the Years Ended
December 31,
 
   
2009
   
2008
   
2007
 
Supplemental Disclosure of Cash Flow Information:
                 
Interest paid
  $ 131,347     $ 148,377     $ 143,930  
Income taxes paid
  $ 1,682     $ 1,591     $ 1,415  

Supplemental Schedule of Noncash Operating, Investing and Financing Activities:
                 
De-consolidation of leased development property:
                 
Property, plant and equipment and leasehold intangibles, net
  $ (3,887 )   $ (6,387 )   $ (2,978 )
Long-term debt
    3,887       6,387       2,978  
Net
  $ ―     $ —     $ —  
Capital leases:
                       
Property, plant and equipment and leasehold intangibles, net
  $ 18,236     $ 35,942     $ —  
Long-term debt
    (18,236 )     (35,942 )     —  
Net
  $ —     $ —     $ —  
Lease Incentive:
                       
Property, plant and equipment and leasehold intangibles, net
  $ 1,237     $ ―     $ —  
Deferred liabilities
    (1,237 )     ―       —  
Net
  $ —     $ —     $ —  
Acquisitions of assets, net of related payables and cash received, net:
                       
Cash and escrow deposits-restricted
  $ 1,404     $ —     $ 387  
 
 
 
Account receivable, net
    —       —       64  
Prepaid expenses and other current assets
    10,573       —       —  
Property, plant and equipment and leasehold intangibles
    285,488       —       172,074  
Investment in unconsolidated ventures
    ―       —       (1,342 )
Goodwill
    ―       —       3,395  
Other intangible assets, net
    1,543       6,731       (668 )
Other assets, net
    40       —       (173 )
Other liabilities
    (2,900 )     —       (3,201 )
Long-term debt and capital and financing lease obligations
    (92,011 )     —       (2,786 )
Noncontrolling interest
    ―       —       4,351  
Net
  $ 204,137     $ 6,731     $ 172,101  
De-consolidation of an entity pursuant to FIN 46(R):
                       
Accounts receivable
  $ —     $ 92     $ —  
Prepaid expenses and other current assets
    —       1,870       —  
Property, plant and equipment and leasehold intangibles, net
    —       36,613       —  
Other assets, net
    —       7       —  
Investment in unconsolidated ventures
    —       186       —  
Long-term debt
    —       (29,159 )     —  
Accrued expenses
    —       (1,252 )     —  
Trade accounts payable
    —       (20 )     —  
Tenant security deposits
    —       (173 )     —  
Refundable entrance fees and deferred revenue
    —       (89 )     —  
Additional paid-in-capital
    —       (13,287 )     —  
Accumulated deficit
    —       5,212       —  
Net
  $ —     $ —     $ —  
Reclassification of other intangibles, net
  $ 141     $ —     $ —  

22.          Commitments and Contingencies

The Company has three operating lease agreements for 30,314, 55,296 and 99,374 square feet (unaudited) of corporate office space that extend through 2012, 2019 and 2014, respectively. The leases require the payment of base rent which escalates annually, plus operating expenses (as defined).  The Company incurred rent expense of $3.9 million, $4.0 million and $4.5 million for the years ended December 31, 2009, 2008 and 2007, respectively, under the corporate office leases.

The aggregate amounts of all future minimum operating lease payments, including community and office leases, as of December 31, 2009, are as follows (dollars in thousands):

Year Ending December 31,
 
Operating
Leases
 
2010
  $ 265,471  
2011
    266,679  
2012
    263,842  
2013
    253,526  
2014
    227,845  
Thereafter
    995,089  
Total
  $ 2,272,452  

The Company has employment agreements with certain officers of the Company that grant these employees the right to receive their base salary and continuation of certain benefits, for a defined period of time, in the event of certain terminations of the officers’ employment, as described in those agreements.

23.          Litigation

The Company has settled the litigation specifically described below.


 
In connection with the sale of certain communities to Ventas Realty Limited Partnership in 2004, two legal actions were filed against the Company, certain of its subsidiaries and affiliates and the Company’s former Chief Financial Officer.  During the year ended December 31, 2008, the Company recorded an $8.0 million reserve related to the foregoing matters.  The first action, captioned David T. Atkins et al. v. Apollo Real Estate Advisors, L.P., et al. , was settled by the parties and formally dismissed in 2008.  The second action, captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. , was settled by the parties and formally dismissed in 2009.

In addition, the Company has been and is currently involved in other litigation and claims incidental to the conduct of its business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, the Company maintains insurance policies in amounts and with coverage and deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards.  Effective January 1, 2010, the Company’s current policies provide for deductibles of $150,000 for each claim.  Accordingly, the Company is, in effect, self-insured for claims that are less than $150,000.

24.          Segment Information

The Company has four reportable segments: retirement centers; assisted living; CCRCs; and management services. These segments were determined based on the way that the chief operating decision makers organize the Company’s business activities for making operating decisions and assessing performance.

During the year ended December 31, 2009, eight communities moved between segments to more accurately reflect the underlying product offering of each segment.  The movement did not change the Company’s reportable segments, but it did impact the revenues and cost reported within each segment.

Retirement Centers.     Retirement center communities are primarily designed for middle to upper income senior citizens age 70 and older who desire an upscale residential environment providing the highest quality of service. The majority of the Company’s retirement center communities consist of both independent living and assisted living units in a single community, which allows residents to “age-in-place” by providing them with a continuum of senior independent and assisted living services.

Assisted Living.     Assisted living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents.  Assisted living communities include both freestanding, multi-story communities and freestanding single story communities. The Company also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer’s disease and other dementias.

CCRCs.    CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of the Company’s CCRCs have retirement centers, assisted living and skilled nursing available on one campus, and some also include memory care and Alzheimer’s units.

Management Services.     The Company’s management services segment includes communities owned by others and operated by the Company pursuant to management agreements. Under management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of certain expenses it incurs on behalf of the owners.

The accounting policies of the Company’s reporting segments are the same as those described in the summary of significant accounting policies. The following table sets forth certain segment financial and operating data (dollars in thousands):
 
 
 
   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Revenue (1) :
                 
Retirement Centers
  $ 496,744     $ 497,453     $ 489,931  
Assisted Living
    925,917       890,075       841,819  
CCRCs
    593,688       533,532       500,757  
Management Services
    6,719       6,994       6,789  
    $ 2,023,068     $ 1,928,054     $ 1,839,296  
Segment Operating Income (2) :
                       
Retirement Centers
  $ 213,608     $ 211,418     $ 216,581  
Assisted Living
    324,969       299,431       301,953  
CCRCs
    175,495       148,630       143,036  
Management Services
    4,703       4,896       4,752  
      718,775       664,375       666,322  

General and administrative (including non-cash stock compensation expense) (3)
    132,848       138,821       135,976  
Facility lease expense
    272,096       269,469       271,628  
Depreciation and amortization
    271,935       276,202       299,925  
Loss on sale of communities, net
    2,043       ―       ―  
Goodwill and asset impairment
    10,073       220,026       —  
Income (loss) from operations
  $ 29,780     $ (240,143 )   $ (41,207 )
                         
                         
   
As of December 31,
 
      2009       2008       2007  
Total assets:
                       
Retirement Centers
  $ 1,109,794     $ 1,094,180     $ 1,226,802  
Assisted Living
    1,519,693       1,532,311       1,547,902  
CCRCs
    1,685,832       1,476,206       1,651,467  
Corporate and Management Services
    330,624       346,561       385,451  
    $ 4,645,943     $ 4,449,258     $ 4,811,622  

__________
 
(1)
All revenue is earned from external third parties in the United States.

(2)
Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).

(3)
Net of general and administrative costs allocated to management services reporting segment.

25.          Quarterly Results of Operations (Unaudited)

The following is a summary of quarterly results of operations for each of the fiscal quarters in 2009 and 2008 (dollars in thousands, except per share amounts):
 
 
 
   
For the Quarters Ended
 
   
March 31,
2009
   
June 30,
2009
   
September 30,
2009
   
December 31,
2009
 
Revenues
  $ 497,946     $ 500,757     $ 505,843     $ 518,522  
Income (loss) from operations (1)
    10,253       16,754       7,165       (4,392 )
Loss before income taxes
    (22,748 )     (13,025 )     (28,619 )     (34,789 )
Net loss
    (13,636 )     (10,530 )     (21,290 )     (20,799 )
Weighted average basic and diluted loss per share
  $ (0.13 )   $ (0.10 )   $ (0.18 )   $ (0.18 )
Weighted average shares used in computing basic and diluted loss per share
    101,738       106,042       118,455       118,653  
Cash dividends declared per share
  $ ―     $ ―     $ ―     $ ―  

   
For the Quarters Ended
 
   
March 31,
2008
   
June 30,
2008
   
September 30,
2008
   
December 31,
2008
 
Revenues
  $ 480,648     $ 478,201     $ 482,277     $ 486,928  
Loss from operations (1)
    (551 )     (4,697 )     (10,968 )     (223,927 )
Loss before income taxes
    (84,980 )     (6,256 )     (58,215 )     (310,521 )
Net loss
    (55,093 )     (3,485 )     (35,877 )     (278,786 )
Weighted average basic and diluted loss per share
  $ (0.54 )   $ (0.03 )   $ (0.36 )   $ (2.75 )
Weighted average shares used in computing basic and diluted loss per share
    101,995       101,856       101,398       101,424  
Cash dividends declared per share
  $ 0.25     $ 0.25     $ 0.25     $ —  

__________
 
(1)
Fourth quarter 2009 and 2008 results include non-cash impairment charges of $10.1 million and $220.0 million, respectively.

26.          Subsequent Events

On February 22, 2010, the Company entered into an agreement to acquire four independent living communities that the Company currently leases for an aggregate purchase price of $22.5 million.  In connection therewith, the remaining leases between the Company and the seller/lessor were amended to modify and clarify certain of the terms thereof, including various financial and non-financial covenants.  The Company anticipates that the purchase of the four communities will close in April 2010.

Effective February 23, 2010, the Company terminated the $75.0 million revolving credit facility with Bank of America, N.A. and entered into a credit agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The new facility has a commitment of $100.0 million, with an option to increase the commitment to $120.0 million, and is scheduled to mature on June 30, 2013.

The revolving line of credit may be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.

The new facility is secured by a first priority lien on certain of the Company’s communities.  The availability under the line may vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility will bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event shall LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower


 
utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  The Company is also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

Effective February 25, 2010, the Company obtained a $44.6 million first mortgage loan, secured by five communities that the Company acquired in November 2009.  The loan bears interest at a fixed rate of 6.33% and matures in March 2020.  In connection with the transaction, the Company repaid $13.4 million of debt that had been assumed at the time of closing of the acquisition. 
 

 

 
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2009
(In thousands)

         
Additions
                   
Description
 
Balance at
 Beginning of
 Period
   
Charged to
 costs and
 expenses
   
Charged
To other
Accounts
   
Acquisitions
   
Deductions
   
Balance
at
 End of
 Period
 
Deferred Tax Valuation Account:
                                   
Year ended December 31, 2007
  $ 6,000     $ —     $ 407 (1)   $ —     $ —     $ 6,407  
Year ended December 31, 2008
  $ 6,407     $ —     $ 3,328 (2)   $ —     $ —     $ 9,735  
Year ended December 31, 2009
  $ 9,735     $ ―     $ 973 (3)   $ —     $ —     $ 10,708  

__________
 
(1)
Adjustment to valuation allowance based on final returns.
(2)
Adjustment to valuation allowance for state net operating losses of $1,800.  Establishment of valuation allowance against federal tax credits of $1,528.
(3)
Adjustment to valuation allowance for state net operating losses of $264.  Establishment of valuation allowance against state tax credit of $709.

     See accompanying report of independent registered public accounting firm.


109

 
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.

It em 9A.          Controls and Procedures.

Management’s Assessment of Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).  Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009.  Management reviewed the results of their assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has 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 report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of December 31, 2009, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

There has not been any change 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 fiscal quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Ite m 9B.          Other Information.

The disclosure regarding the termination of our $75.0 million revolving credit facility with Bank of America, N.A. and our new $100.0 million revolving credit facility contained under “Credit Facilities – 2010 Credit Facility” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.  The summary contained therein of certain provisions of the new credit agreement with General Electric Capital Corporation does not purport to be complete and is qualified in its entirety by reference to the full text of the credit agreement filed as Exhibit 10.29 hereto, which is incorporated herein by reference.

PA RT III

It em 10.          Directors, Executive Officers and Corporate Governance.

The information required by this item is incorporated by reference from the discussions under the headings “Proposal Number One - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders. Pursuant to General Instruction G(3), certain information concerning our executive officers is contained in the discussion entitled “Executive Officers of the Registrant” under Item 4 of Part I of this report.

We have adopted a Code of Business Conduct and Ethics that applies to all employees, directors and officers, including our principal executive officer, our principal financial officer, our principal accounting officer or controller, or persons performing similar functions, as well as a Code of Ethics for Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Co-Presidents, Chief Financial Officer, Executive Vice Presidents of Finance and Controller, both of which are available on our website at


 
www.brookdaleliving.com. Any amendment to, or waiver from, a provision of such codes of ethics granted to a principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions, will be posted on our website.

Ite m 11.          Executive Compensation.

The information required by this item is incorporated by reference from the discussions under the headings “Compensation of Directors” and “Compensation of Executive Officers” in our Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
Ite m 12.          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Security Ownership of Certain Beneficial Owners and Management” in our Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.

The following table provides certain information as of December 31, 2009 with respect to our equity compensation plans (after giving effect to shares issued and/or vesting on such date):

Equity Compensation Plan Information

Plan category
 
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a) (1)
   
Weighted-average
exercise price of
outstanding
options, warrants
and, rights
(b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c) (2)
 
Equity compensation plans approved by security holders (3)
    —       —       6,626,312  
Equity compensation plans not approved by security holders (4)
    —       —       95,189  
Total
    —       —       6,721,501  
 
(1)
In addition to options, warrants, and rights, our Omnibus Stock Incentive Plan allows awards to be made in the form of shares of restricted stock, restricted stock units or other forms of equity-based compensation. As of December 31, 2009, 3,660,112 shares of unvested restricted stock and 400,000 restricted stock units issued under our Omnibus Stock Incentive Plan were outstanding. In addition, as of such date, 255,218 shares of unvested restricted stock issued under the plans of our predecessor entities were outstanding. Such shares and restricted stock units are not reflected in the table above.

(2)
The number of shares remaining available for future issuance under equity compensation plans approved by security holders consists of 5,775,375 shares remaining available for future issuance under our Omnibus Stock Incentive Plan and 850,937 shares remaining available for future issuance under our Associate Stock Purchase Plan.

(3)
Under the terms of our Omnibus Stock Incentive Plan, the number of shares reserved and available for issuance will increase annually each January 1 by an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of our common stock on the last day of the immediately preceding fiscal year.  Under the terms of our Associate Stock Purchase Plan, the number of shares reserved and available for issuance will automatically increase by 200,000 shares on the first day of each calendar year beginning January 1, 2010.

(4)
Represents shares remaining available for future issuance under our Director Stock Purchase Plan.  Under the existing compensation program for the members of our Board of Directors, each non-affiliated director

 

 
has the opportunity to elect to receive either immediately vested shares or restricted stock units in lieu of up to 50% of his or her quarterly cash compensation.  Any immediately vested shares that are elected to be received will be issued pursuant to the Director Stock Purchase Plan.  Under the director compensation program, all cash amounts are payable quarterly in arrears, with payments to be made on April 1, July 1, October 1 and January 1.  Any immediately vested shares that a director elects to receive under the Director Stock Purchase Plan will be issued at the same time that cash payments are made.  The number of shares to be issued will be based on the closing price of our common stock on the date of issuance (i.e., April 1, July 1, October 1 and January 1), or if such date is not a trading date, on the previous trading day’s closing price.  Fractional amounts will be paid in cash.  The Board of Directors initially reserved 100,000 shares of our common stock for issuance under the Director Stock Purchase Plan.
 
Ite m 13.          Certain Relationships and Related Transactions, and Director Independence.
 
The information required by this item is incorporated by reference from the discussions under the headings “Certain Relationships and Related Transactions” and “Director Independence” in our Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
Ite m 14.          Principal Accounting Fees and Services.
 
The information required by this item is incorporated by reference from the discussion under the heading “Proposal Number Two – Ratification of Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm” in our Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.

PAR T IV
 
It em 15.          Exhibits and Financial Statement Schedules.
 
The following documents are filed as part of this report:
 
 
1)
Our Audited Consolidated Financial Statements
 
 
Balance Sheets as of December 31, 2009 and 2008
 
 
Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
 
 
Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
 
 
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
 
 
Notes to Consolidated Financial Statements
 
 
Schedule II – Valuation and Qualifying Accounts
 
 
2)
Exhibits – See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.
 


 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
BROOKDALE SENIOR LIVING INC.
     
 
By:
/s/ W.E. Sheriff
 
 
Name:
W.E. Sheriff
 
 
Title:
Chief Executive Officer
 
 
Date:
February 26, 2010
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
Date
 
         
/s/ Wesley R. Edens
 
Chairman of the Board
February 26, 2010
 
Wesley R. Edens
       
         
/s/ W.E. Sheriff
 
Chief Executive Officer and Director
February 26, 2010
 
W.E. Sheriff
       
         
/s/ Mark W. Ohlendorf
 
Co-President and Chief Financial Officer
February 26, 2010
 
Mark W. Ohlendorf
 
    (Principal Financial and Accounting Officer)
   
         
/s/ Frank M. Bumstead
 
Director
February 26, 2010
 
Frank M. Bumstead
       
         
/s/ Jackie M. Clegg
 
Director
February 26, 2010
 
Jackie M. Clegg
       
         
/s/ Tobia Ippolito
 
Director
February 26, 2010
 
Tobia Ippolito
       
         
/s/ Jeffrey R. Leeds
 
Director
February 26, 2010
 
Jeffrey R. Leeds
       
         
/s/ Mark J. Schulte
 
Director
February 26, 2010
 
Mark J. Schulte
       
         
/s/ James R. Seward
 
Director
February 26, 2010
 
James R. Seward
       
         
/s/ Samuel Waxman
 
Director
February 26, 2010
 
Samuel Waxman
       


 
EXHIBIT INDEX
 
Exhibit No.
Description
3.1
Amended and Restated Certificate of Incorporation of the Company.
3.2
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 19, 2010).
4.1
Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-127372) filed on November 7, 2005).
4.2
Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed on March 31, 2006).
4.3
Amendment No. 1 to Stockholders Agreement, dated as of July 25, 2006, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT Holdings LLC (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2006).
4.4
Amendment Number Two to Stockholders Agreement, dated as of November 4, 2009 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed on November 4, 2009).
10.1
Employment Agreement dated September 8, 2005, by and between Brookdale Senior Living Inc., Alterra Healthcare Corporation and Mark W. Ohlendorf (incorporated by reference to Exhibit 10.70 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.2
Employment Agreement dated August 9, 2005, by and between Brookdale Senior Living Inc., Brookdale Living Communities, Inc. and John P. Rijos (incorporated by reference to Exhibit 10.71 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.3
Employment Agreement dated September 8, 2005, by and between Brookdale Senior Living Inc., a Delaware corporation, Alterra Healthcare Corporation and Kristin A. Ferge (incorporated by reference to Exhibit 10.73 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.4
Brookdale Living Communities, Inc. Employee Restricted Stock Plan (incorporated by reference to Exhibit 10.75 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.5
Award Agreement dated August 9, 2005, by and between Brookdale Living Communities, Inc. and John P. Rijos (incorporated by reference to Exhibit 10.77 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.6
FEBC-ALT Investors LLC Employee Restricted Securities Plan (incorporated by reference to Exhibit 10.80 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.7
Award Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and Mark W. Ohlendorf (incorporated by reference to Exhibit 10.81 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.8
Award Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and Kristin A. Ferge (incorporated by reference to Exhibit 10.82 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
10.9
Exchange and Stockholder Agreement, dated September 30, 2005, by and among Brookdale Senior Living Inc., Fortress Brookdale Acquisition LLC and Mark J. Schulte (incorporated by reference to Exhibit 10.86 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-127372) filed on October 11, 2005).*
 
 
 
10.10
Consent to Change of Control and Third Amendment to Master Lease, dated April 1, 2006, by and between Health Care Property Investors, Inc., Texas HCP Holding, L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland Real Estate Holdings, LLC, ARC Sun City Center Real Estate Holdings, LLC, and ARC LaBarc Real Estate Holdings, LLC, on the one hand, and Fort Austin Limited Partnership, ARC Santa Catalina, Inc., ARC Richmond Place, Inc., Freedom Village of Holland, Michigan, Freedom Village of Sun City Center, Ltd., LaBarc, L.P. and Park Place Investments, LLC, on the other hand, and ARCPI Holdings, Inc. and American Retirement Corporation (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2006).
10.11
Second Amended and Restated Master Lease Agreement, dated as of April 7, 2006, among Health Care REIT, Inc., HCRI North Carolina Properties III, Limited Partnership, HCRI Tennessee Properties, Inc., HCRI Indiana Properties, LLC, HCRI Wisconsin Properties, LLC, and HCRI Texas Properties, Ltd., and Alterra Healthcare Corporation (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 (No. 333-135030) filed on June 14, 2006).
10.12
Form of Employment Agreement for Gregory B. Richard, George T. Hicks, Bryan D. Richardson and H. Todd Kaestner (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 12, 2006).*
10.13
Separation Agreement and General Release, dated September 15, 2006, between Brookdale Senior Living Inc. and R. Stanley Young (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 18, 2006).*
10.14
Separation Agreement and General Release dated September 15, 2006 between Brookdale Senior Living Inc. and Deborah C. Paskin (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 18, 2006).*
10.15
Employment Agreement, dated September 25, 2006, by and between Brookdale Senior Living Inc. and T. Andrew Smith (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 26, 2006).*
10.16.1
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting; No Dividends) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2007).*
10.16.2
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting; With Dividends) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2007).*
10.16.3
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Performance/Time-Vesting; With Dividends) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2007).*
10.16.4
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Performance/Time-Vesting; No Dividends) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2007).*
10.17
Separation Agreement and General Release, dated February 7, 2008, between Brookdale Senior Living Inc. and Mark J. Schulte (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2008).*
10.18
Separation Agreement and General Release and Consulting Agreement, dated February 11, 2008, between Brookdale Senior Living Inc. and Paul A. Froning (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 11, 2008).*
10.19
Brookdale Senior Living Inc. Associate Stock Purchase Plan  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 11, 2008).*
10.20
Second Amended and Restated Credit Agreement, dated as of February 27, 2009, among Brookdale Senior Living Inc., certain of its subsidiaries, the several lenders parties thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on March 2, 2009) .
10.21
Pledge Agreement, dated as of February 27, 2009, among Brookdale Senior Living Inc., certain of its subsidiaries, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on March 2, 2009) .
10.22
Security Agreement, dated as of February 27, 2009, among certain subsidiaries of Brookdale Senior Living Inc. and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed on March 2, 2009) .
 
 
 
10.23
First Amendment, dated as of June 1, 2009, to the Second Amended and Restated Credit Agreement, dated as of February 27, 2009, among the Company, certain of its subsidiaries, the several lenders parties thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 2, 2009).
10.24
Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated effective June 23, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 23, 2009).*
10.25
Employment Agreement, dated as of June 23, 2009, by and between Brookdale Senior Living Inc. and W.E. Sheriff (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2009).*
10.26
Restricted Stock Unit Agreement, dated as of June 23, 2009, by and between Brookdale Senior Living Inc. and W.E. Sheriff (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 26, 2009).*
10.27
Summary of Brookdale Senior Living Inc. Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (No. 333-160354) filed on June 30, 2009).*
10.28
First Amendment to Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated, effective as of October 30, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 4, 2009).*
10.29
Credit Agreement, dated as of February 23, 2010, among certain subsidiaries of Brookdale Senior Living Inc., General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto.
21
Subsidiaries of the Registrant.
23
Consent of Ernst & Young LLP.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
*
Management Contract or Compensatory Plan
 
 

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EXHIBIT 3.1
 
(Restated electronically for SEC filing purposes only)

AMENDED AND RESTATED
 
CERTIFICATE OF INCORPORATION
 
OF
 
BROOKDALE SENIOR LIVING INC.
 
The undersigned, Deborah C. Paskin, certifies that she is the Secretary of Brookdale Senior Living Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), and does hereby further certify as follows:

(1)
The name of the Corporation is Brookdale Senior Living Inc.

(2)
The name under which the Corporation was originally incorporated was Brookdale Senior Living Inc. and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on June 28, 2005.

(3)
This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware.

(4)
The text of the Restated Certificate of Incorporation of the Corporation as amended hereby is restated to read in its entirety, as follows:


ARTICLE ONE
 
The name of the corporation is Brookdale Senior Living Inc. (the "Corporation").
 
ARTICLE TWO
 
The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle 19801.  The name of its registered agent at such address is The Corporation Trust Company.
 
ARTICLE THREE
 
The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as the same may be amended and supplemented from time to time, or any successor thereto ("Delaware Corporation Law").
 

 
 
 

 
ARTICLE FOUR
 
PART A.  AUTHORIZED SHARES
 
1.   NUMBER OF AUTHORIZED SHARES .  The total number of shares of Capital Stock (as defined below) which the Corporation has authority to issue is 250,000,000 shares, consisting of:
 
a.   200,000,000 shares of Common Stock, par value $0.01 per share (the "Common Stock"); and
 
b.   50,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock").
 
Shares of Common Stock and Preferred Stock will have the rights, preferences and limitations separately set forth below.  As used in this certificate of incorporation of the Corporation, as amended and restated from time to time (this "Certificate of Incorporation"), "Capital Stock" means all classes or series of stock of the Corporation, including, without limitation, Common Stock and Preferred Stock.
 
2.   REGISTRATION OF TRANSFERS .  The Corporation will keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration of shares of Capital Stock.  Upon the surrender at such place of any certificate representing shares of Capital Stock, the Corporation will, at the request of the registered holder of such certificate, execute and deliver a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of the class represented by the surrendered certificate, and the Corporation forthwith will cancel such surrendered certificate.  Each such new certificate will be registered in such name and will represent such number of shares of such class as is requested by the holder of the surrendered certificate and will be substantially identical in form to the surrendered certificate.  The issuance of new certificates will be made without charge to the holders of the surrendered certificates for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such issuance.
 
3.   REPLACEMENT .  Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder being satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Capital Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor then its own agreement will be satisfactory) or, in the case of any such mutilation upon surrender of such certificate, the Corporation will (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate.
 

 
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PART B.  PREFERRED STOCK
 
Shares of Preferred Stock may be issued from time to time in one or more classes or series.  The board of directors of the Corporation (the "Board of Directors") is hereby authorized to provide for the issuance of all or any shares of Preferred Stock, and to fix for each class or series thereof such voting powers, full or limited or no voting powers, and such designations, preferenc­es and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolu­tion or reso­lutions adopted by the Board of Directors pro­vid­ing for the issuance of such class or series, includ­ing, without limitation, the authority to provide that any such class or series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumula­tive) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) enti­tled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (iv) convertible into, or ex­changeable for, shares of any other class or classes of Capital Stock, or of any other series of the same or any other class or classes of Capital Stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; in the case of each of the foregoing, all as may be stated in such resolution or resolutions.
 
PART C.  COMMON STOCK
 
All shares of Common Stock will be identical in all respects and will entitle the holders of such shares to the same rights and privileges, subject to the same qualifications, limitations and restrictions.  The holders of Common Stock will be entitled to vote in the election of directors and on all other matters submitted to a vote of the Corporation's stockholders, with each holder of Common Stock being entitled to one vote for each share of Common Stock held by such holder.
 
ARTICLE FIVE
 
The Corporation is to have perpetual existence.
 
ARTICLE SIX
 
In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, amend, alter or repeal the bylaws of the Corporation, as amended and restated from time to time (the "Bylaws").  The affirmative vote of at least a majority of the whole Board of Directors shall be required to adopt, amend, alter or repeal the Bylaws.  The Bylaws also may be adopted, amended, altered or repealed by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66.67%) of the voting power of the then issued and outstanding shares of Capital Stock that are entitled to vote generally in the election of directors (the "Voting Shares").
 

 
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ARTICLE SEVEN
 
PART A.  MEETINGS OF STOCKHOLDERS; ETC.
 
Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide.  Unless otherwise required by law, special meetings of stockholders, for any purpose or purposes, may be called by either (i) the Chairman of the Board of Directors, if there is one, (ii) the Chief Executive Officer, if there is one, or (iii) the Board of Directors.  If, and for so long as, the Significant Stockholders (as defined in Part A of Article EIGHT) and their respective Affiliates (as defined in Part A of Article EIGHT), collectively, beneficially own at least fifty percent (50%) of the then issued and outstanding Voting Shares, then any authorized officer may call a special meeting at the request in writing of the stockholders holding a majority of the voting power of the then issued and outstanding Voting Shares.  At any time after the Significant Stockholders and their respective Affiliates cease, collectively, to beneficially own at least fifty percent (50%) of the then issued and outstanding Voting Shares, then the ability of the stockholders to call or cause a special meeting of stockholders to be called is hereby specifically denied.  The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws.
 
PART B.  ACTION BY WRITTEN CONSENT
 
If, and for so long as, the Significant Stockholders (as defined in Part A of Article EIGHT) and their respective Affiliates (as defined in Part A of Article EIGHT), collectively, beneficially own at least fifty percent (50%) of the then issued and outstanding Voting Shares, any action required or permitted by the Delaware Corporation Law to be taken at a stockholders' meeting may be taken without a meeting and without prior notice if the action is taken by the written consent of stockholders who would be entitled to vote at a meeting of holders of outstanding shares and who have voting power to cast not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all stockholders entitled to vote thereon were present and voted.  At any time after the Significant Stockholders and their respective Affiliates cease, collectively, to beneficially own at least fifty percent (50%) of the then issued and outstanding Voting Shares, then no action required or permitted by the Delaware Corporation Law to be taken at a stockholders' meeting may be taken without a meeting or without prior notice.
 
ARTICLE EIGHT
 
PART A.  DEFINITIONS
 
For purposes of this Article EIGHT, the following definitions shall apply:
 
"Affiliate" means, with respect to a given person, any other person that, directly or indirectly, controls, is controlled by or is under common control with, such person; provided , however , that for purposes of this definition and this Article EIGHT, none of (i) the Brookdale Entities and their Affiliates, on the one
 

 
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hand, or (ii) the Significant Stockholders and their respective Affiliates, on the other hand, shall be deemed to be "Affiliates" of one another.  For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as applied to any person, means the possession, directly or indirectly, of beneficial ownership of, or the power to vote, forty percent (40%) or more of the securities having voting power for the election of directors (or other persons acting in similar capacities) of such person or the power otherwise to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise.
 
"Brookdale Entities" means the Corporation and its Subsidiaries, and "Brookdale Entity" shall mean any of the Brookdale Entities.
 
"corporate opportunity" shall include, but not be limited to, business opportunities which the Corporation is financially able to undertake, which are, from their nature, in the line of the Corporation's business, are of practical advantage to it and are ones in which the Corporation has an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of any of the Significant Stockholders or their respective Affiliates or their officers or directors will be brought into conflict with that of any of the Brookdale Entities or their Affiliates.
 
"Governmental Entity" shall mean any national, state, provincial, municipal, local or foreign government, any court, arbitral tribunal, administrative agency or commission or other governmental or regulatory authority, commission or agency or any non-governmental, self-regulatory authority, commission or agency.
 
"Judgment" shall mean any order, writ, injunction, award, judgment, ruling or decree of any Governmental Entity.
 
"Law" shall mean any statute, law, code, ordinance, rule or regulation of any Governmental Entity.
 
"Lien" shall mean any pledge, claim, equity, option, lien, charge, mortgage, easement, right-of-way, call right, right of first refusal, "tag"- or "drag"- along right, encumbrance, security interest or other similar restriction of any kind or nature whatsoever.
 
"Restriction" with respect to any capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security, shall mean any voting or other trust or agreement, option, warrant, preemptive right, right of first offer, right of first refusal, escrow arrangement, proxy, buy-sell agreement, power of attorney or other contract, any Law, license, permit or Judgment that, conditionally or unconditionally, (i) grants to any person the right to purchase or otherwise acquire, or obligates any person to sell or
 

 
5
 

 
otherwise dispose of or issue, or otherwise results or, whether upon the occurrence of any event or with notice or lapse of time or both or otherwise, may result in any person acquiring, (A) any of such capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security, (B) any of the proceeds of, or any distributions paid or that are or may become payable with respect to, any of such capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security or (C) any interest in such capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security or any such proceeds or distributions, (ii) restricts or, whether upon the occurrence of any event or with notice or lapse of time or both or otherwise, is reasonably likely to restrict the transfer or voting of, or the exercise of any rights or the enjoyment of any benefits arising by reason of ownership of, any such capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security or any such proceeds or distributions or (iii) creates or, whether upon the occurrence of any event or with notice or lapse of time or both or otherwise, is reasonably likely to create a Lien or purported Lien affecting such capital stock, partnership interest, membership interest in a limited liability company or other equity interest or security, proceeds or distributions.
 
"Significant Stockholders" means FIT-ALT Investor LLC, a Delaware limited liability company, Fortress Brookdale Acquisition LLC, a Delaware limited liability company, Fortress Investment Trust II, a Delaware business trust, Fortress Registered Investment Trust, a Delaware business trust, Fortress Brookdale Investment Fund LLC, a Delaware limited liability company, and Health Partners, a Bermuda exempted partnership and, in each case, their respective Subsidiaries (other than Subsidiaries that constitute Brookdale Entities), and "Significant Stockholder" shall mean any of the Significant Stockholders.
 
"Subsidiary" with respect to any person means:  (i) a corporation, a majority in voting power of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly owned by such person, by a Subsidiary of such person, or by such person and one or more Subsidiaries of such person, without regard to whether the voting of such capital stock is subject to a voting agreement or similar Restriction, (ii) a partnership or limited liability company in which such person or a Subsidiary of such person is, at the date of determination, (A) in the case of a partnership, a general partner of such partnership with the power affirmatively to direct the policies and management of such partnership or (B) in the case of a limited liability company, the managing member or, in the absence of a managing member, a member with the power affirmatively to direct the policies and management of such limited liability company or (iii) any other person (other than a corporation) in which such person, a Subsidiary of such person or such person and one or more Subsidiaries of such person, directly or indirectly, at the date of determination thereof, has (A) the power to elect or direct the election of a majority of the members of the governing body of such person (whether or not
 

 
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such power is subject to a voting agreement or similar restriction) or (B) in the absence of such a governing body, a majority ownership interest.
 
PART B.  SIGNIFICANT STOCKHOLDERS, ETC.
 
In anticipation and in recognition that:
 
a.   the Significant Stockholders or their respective Affiliates will be significant stockholders of the Corporation;
 
b.   directors, officers and/or employees of the Significant Stockholders and their respective Affiliates may serve as directors, officers and/or employees of the Brookdale Entities and their Affiliates;
 
c.   the Brookdale Entities and their Affiliates, on the one hand, and the Significant Stockholders and their respective Affiliates, on the other hand, may engage in the same, similar or related lines of business and may have an interest in the same, similar or related areas of corporate opportunities;
 
d.   the Brookdale Entities and their Affiliates, on the one hand, and the Significant Stockholders and their respective Affiliates, on the other hand, may enter into, engage in, perform and consummate contracts, agreements, arrangements, transactions and other business relations; and
 
e.   the Brookdale Entities and their Affiliates will derive benefits therefrom and through their continued contractual, corporate and business relations with the Significant Stockholders and their respective Affiliates,
 
the provisions of this Article EIGHT are set forth to regulate, define and guide, to the fullest extent permitted by Law, the conduct of certain affairs of the Brookdale Entities and their Affiliates as they may involve the Significant Stockholders and their respective Affiliates and their officers and directors, and the powers, rights, duties and liabilities of the Brookdale Entities and their Affiliates and their officers, directors and stockholders in connection therewith.
 
PART C.  RELATED BUSINESS ACTIVITIES, ETC.
 
Except as the Significant Stockholders or their respective Affiliates, on the one hand, and the Brookdale Entities or their Affiliates, on the other hand, may otherwise agree in writing, the Significant Stockholders and their respective Affiliates shall have the right to, and shall have no duty to abstain from exercising such right to, (i) engage or invest, directly or indirectly, in the same, similar or related business activities or lines of business as the Brookdale Entities or their Affiliates, (ii) do business with any client, customer, vendor or lessor of any of the Brookdale Entities or their Affiliates or (iii) employ or otherwise engage any officer, director or employee of the Brookdale Entities
 

 
7
 

 
or their Affiliates, and, to the fullest extent permitted by Law, the Significant Stockholders and their respective Affiliates and officers, directors and employees thereof (subject to Part E of this Article EIGHT) shall not have or be under any fiduciary duty, duty of loyalty nor duty to act in good faith or in the best interests of the Corporation or its stockholders and shall not be liable to the Corporation or its stockholders for any breach or alleged breach thereof or for any derivation of any personal economic gain by reason of any such activities of any of the Significant Stockholders or their respective Affiliates or of any of their officer's, director's or employee's participation therein.
 
PART D.  CORPORATE OPPORTUNITY, ETC.
 
Except as the Significant Stockholders or their respective Affiliates, on the one hand, and the Brookdale Entities or their Affiliates, on the other hand, may otherwise agree in writing, if any of the Significant Stockholders or their respective Affiliates, or any officer, director or employee thereof (subject to the provisions of Part E of this Article EIGHT), acquires knowledge of a potential transaction or matter that may be a corporate opportunity for any of the Significant Stockholders or any of their Affiliates, none of the Brookdale Entities or their Affiliates or any stockholder thereof shall have an interest in, or expectation that, such corporate opportunity be offered to it or that it be offered an opportunity to participate therein, and any such interest, expectation, offer or opportunity to participate, and any other interest or expectation otherwise due to the Corporation or any other Brookdale Entity with respect to such corporate opportunity, is hereby renounced by the Corporation on its behalf and on behalf of the other Brookdale Entities and their respective Affiliates and stockholders in accordance with Section 122(17) of the Delaware Corporation Law.  Accordingly, subject to Part E of this Article EIGHT and except as the Significant Stockholders or their respective Affiliates may otherwise agree in writing, (i) none of the Significant Stockholders or their respective Affiliates or any officer, director or employee thereof will be under any obligation to present, communicate or offer any such corporate opportunity to the Brookdale Entities or their Affiliates and (ii) any of the Significant Stockholders and their respective Affiliates shall have the right to hold any such corporate opportunity for its own account, or to direct, recommend, sell, assign or otherwise transfer such corporate opportunity to any person or persons other than the Brookdale Entities and their Affiliates, and, to the fullest extent permitted by Law, the Significant Stockholders and their respective Affiliates and officers, directors and employees thereof (subject to Part E of this Article EIGHT) shall not have or be under any fiduciary duty, duty of loyalty or duty to act in good faith or in the best interests of the Corporation, the other Brookdale Entities and their respective Affiliates and stockholders and shall not be liable to the Corporation, the other Brookdale Entities or their respective Affiliates and stockholders for any breach or alleged breach thereof or for any derivation of personal economic gain by reason of the fact that any of the Significant Stockholders or their respective Affiliates or any of their officers, directors or employees pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another person, or any of the Significant Stockholders or their respective Affiliates or any of their officers, directors or employees does not present, offer or communicate information regarding the corporate opportunity to the Brookdale Entities or their Affiliates.
 

 
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PART E.  DIRECTORS, OFFICERS AND EMPLOYEES
 
Except as the Significant Stockholders or their respective Affiliates, on the one hand, and the Brookdale Entities or their Affiliates, on the other hand, may otherwise agree in writing, in the event that a director or officer of any of the Brookdale Entities or their Affiliates who is also a director, officer or employee of any of the Significant Stockholders or their respective Affiliates acquires knowledge of a potential transaction or matter that may be a corporate opportunity or is offered a corporate opportunity, if (i) such person acts in good faith and (ii) such knowledge of such potential transaction or matter was not obtained solely in connection with, or such corporate opportunity was not offered to such person solely in, such person's capacity as director or officer of any of the Brookdale Entities or their Affiliates, then (A) such director, officer or employee, to the fullest extent permitted by Law, (1) shall be deemed to have fully satisfied and fulfilled such person's fiduciary duty to the Corporation, the other Brookdale Entities and their respective Affiliates and stockholders with respect to such corporate opportunity, (2) shall not have or be under any fiduciary duty to the Corporation, the other Brookdale Entities and their respective Affiliates and stockholders and shall not be liable to the Corporation, the other Brookdale Entities or their respective Affiliates and stockholders for any breach or alleged breach thereof by reason of the fact that any of the Significant Stockholders or their respective Affiliates pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another person, or any of the Significant Stockholders or their respective Affiliates or such director, officer or employee does not present, offer or communicate information regarding the corporate opportunity to the Brookdale Entities or their Affiliates, (3) shall be deemed to have acted in good faith and in a manner such person reasonably believes to be in, and not opposed to, the best interests of the Corporation and its stockholders for the purposes of Article NINE and the other provisions of this Certificate of Incorporation and (4) shall not have any duty of loyalty to the Corporation, the other Brookdale Entities and their respective Affiliates and stockholders or any duty not to derive any personal benefit therefrom and shall not be liable to the Corporation, the other Brookdale Entities or their respective Affiliates and stockholders for any breach or alleged breach thereof for purposes of Article NINE and the other provisions of this Certificate of Incorporation as a result thereof and (B) such potential transaction or matter that may be a corporate opportunity, or the corporate opportunity, shall belong to the applicable Significant Stockholder or respective Affiliates thereof (and not to any of the Brookdale Entities or Affiliates thereof).
 
PART F.  AGREEMENTS WITH SIGNIFICANT STOCKHOLDERS
 
The Brookdale Entities and their Affiliates may from time to time enter into and perform one or more agreements (or modifications or supplements to pre-existing agreements) with the Significant Stockholders and their respective Affiliates pursuant to which the Brookdale Entities and their Affiliates, on the one hand, and the Significant Stockholders and their respective Affiliates, on the other hand, agree to engage in transactions of any kind or nature with each other and/or agree to compete, or to refrain from competing or to limit or restrict their competition, with each other, including to allocate and to cause their respective directors, officers and employees
 

 
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(including any who are directors, officers or employees of both) to allocate corporate opportunities between or to refer corporate opportunities to each other.  Subject to Part E of this Article EIGHT, except as otherwise required by Law, and except as the Significant Stockholders or their respective Affiliates, on the one hand, and the Brookdale Entities or their Affiliates, on the other hand, may otherwise agree in writing, no such agreement, or the performance thereof by the Brookdale Entities and their Affiliates, or the Significant Stockholders or their respective Affiliates, shall be considered contrary to or inconsistent with any fiduciary duty to the Corporation, any other Brookdale Entity or their respective Affiliates and stockholders of any director or officer of the Corporation, any other Brookdale Entity or any Affiliate thereof who is also a director, officer or employee of any of the Significant Stockholders or their respective Affiliates or to any stockholder thereof.  Subject to Part E of this Article EIGHT, to the fullest extent permitted by Law, and except as the Significant Stockholders or their respective Affiliates, on the one hand, and the Brookdale Entities or their Affiliates, on the other hand, may otherwise agree in writing, none of the Significant Stockholders or their respective Affiliates shall have or be under any fiduciary duty to refrain from entering into any agreement or participating in any transaction referred to in this Part F of Article EIGHT and no director, officer or employee of the Corporation, any other Brookdale Entity or any Affiliate thereof who is also a director, officer or employee of any of the Significant Stockholders or their respective Affiliates shall have or be under any fiduciary duty to the Corporation, the other Brookdale Entities and their respective Affiliates and stockholders to refrain from acting on behalf of any of the Significant Stockholders or their respective Affiliates in respect of any such agreement or transaction or performing any such agreement in accordance with its terms.
 
PART G.  AMBIGUITY
 
For the avoidance of doubt and in furtherance of the foregoing, nothing contained in this Article EIGHT amends or modifies, or will amend or modify, in any respect, any written contractual arrangement between the Significant Stockholders or any of their Affiliates, on the one hand and the Brookdale Entities or any of their Affiliates, on the other hand.
 
PART H.  TERMINATION
 
The provisions of this Article EIGHT shall have no further force and effect on the date that both (i) the Significant Stockholders and their respective Affiliates cease to, collectively, beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) shares of Capital Stock representing in the aggregate twenty percent (20%) of the voting power of the then issued and outstanding Voting Shares and (ii) no person who is a director or officer of the Corporation or any of its Affiliates is also a director or officer of any of the Significant Stockholders or their respective Affiliates.  In addition to any vote of the stockholders required by this Certificate of Incorporation, until the expiration of this Article EIGHT referred to in the immediately preceding sentence, the affirmative vote of eighty percent (80%) of the voting power of the then issued and outstanding Voting Shares, including the Voting Shares held by the Significant Stockholders and their respective Affiliates, shall be
 

 
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required to alter, amend or repeal (including, without limitation, by merger or otherwise) in a manner adverse to the interests of any of the Significant Stockholders or their respective Affiliates or any of their officers, directors or employees, or adopt any provision adverse to the interests of any of the Significant Stockholders or their respective Affiliates or any of their officers, directors or employees and inconsistent with, any provision of this Article EIGHT.
 
PART I.  APPLICATION OF PROVISION, ETC.
 
This Article EIGHT shall apply as set forth above except as otherwise provided by Law.  It is the intention of this Article EIGHT to take full advantage of statutory amendments, the effect of which may be to specifically authorize or approve provisions such as this Article EIGHT.  No alteration, amendment, termination, expiration or repeal of this Article EIGHT nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article EIGHT shall eliminate, reduce, apply to or have any effect on the protections afforded hereby to any director, officer, employee or stockholder of the Brookdale Entities or their Affiliates for or with respect to any investments, activities or opportunities of which such director, officer, employee or stockholder becomes aware prior to such alteration, amendment, termination, expiration, repeal or adoption, or any matters occurring, or any cause of action, suit or claim that, but for this Article EIGHT, would accrue or arise, prior to such alteration, amendment, termination, expiration, repeal or adoption.
 
ARTICLE NINE
 
No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit.  Any repeal or modification of this Article NINE by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
 
ARTICLE TEN
 
The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of such person's heirs, executors and personal and legal representatives; provided , however , that except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or such person's heirs, executors or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors.
 

 
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The right to indemnification conferred by this Article TEN shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition.  The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article TEN to directors and officers of the Corporation. The indemnification and advancement of expenses provided for herein shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  Any repeal or modification of this Article TEN shall not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.
 
ARTICLE ELEVEN
 
The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation against any liability asserted against him or her and incurred by him or her or on his or her behalf in such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability.
 
ARTICLE TWELVE
 
The number of directors which constitute the whole Board of Directors shall be not less than three (3) or more than nine (9).  The exact number of directors which shall constitute the whole Board of Directors shall be determined from time to time by a resolution adopted by a majority of the Board of Directors then in office.  The directors shall be divided into three classes, designated Class I, Class II and Class III.  Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors.  The term of the Class I directors in office at the time of the filing of this Amended and Restated Certificate of Incorporation shall terminate on the date of the 2008 annual meeting; the term of the Class II directors in office at the time of the filing of this Amended and Restated Certificate of Incorporation shall terminate on the date of the 2007 annual meeting; and the term of the Class III directors in office at the time of the filing of this Amended and Restated Certificate of Incorporation shall terminate on the date of the 2006 annual meeting.  At each succeeding annual meeting of stockholders beginning in 2006, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term.  If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.  Directors need not be stockholders.
 

 
12
 

 
Except as otherwise provided in the Bylaws, the directors shall be elected at the annual meeting of the stockholders, and each director elected shall hold office until the third succeeding meeting next after his election and until his successor is duly elected and qualified or until his death or retirement or until he resigns or is removed in the manner hereinafter provided.  Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote on the election of directors at any annual or special meeting of stockholders.  Such election shall be by written ballot.  Any director or the whole Board of Directors may be removed from office at any time, but only for cause, and only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then issued and outstanding Voting Shares.
 
ARTICLE THIRTEEN
 
The Corporation expressly elects not to be governed by Section 203 of the Delaware Corporation Law.
 
ARTICLE FOURTEEN
 
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed herein and by the laws of the State of Delaware, and all rights conferred upon stockholders herein are granted subject to this reservation.
 


[ Remainder of page left blank intentionally ]

 
13
 
 
 
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed on this 30 th day of September, 2005.
 

 
BROOKDALE SENIOR LIVING INC.
 
     
     
     
 
By:
 
/s/ Deborah C. Paskin
 
   
Name:
Deborah C. Paskin
 
   
Title:
Secretary
 



 




 

 
Loan No. 07-0004350
 
CREDIT AGREEMENT
 
Dated as of February 23, 2010
 
among
 
THE PARTIES LISTED ON SCHEDULE 1.01 ATTACHED HERETO
 
as Borrowers,
 
GENERAL ELECTRIC CAPITAL CORPORATION,
 
as Administrative Agent and a Lender,
 
and
 
THE OTHER FINANCIAL INSTITUTIONS WHO ARE OR HEREAFTER
BECOME PARTIES TO THIS CREDIT AGREEMENT,
 
as Lenders
 

 


 DAL:0535130/00080:1910701v7
 
 
 

TABLE OF CONTENTS
 
 
  Article and Section   Page
     
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1
1.01.
Defined Terms.
1
1.02.
Interpretive Provisions.
32
1.03.
Accounting Terms.
33
1.04.
Rounding.
33
1.05.
References to Agreements and Laws.
33
1.06.
Times of Day.
33
     
ARTICLE II
COMMITMENTS AND ADVANCES
33
2.01.
Commitments.
33
2.02.
Advances of the Loan.
35
2.03.
Calculation of Availability Amount.
36
2.04.
Repayment of the Loan.
36
2.05.
Prepayments.
37
2.06.
Interest.
37
2.07.
Fees and Expenses.
38
2.08.
Computation of Interest.
39
2.09.
Payments Generally.
39
2.10.
Sharing of Payments.
41
2.11.
Evidence of Debt.
41
2.12.
Joint and Several Liability of the Borrowers.
42
2.13.
Appointment of Parent as Legal Representative for Credit Parties.
46
2.14.
Establishment of Impounds.
46
2.15.
Defaulting Lenders.
48
     
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
49
3.01.
Taxes.
49
3.02.
Illegality.
50
3.03.
Inability to Determine Rates.
51
3.04.
Increased Cost and Reduced Return; Capital Adequacy; Reserves.
51
3.05.
Funding Losses.
52
3.06.
Matters Applicable to all Requests for Compensation.
52
3.07.
Survival.
53
     
ARTICLE IV
CONDITIONS PRECEDENT TO ADVANCES
53
4.01.
Conditions to Initial Advance.
53
4.02.
Conditions to Advances.
57
     
ARTICLE V
REPRESENTATIONS AND WARRANTIES
57
5.01.
Financial Statements; No Material Adverse Effect; No Internal Control Event.
57
5.02.
Corporate Existence and Power.
58
5.03.
Corporate and Governmental Authorization; No Contravention.
58
 
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5.04.
Binding Effect.
58
5.05.
Litigation.
59
5.06.
Compliance with ERISA.
59
5.07.
Environmental Matters.
60
5.08.
Margin Regulations; Investment Company Act.
60
5.09.
Compliance with Laws.
61
5.10.
Ownership of Property; Liens.
61
5.11.
Corporate Structure; Capital Stock, Etc.
61
5.12.
Real Property Assets; Leases.
62
5.13.
Material Contracts; Additional Contractual Obligations.
63
5.14.
Investments.
63
5.15.
Solvency.
63
5.16.
Taxes.
63
5.17.
Reserved.
64
5.18.
Insurance.
64
5.19.
Healthcare; Facility Representations and Warranties.
64
5.20.
Disclosure.
65
5.21.
Collateral Documents.
65
     
ARTICLE VI
AFFIRMATIVE COVENANTS
66
6.01.
Financial Statements.
66
6.02.
Certificates; Other Information.
67
6.03.
Preservation of Existence and Franchises.
69
6.04.
Books and Records.
69
6.05.
Compliance with Law.
69
6.06.
Payment of Taxes and Other Indebtedness.
69
6.07.
Insurance.
70
6.08.
Maintenance of Property.
70
6.09.
Performance of Obligations.
70
6.10.
Visits and Inspections.
70
6.11.
Use of Proceeds/Purpose of Loan.
71
6.12.
Financial Covenants.
71
6.13.
Environmental Matters.
71
6.14.
Single Purpose Entity/Separateness.
72
6.15.
New Borrowers.
74
6.16.
Pledged Assets.
75
6.17.
Appraisals.
75
6.18.
Anti-Terrorism Laws.
75
6.19.
Compliance With Material Contracts.
76
6.20.
Health Care Covenants.
76
6.21.
Public Company Status.
77
6.22.
Use and Application of Insurance Proceeds.
77
6.23.
Condemnation Awards.
78
6.24.
Cash Management System.
79
     
ARTICLE VII
NEGATIVE COVENANTS
79
7.01.
Liens.
79
 
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7.02.
Indebtedness.
79
7.03.
Fundamental Changes.
80
7.04.
Dispositions; Acquisitions.
80
7.05.
Business Activities.
81
7.06.
Transactions with Affiliates and Insiders.
81
7.07.
Organization Documents; Fiscal Year.
81
7.08.
Modifications to Other Documents.
81
7.09.
Ownership of Subsidiaries.
82
7.10.
No Further Negative Pledges.
82
7.11.
Limitation on Restricted Actions.
82
7.12.
Addition/Replacement of Borrowing Base Assets.
83
     
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES
84
8.01.
Events of Default.
84
8.02.
Remedies Upon Event of Default.
86
8.03.
Application of Funds.
87
8.04.
Administrative Agent’s Right to Perform the Obligations.
87
8.05.
Special Cure Right.
88
     
ARTICLE IX
ADMINISTRATIVE AGENT
88
9.01.
Appointment and Authorization of Administrative Agent.
88
9.02.
Delegation of Duties.
89
9.03.
Liability of Administrative Agent.
89
9.04.
Reliance by Administrative Agent.
89
9.05.
Notice of Default.
90
9.06.
Credit Decision; Disclosure of Confidential Information by Administrative Agent.
90
9.07.
Indemnification of Administrative Agent.
91
9.08.
Administrative Agent in its Individual Capacity.
91
9.09.
Successor Administrative Agent.
92
9.10.
Administrative Agent May File Proofs of Claim.
92
     
ARTICLE X
MISCELLANEOUS
93
10.01.
Amendments, Etc.
93
10.02.
Notices and Other Communications; Facsimile Copies.
94
10.03.
No Waiver; Cumulative Remedies.
96
10.04.
Attorney Costs, Expenses and Taxes.
96
10.05.
Indemnification by the Borrowers.
97
10.06.
Payments Set Aside.
98
10.07.
Successors and Assigns.
98
10.08.
Confidentiality.
101
10.09.
Set-off.
102
10.10.
Interest Rate Limitation.
103
10.11.
Counterparts.
103
10.12.
Integration.
103
10.13.
Survival of Representations and Warranties.
103
10.14.
Severability.
104
 
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10.15.
Tax Forms.
104
10.16.
Replacement of Lenders.
106
10.17.
No Advisory or Fiduciary Responsibility.
106
10.18.
Source of Funds.
107
10.19.
GOVERNING LAW.
107
10.20.
WAIVER OF RIGHT TO TRIAL BY JURY.
108
10.21.
No Conflict.
108
10.22.
USA Patriot Act Notice.
 
  108
10.23.
Entire Agreement.
 
  108 
10.24.
California Real Property Assets.
 
  109

 
SCHEDULES
 
1.01           List of Borrowers
2.01           Lenders and Commitments
2.12           Allocable Amounts of Loan
5.11           Corporate Structure; Capital Stock
5.12           Real Property Asset Matters
Part I           Borrowing Base Assets
Part II          Management Agreements and Property Managers
Part III         Defaulting Tenants
Part IV         Facility Operating Leases and Operating Tenants
Part V           Material Subleases
5.13           Material Contracts; Contracts Subject to Assignment of Claims Act
5.18           Insurance Certificates
5.19           Covered Entities Under HIPAA
7.01           Liens
7.02           Borrower’s Indebtedness
10.02         Notice Addresses
 
EXHIBITS
 
A          Form of Loan Borrowing Notice
B          Form of Revolving Note
C-1       Form of Compliance Certificate
C-2       Borrowing Base Certificate
D          Form of Assignment and Assumption
E           Form of Borrower Joinder Agreement
F           Form of Lender Joinder Agreement
G           Form of Guaranty
H           Form of Security Agreement
 
I             Form of Partial Release Letter
 

 

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CREDIT AGREEMENT
 
This CREDIT AGREEMENT (as amended, modified, restated or supplemented from time to time, this “ Credit Agreement ” or this “ Agreement ”) is entered into as of February ___, 2010 by and among GENERAL ELECTRIC CAPITAL CORPORATION , a Delaware corporation (in its individual capacity, “ GECC ” and in its capacity as agent for the Lenders, together with its successors, “ Administrative Agen t ”), the financial institutions other than GECC who are or hereafter become parties to this Agreement (together with GECC, individually, a “ Lender ” , and collectively, the “ Lenders ”, as the context may require), and THE PARTIES LISTED ON SCHEDULE 1.01 ATTACHED HERETO (each of the foregoing entities and each of the entities from time to time executing a Joinder Agreement pursuant to Section 6.15 hereof shall be hereinafter referred to individually as “ Borrower ” and collectively as the “ Borrowers ”).
 
WHEREAS , the Borrowers have requested the Lenders to provide a revolving credit facility to Borrowers in an amount of $100,000,000.00 (the “ Credit Facility ”) for the purposes of refinancing certain existing debt and for the purposes hereinafter set forth; and
 
WHEREAS , the Lenders have agreed to provide the Credit Facility to the Borrowers, subject to the terms and conditions set forth herein.
 
NOW, THEREFORE , in consideration of these premises and the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows:
 
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
 
1.01.             Defined Terms.
 
As used in this Credit Agreement, the following terms have the meanings set forth below:
 
“ Administrative Agent ” means General Electric Capital Corporation in its capacity as administrative agent for the Lenders under any of the Credit Documents, or any successor administrative agent.
 
“ Administrative Agent’s Office ” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02 , or such other address or account as the Administrative Agent may from time to time notify the Borrowers and the Lenders.
 
“ Adjusted Expenses ” means actual operating expenses related to the Borrowing Base Assets, excluding any rent and interest paid by Operating Tenants and depreciation recorded by the Operating Tenants or Borrowers on a stabilized accrual basis for the previous twelve (12) month period (as reasonably adjusted by Administrative Agent), including: (i) recurring expenses (e.g., tenant improvements, leasing commissions, carpeting replacement, appliance and drapery replacement and such others as determined by Administrative Agent), (ii) real estate taxes, (iii) management fees (whether paid or not) in an amount not less than five percent (5%) of effective gross income (or the actual management fee paid, if higher), (iv) a replacement reserve (whether reserved or not) of not less than Three Hundred Fifty and No/100 Dollars ($350.00) per Senior
 

CREDIT AGREEMENT
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Housing Unit and (v) definitive changes (federal or state) in the Medicare and/or Medicaid reimbursement rates.
 
“ Adjusted Net Operating Income ” or “ ANOI ” means annualized Adjusted Revenue less Adjusted Expenses, based upon the financial reports provided by Borrowers under Section 6.01 and approved by Administrative Agent in its reasonable discretion.
 
“ Adjusted Revenue ” means revenues from the Borrowing Base Assets for the period in question (and if none specified, then for the most current twelve (12) months), as determined under GAAP, but excluding (a) nonrecurring income and non-property related income (as determined by Administrative Agent in its sole discretion) and income from tenants and/or residents that is classified as “bad debt” under generally accepted accounting principles, and (b) other revenue for such period not to exceed ten percent (10%) of the amounts included in clause (a) above for laundry, vending, parking and other occupancy payments (but excluding late fees and interest income) based upon collections for such period.
 
“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
 
“ Advance ” or “ Advances ” have the meanings provided in Section 2.01(a) .
 
“ Affiliate ” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
 
“ Agent-Related Persons ” means the Administrative Agent, together with its Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates.
 
“ Aggregate Commitments ” means the Commitments of all the Lenders.
 
“ Aggregate Committed Amount ” has the meaning provided in Section 2.01(a) , as increased pursuant to Section 2.01(b) .
 
“ Agreement ” has the meaning provided in the introductory paragraph hereof.
 
“ Allocable Amount ” has the meaning provided in Section 2.12(i) .
 
“ Applicable Percentage ” means each of the following percentages per annum, as applicable, based upon the Outstanding Amount Percentage:
 
Outstanding Amount
Percentage
 
Applicable Percentage
< 35%
4.50%
>35%, but < 50%
5.00%
>50, but < 100%
5.50%
 

 
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Any increase or decrease in the Applicable Percentage resulting from a change in the Outstanding Amount Percentage shall become effective as of the first Business Day immediately following the change in the Outstanding Amount Percentage.
 
“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
 
“ Arizona Facility ” has the meaning provided in Section 5.13(b) .
 
“ Assignee Group ” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.
 
“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.07(b) ), and accepted by the Administrative Agent, in substantially the form of Exhibit D or any other form approved by the Administrative Agent and, if such assignment and assumption requires their consent, the Borrowers.
 
“ Assignment of Leases ” means an assignment of leases, rents and profits to the Administrative Agent with respect to the applicable Borrower’s interests in a Borrowing Base Asset (which assignment may be contained within the related Mortgage Instrument); provided that each such Assignment of Leases shall, subject to the terms and conditions of the applicable underlying lease, directly assign to the Administrative Agent the following: (a) all existing and future leases, subleases, tenancies, licenses, occupancy agreements or agreements to lease all or any portion of such Borrowing Base Asset (including, without limitation, any applicable Facility Operating Lease), whether written or oral or for a definite period or month-to-month, together with any extensions, renewals, amendments, modifications or replacements thereof, and any options, rights of first refusal, pledges, security agreements and guarantees of any tenant’s obligations under any lease or sublease now or hereafter in effect with respect to the Borrowing Base Asset (individually, for the purposes of this definition, a “ Lease ” and collectively, the “ Leases ”); and (b) all rents (including, without limitation, base rents, minimum rents, additional rents, percentage rents, parking, maintenance and deficiency rents and payments which are characterized under the terms of the applicable Lease as payments of interest and/or principal with respect to the applicable Borrowing Base Asset), security deposits (in whatever form, including cash and letters of credit), tenant escrows, income, receipts, revenues, reserves, issues and profits of the Borrowing Base Asset from time to time accruing, including, without limitation, (i) all rights to receive payments arising under, derived from or relating to any Lease, (ii) all lump sum payments for the cancellation or termination of any Lease, the waiver of any term thereof, or the exercise of any right of first refusal, call option, put option or option to purchase, and (iii) the return of any insurance premiums or ad valorem tax payments made in advance and subsequently refunded.  In furtherance (and not limitation) of the foregoing, each Assignment of Leases shall assign to the Administrative Agent any and all of the applicable Borrower’s rights to collect or receive any payments with respect to the applicable Borrowing Base Asset.  Finally, each Assignment of Leases shall, in any case, be in form and substance satisfactory to the Administrative Agent in its discretion and suitable for recording in the applicable jurisdiction; and “Assignments of Leases” means a collective reference to each such Assignment of Leases.
 

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“ Attorney Costs ” means and includes all reasonable and documented fees, expenses and disbursements of any law firm or other external counsel and, without duplication, the allocated reasonable and documented cost of internal legal services and all expenses and disbursements of internal counsel.
 
“ Attributable Principal Amount ” means (a) in the case of Capital Leases, the amount of capital lease obligations determined in accordance with GAAP, (b) in the case of Synthetic Leases, an amount determined by capitalization of the remaining lease payments thereunder as if it were a capital lease determined in accordance with GAAP, (c) in the case of Securitization Transactions, the outstanding principal amount of such financing, after taking into account reserve amounts and making appropriate adjustments, determined by the Administrative Agent in its reasonable judgment and (d) in the case of Sale and Leaseback Transactions, the present value (discounted in accordance with GAAP at the debt rate implied in the applicable lease) of the obligations of the lessee for rental payments during the term of such lease).
 
“ Audited Financial Statements ” means the audited consolidated balance sheet of the Parent and its consolidated Subsidiaries for the fiscal year ended December 31, 2009, and the related consolidated statements of earnings, shareholders’ equity and cash flows for such fiscal year of the Parent and its consolidated Subsidiaries, including the notes thereto.
 
“ Availability Amount ” means, as of any date of determination, the sum of the following amounts:  (a) the annualized ANOI (based on the trailing six (6) month period prior to the date of determination) for the Borrowing Base Assets that are not skilled nursing facilities, divided by 12.5% and (b) the annualized ANOI (based on the trailing six (6) month period prior to the date of determination) for the Borrowing Base Assets that are skilled nursing facilities, divided by 13.5%.
 
“ Award ” has the meaning provided in Section 6.23 .
 
“ Bankruptcy Event ” means, with respect to any Person, the occurrence of any of the following: (a) the entry of a decree or order for relief by a court or governmental agency in an involuntary case under any applicable Debtor Relief Law or any other bankruptcy, insolvency or other similar law now or hereafter in effect, or the appointment by a court or governmental agency of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or the ordering of the winding up or liquidation of its affairs by a court or governmental agency and such decree, order or appointment is not vacated or discharged within ninety (90) days of its filing; or (b) the commencement against such Person of an involuntary case under any applicable Debtor Relief Law or any other bankruptcy, insolvency or other similar law now or hereafter in effect, or of any case, proceeding or other action for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed for a period of ninety (90) consecutive days, or the repossession or seizure by a creditor of such Person of a substantial part of its Property; or (c) such Person shall commence a voluntary case under any applicable Debtor Relief Law or any other bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to
 

CREDIT AGREEMENT
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the appointment of or the taking possession by a receiver, liquidator, assignee, creditor in possession, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or make any general assignment for the benefit of creditors; or (d) the filing of a petition by such Person seeking to take advantage of any Debtor Relief Law or any other applicable Law, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, or (e) such Person shall fail to contest in a timely and appropriate manner (and if not dismissed within ninety (90) days or shall consent to any petition filed against it in an involuntary case under such bankruptcy laws or other applicable Law or consent to any proceeding or action relating to any bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts with respect to its assets or existence, or (f) such Person shall admit in writing, or such Person’s financial statements shall reflect, an inability to pay its debts generally as they become due.
 
“ Base Rate ” means for any day a fluctuating rate per annum equal to the rate of interest in effect for such day as publicly announced from time to time by the Base Rate Bank as its “prime rate,”  The “prime rate” is a rate set by the Base Rate Bank based upon various factors including Base Rate Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.  Any change in the prime rate announced by Base Rate Bank shall take effect at the opening of business on the day specified in the public announcement of such change.
 
“ Base Rate Bank ” means Bank of America, N.A.
 
“ Bath Asset ” has the meaning provided in Section 2.03 .
 
“ Blocked Account Agreements ” means the Blocked Account Agreements (With Activation) dated of even date herewith, executed by (a) with respect to the Portfolio General Receivables Account, Borrower Representative, as agent for Borrowers, Administrative Agent and the bank named therein (the “ Blocked Account Bank ”) and (b) with respect to the Third Party Payor Receivables Account, each of the Borrowers who own a Borrowing Base Asset that is a skilled nursing facility, Administrative Agent and Blocked Account Bank.
 
“ Borrower ” and “ Borrowers ” shall have the meanings given to such terms in the introductory paragraph hereof.
 
“ Borrower Joinder Agreement ” means a joinder agreement in the form of Exhibit E hereto, to be executed by each new Person who becomes a Borrower in accordance with Section 6.15 hereof.
 
“ Borrower Representative ” has the meaning provided in Section 2.13 hereof.
 
“ Borrowing ” means a borrowing of an Advance under the Loan by Borrowers pursuant to this Agreement.
 
“ Borrowing Base Amount ” means an amount equal to the lesser of: (a) the Availability Amount as of such date and (b) the aggregate Collateral Value Amount as of such date for the Borrowing Base Assets.
 

CREDIT AGREEMENT
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“ Borrowing Base Asset ” means a Real Property Asset which, as of any date of determination, satisfies all of the following requirements:  (a) such Real Property Asset is 100% owned by a Borrower in fee simple or pursuant to the terms of an Eligible Ground Lease; (b) the Administrative Agent, on behalf of the Lenders, shall have received each of the Borrowing Base Asset Deliverables with respect to such Real Property Asset, in each case in form and substance acceptable to the Administrative Agent in its discretion; (c) such Real Property Asset is not subject to any Lien (other than a Permitted Lien) or any Negative Pledge; (d) such Real Property Asset is free of all material mechanical and structural defects, environmental conditions (as evidenced by environmental reports acceptable to Administrative Agent) or other adverse matters except for defects, conditions or matters individually or collectively which are not material to the profitable operation of such Real Property Asset and the most recently-delivered FIRREA-compliant MAI appraisal with respect to such Real Property Asset is acceptable to the Administrative Agent in its discretion; (e) such Real Property Asset has been fully developed for use as a skilled nursing facility, domestic assisted living facility, independent living facility, rehabilitation hospital or other healthcare facility acceptable to the Administrative Agent and Required Lenders; (f) such Real Property Asset is leased to and operated by an Eligible Tenant pursuant to a Facility Operating Lease reasonably acceptable to the Administrative Agent; (g) no required rental payment, principal or interest payment, payments of real property taxes or payments of premiums on insurance policies payable to the applicable Borrower-owner with respect to such Real Property Asset is past due beyond the earlier of the applicable grace period with respect thereto, if any, and sixty (60) days; (h) no event of default has occurred and is then continuing under any Material Contract applicable to such Borrowing Base Asset; (i) no Material Contract applicable to such Borrowing Base Asset shall have been terminated without the prior written consent of the Required Lenders; (j) no condemnation or condemnation proceeding shall have been instituted (and remain undismissed for a period of ninety (90) consecutive days), in each case, with respect to a material portion of the Real Property Asset; (k) no material casualty event shall have occurred with respect to the improvements located on such Real Property Asset which is not able to be fully remediated with available insurance proceeds; and (l) no Hazardous Substances are located on or under such Real Property Asset and no other environmental conditions exist in connection with such Real Property Asset which constitute a violation of any Environmental Law.  “ Borrowing Base Assets ” means a collective reference to all Borrowing Base Assets in existence at any given time.
 
“ Borrowing Base Asset Deliverables ” means, with respect to any Real Property Asset which is proposed for qualification as a “Borrowing Base Asset” hereunder, a collective reference to each of the following (with each such item to be in form and substance acceptable to the Administrative Agent):
 
(a)            a fully executed and notarized Mortgage Instrument and Assignments of Leases with respect to such Real Property Asset and a related legal opinion from special local counsel to the Borrowers opining as to the propriety of the form of such documents for recording in the applicable jurisdiction and such other matters as may be required by the Administrative Agent;
 
(b)            a fully executed copy of any Facility Operating Lease applicable to such Real Property Asset, together with an estoppel certificate from the applicable Eligible Tenant and a subordination, non-disturbance and attornment agreement with respect to such Facility Operating Lease (the “ Facility Operating Lease SNDA ”);
 

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(c)            in the case of a Real Property Asset which constitutes a leasehold interest, evidence that the applicable lease, a memorandum of lease with respect thereto, or other evidence of such lease in form and substance reasonably satisfactory to the Administrative Agent, has been properly recorded in all places to the extent necessary or desirable, in the reasonable judgment of the Administrative Agent, so as to enable the Mortgage Instrument encumbering such leasehold interest to effectively create a valid and enforceable first priority lien (subject to Permitted Liens and required landlord consents) on such leasehold interest in favor of the Administrative Agent (or such other Person as may be required or desired under local law) for the benefit of Lenders and that such lease qualifies as an Eligible Ground Lease hereunder, together with such estoppels, waivers and/or consents from the lessor under such Eligible Ground Lease as are required by the terms thereof or otherwise reasonably requested by the Administrative Agent;
 
(d)            maps or plats of an as-built survey of the site constituting the Real Property Asset sufficient in all cases to delete the standard survey exception from the applicable Mortgage Policy;
 
(e)            a FIRREA-compliant MAI appraisal, commissioned, reviewed and approved by the Administrative Agent (or otherwise acceptable to the Administrative Agent, in its discretion) with respect to such Real Property Asset;
 
(f)            evidence as to the compliance of such Real Property Asset and the improvements related thereto with applicable zoning and use requirements;
 
(g)            an ALTA mortgagee title insurance policy (or its equivalent in non-ALTA jurisdictions) with respect to the applicable Real Property Asset (each, a “ Mortgage Policy ” and collectively, the “ Mortgage Policies ”), assuring the Lender that the Mortgage Instrument creates a valid and enforceable first priority mortgage lien on the applicable Real Property Asset, free and clear of all defects and encumbrances except Permitted Liens, which Mortgage Policy shall (i) be in an amount acceptable to the Administrative Agent, (ii) be from an insurance company reasonably acceptable to the Administrative Agent, (iii) include such available endorsements and reinsurance as the Administrative Agent may reasonably require and (iv) otherwise satisfy the reasonable title insurance requirements of the Administrative Agent;
 
(h)            evidence as to whether the applicable Real Property Asset is in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards (a   “ Flood Hazard Property ”) and if such Real Property Asset is a Flood Hazard Property, (i) the applicable Borrower’s written acknowledgment of receipt of written notification from the Administrative Agent (A) as to the fact that such Real Property Asset is a Flood Hazard Property and (B) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program and (ii) copies of insurance policies or certificates of insurance evidencing flood insurance satisfactory to the Administrative Agent and naming the Administrative Agent as sole loss payee on behalf of the Lenders under a standard mortgagee endorsement;
 

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(i)            copies of any material subleases which would be required to be disclosed on Part V of Schedule 5.12 hereof with respect to such Real Property Asset if approved as a Borrowing Base Asset;
 
(j)            evidence that the Operating Tenant under the applicable Facility Operating Lease is an Eligible Tenant;
 
(k)            a Phase I environmental assessment from an environmental consultant acceptable to the Administrative Agent, dated as of a date acceptable to the Administrative Agent and indicating that, as of such date, no Hazardous Substances or other conditions on, under or with respect to the applicable Real Property Asset constitute a violation of any Environmental Laws and that, in any case, no commercially unreasonable amount of any Hazardous Substances are located on or under such Real Property Asset; and
 
(l)            evidence of insurance coverage with respect to such Real Property Asset meeting the requirements set forth herein and establishing the Administrative Agent as loss payee, as required pursuant to the terms hereof.
 
“ Borrowing Base Certificate ” means a certificate substantially in the form of Exhibit C-2 hereto delivered to the Administrative Agent pursuant to Section 6.02(b) or more frequently at the option of the Borrower Representative and (a) setting forth each Real Property Asset of the Borrowers, identifying which such Real Property Assets are Borrowing Base Assets, and certifying the Collateral Value Amount with respect to each such Borrowing Base Asset, (b) certifying (based upon its own information and the information made available to the Parent by the applicable Operating Tenants, which information the Parent believes in good faith to be true and correct in all material respects) (i) as to the calculation of the Borrowing Base Amount as of the date of such certificate and (ii) that each Real Property Asset used in the calculation of the Borrowing Base Amount meets each of the criteria for qualification as a Borrowing Base Asset and (c) providing such other information with respect to the Real Property Assets and/or Borrowing Base Assets as the Administrative Agent may reasonably require.
 
“ Business ” or “ Businesses ” means, at any time, a collective reference to the businesses operated by the respective Borrowers or Parent, as applicable, at such time.
 
“ Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the State of Illinois or the state where the Administrative Agent’s Office is located and, if such day relates to determining the Eurodollar Rate hereunder, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market.
 
“ Capitalized Loan Fees ” means, with respect to the Parent and its Subsidiaries, and with respect to any period, (a) any up-front, closing or similar fees paid by such Person in connection with the incurrence or refinancing of Indebtedness during such period and (b) all other costs incurred in connection with the incurrence or refinancing of Indebtedness during such period, including, without limitation, appraisal fees paid to lenders, costs and expenses incurred in connection with Swap Contracts, engineering reports, phase I environmental report and other report review fees paid to lenders and legal fees, in each of the foregoing cases, that are
 

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capitalized on the balance sheet of such Person in accordance with GAAP and amortized over the term of such Indebtedness.
 
“ Capital Lease ” means a lease that would be capitalized on a balance sheet of the lessee prepared in accordance with GAAP.
 
“ Capital Lease Obligation ” means, with respect to a Capital Lease, the amount of rental and other obligations of the lessee thereunder which would, in accordance with GAAP, appear on a balance sheet of such lessee in respect of such Capital Lease.
 
“ Capital Stock ” means (a) in the case of a corporation, capital stock, (b) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (c) in the case of a partnership, partnership interests (whether general or limited), (d) in the case of a limited liability company, membership interests and (e) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.
 
“ Cash Equivalents ” means (a) securities issued or directly and fully guaranteed or insured by (i) the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody’s is at least P-1 or the equivalent thereof (each an “ Approved Bank ”), in each case with maturities of not more than two hundred seventy (270) days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody’s and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by any Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments (classified in accordance with GAAP as current assets) in money market investment programs registered under the Investment Company Act of 1940, as amended, that are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subclauses hereof.
 
“ Cash Lease Expense ” means for any period, the aggregate amount of fixed and contingent rentals payable (on a cash basis) by the Parent and its Subsidiaries for such period with respect to leases of real and personal property, determined on a consolidated basis, provided that payments in respect of Capital Lease Obligations shall not constitute Cash Lease Expense.
 
“ Cash Management Agreement ” means any agreement existing as of the date hereof, including the Blocked Account Agreement, or from time to time during the term of the Loan
 

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among Administrative Agent, Borrowers, Borrower Representative on behalf of the Borrowers and/or Operators and a bank approved by Administrative Agent regarding the establishment and operation of a lockbox account, blocked account or similar account into which rents and other revenue are to be deposited.
 
“ Casualty ” has the meaning specified in Section 6.22 .
 
“ Change of Control ” means the occurrence of any of the following events:  (a) any Person or two or more Persons acting in concert, other than the Permitted Investors, shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, control over, voting stock of the Parent (or other securities convertible into such voting stock) representing forty-nine percent (49%) or more of the combined voting power of all voting stock of the Parent, (b) during any period of up to twenty-four (24) consecutive months, commencing after the Closing Date, individuals who at the beginning of such twenty-four (24) month period were directors of the Parent (together with any new director whose election by the Parent’s Board of Directors or whose nomination for election by the Parent’s shareholders was approved by a vote of at least fifty percent (50%) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of the Parent then in office, or (c) the Parent shall fail to own (directly or indirectly) 100% of the Capital Stock of the Borrowers.  As used herein, “beneficial ownership” shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934.
 
“ Closing Date ” means the date hereof.
 
“ CMS ” means the Centers for Medicare & Medicaid Services, the federal agency responsible for administering the Medicare, Medicaid, SCHIP (State Children’s Health Insurance), HIPAA, CLIA (Clinical Laboratory Improvement Amendments), and any other federal health-related programs affecting the operation of the Borrowing Base Assets.
 
“ Collateral ”   means a collective reference to all real and personal Property (including without limitation, the Borrowing Base Assets) with respect to which Liens in favor of the Administrative Agent are either executed, identified or purported to be granted pursuant to and in accordance with the terms of the Collateral Documents.
 
“ Collateral Documents ”   means a collective reference to the Mortgage Instruments, the Security Agreement, the Assignments of Leases and any UCC financing statements securing payment hereunder, or any other documents securing the Obligations under this Credit Agreement or any other Credit Document.
 
“ Collateral Value ” means, with respect to any Borrowing Base Asset or Real Property Asset, an amount equal to the “as-is” appraised value of such Real Property Asset (on an individual, as opposed to portfolio values, basis), as determined by the most recently delivered FIRREA-compliant MAI appraisals commissioned, reviewed and approved by the Administrative Agent or otherwise acceptable to the Administrative Agent in its discretion.
 

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“ Collateral Value Amount ” means an amount equal to (a) seventy percent (70%) multiplied by (b) the Collateral Value as of such date for each Borrowing Base Asset.
 
“ Commitment ” means, with respect to each Lender, the commitment of such Lender to make Advances under the Loan and to share in the Obligations hereunder up to such Lender’s Commitment Percentage thereof.
 
“ Commitment Percentage ” means, at any time for each Lender, a fraction (expressed as a percentage carried to the ninth decimal place), the numerator of which is such Lender’s Committed Amount and the denominator of which is the Aggregate Committed Amount.  The initial Commitment Percentages are set forth on Schedule 2.01 .
 
“ Commitment Period ” means the period from and including the Closing Date to the earlier of (a) the Maturity Date or (b) the date on which the Commitments shall have been terminated as provided herein.
 
“ Committed Amount ” means, with respect to each Lender, the amount of such Lender’s Commitment.  The initial Committed Amounts are set forth on Schedule 2.01.
 
“ Compliance Certificate ” means a certificate substantially in the form of Exhibit C-1 ; provided, that each such Compliance Certificate shall, in any case, include (without limitation): (a) a Borrowing Base Certificate in the form of Exhibit C-2 ; (b) an updated version of Schedules 5.11 , 5.12 , 5.13 and 5.18 , along with a summary of changes made to such schedules since the previous delivery thereof; provided, further, that upon the delivery of such updated schedules, then Schedule 5.11 , Schedule 5.12 , Schedule 5.13 and Schedule 5.18 shall each be deemed to have been amended and restated to read in accordance with the applicable updated schedule and the representations and warranties with respect thereto shall apply to such amended and restated schedules and (c) supporting documents and materials reasonably required by the Administrative Agent for the evidencing of the calculations and certifications made in connection therewith.
 
“ CON ” has the meaning provided in Section 6.20 .
 
“ Condemnation ” has the meaning provided in Section 6.23 .
 
“ Confidential Information ” has the meaning provided in Section 10.08 .
 
“ Consolidated EBITDA ” means, for any period, for any Person, net income of such Person and its Subsidiaries for such period plus , without duplication and to the extent reflected as a charge in the statement of such consolidated net income for such period, the sum of (a) income tax expense, (b) interest expense of such Person and its Subsidiaries, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness whether paid, accrued or capitalized and including, without limitation, the interest component of Capital Lease Obligations, (c) depreciation and amortization expense, (d) net entrance fees received, (e) non-cash compensation expense, (f) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (g) any extraordinary, unusual or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such consolidated net income for such
 

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period, losses on sales of assets outside of the ordinary course of business), (h) such Person’s share of   distributions from Unconsolidated Joint Ventures and (i) any other non-cash charges (such as loss on extinguishment on debt, equity in loss of unconsolidated ventures, change in fair value of derivatives and amortization, straight line rent, etc.), and minus , to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such consolidated net income for such period, gains on the sales of assets outside of the ordinary course of business), (b) any other non-cash income and (c) any cash payments made during such period in respect of items described in clause (e) above subsequent to the fiscal quarter in which the relevant non-cash expenses or losses were reflected as a charge in the statement of Consolidated Net Income, all as determined on a consolidated basis.
 
“ Consolidated EBITDAR ” means for any period, Consolidated EBITDA of the Parent and its Subsidiaries for such period plus Cash Lease Expense of the Parent and its Subsidiaries for such period.
 
“ Consolidated Fixed Charge Coverage Ratio ” means for any period, the ratio of (a) Consolidated EBITDAR of the Parent and its Subsidiaries for such period to (b) Consolidated Fixes Charges for such period plus Cash Lease Expense for such period provided :
 
(i)           the Consolidated EBITDA of any Person acquired by the Parent or its Subsidiaries during the last quarter of such four quarter period shall be included on a pro forma basis (assuming the consummation of such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such quarter) determined on an annualized basis based on the most recent fiscal quarter of such Person for which financial statements are available if the consolidated balance sheet of such acquired Person and its consolidated Subsidiaries as at the end of the period preceding the acquisition of such Person and the related consolidated statements of income and stockholders’ equity and of cash flows for the period, in each case, to the extent available, in respect of which Consolidated EBITDA is to be calculated (x) have been previously provided to the Administrative Agent and the Lenders and (y) either (1) have been reported on without a qualification arising out of the scope of the audit by independent certified public accountants of nationally recognized standing or (2) have been found reasonably acceptable by the Administrative Agent;
 
(ii)           the Consolidated EBITDA of any Person acquired during the first, second or third quarters of such four quarter period shall be deemed to be equal to Consolidated EBITDA of such Person for the number of fiscal quarters elapsed since the date of acquisition (after giving effect to any pro forma adjustment made pursuant to clause (i) above) multiplied by 4, 2 and 4/3, respectively; and
 
(iii)           the Consolidated EBITDA of any Person Disposed of by the Parent or its Subsidiaries during such period shall be excluded for such four quarter period (assuming the consummation of such Disposition and the repayment of any Indebtedness in connection therewith occurred on the first day of such period).
 

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“ Consolidated Fixed Charges ” means for any period, the sum (without duplication) of (a) Consolidated Interest Expense of the Parent and its Subsidiaries for such period, (b) cash income taxes actually paid by the Parent or any of its Subsidiaries on a consolidated basis during such period, (c) scheduled payments made during such period on account of principal of Indebtedness of the Parent or any of its Subsidiaries, (d) dividends accrued (whether or not declared or payable) on the preferred stock of the Parent and its Subsidiaries during such period, (e) the Parent’s and its Subsidiaries’ pro rata share of all expenses and payments referred to in the preceding clauses (a) and (b) of any unconsolidated Person in which they have an equity interest and (f) maintenance capital expenditures in an amount equal to the product of (i) $575 per Senior Living Unit per annum, and (ii) the number of Senior Living Units owned or leased by the Parent and its Subsidiaries during such period measured at the end of the most recent calendar quarter ending prior to such date of determination.
 
“ Consolidated Interest Expense ” means with respect to any Person for any period, total cash interest expense (including that attributable to Capital Lease Obligations) of such Person and its Subsidiaries for such period with respect to all outstanding Indebtedness of such Person and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed by such Person with respect to letters of credit and bankers’ acceptance financing and net costs of such Person under Swap Contracts (but only to the extent included in interest expense in such Person’s financial statement and to the extent actually paid) in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP).
 
“ Consolidated Net Income ” means, with respect to any Person for any period, the consolidated net income (or loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided, that in calculating Consolidated Net Income of the Parent and its Consolidated Subsidiaries for any period, there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Parent or is merged into or consolidated with the Parent or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Parent) in which the Parent or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Parent or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Parent to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligations (other than under any Credit Document) or requirement of Law applicable to such Subsidiary.
 
“ Consolidated Parties ” means the Parent and its Consolidated Subsidiaries, as determined in accordance with GAAP.
 
“ Consolidated Subsidiary ” means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Parent in its consolidated financial statements if such statements were prepared as of such date.
 
“ Consolidated Tangible Net Worth ” means (i) Stockholders’ Equity plus (ii) Minority Interests plus (iii) cumulative net additions of Depreciation and Amortization Expense deducted in determining income for all fiscal quarters ending after the date of Parent’s formation plus (iv)
 

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non-cash deferred gains from sale-leaseback transactions and deferred entrance fee revenue, minus (v) Intangible Assets, in each case, for the most recent fiscal quarter ending prior to such date for which financial statements are available.
 
“ Contract Rate ” means (a) the Eurodollar Rate plus the Applicable Percentage or (b) if the provisions of Section 3.02 or Section 3.03 apply and Borrowers elect to request Borrowings using the Base Rate, in which event it shall mean the Base Rate plus the Applicable Percentage; provided that in no event would use of the Base Rate plus Applicable Percentage increase or decrease the Lender’s rate of return over what it would have received at the Eurodollar Rate plus the Applicable Percentage.
 
“ Contractual Obligation ” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
 
“ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.  “Controlling” and “Controlled” have meanings correlative thereto.  Without limiting the generality of the foregoing, a Person shall be deemed to be Controlled by another Person if such other Person possesses, directly or indirectly, power to vote twenty-five percent (25%) or more of the securities having ordinary voting power for the election of directors, managing general partners or the equivalent.
 
“ Control Investment Affiliates ” means, as to any Person that (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies.  For purposes of this definition, “control” of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
 
“ COSO ” means the Committee of Sponsoring Organizations of the Treadway Commission.
 
“ Credit Agreement ” has the meaning given to such term in the introductory paragraph hereof.
 
“ Credit Documents ” means this Credit Agreement, the Collateral Documents, the Notes, the Guaranty, the Proposal, the Lender Joinder Agreements, the Borrower Joinder Agreement, the Borrowing Base Certificates, the Hazardous Materials Indemnity Agreement and the Compliance Certificates.
 
“ Credit Party ” means, as of any date, the Borrowers or Guarantor; and “ Credit Parties ” means a collective reference to each of them.
 
“ Daily Unused Fee ” means, for any day during the Commitment Period, an amount equal to (a) one percent (1%) multiplied by (b) the amount by which the Aggregate Commitments exceed the sum of the Outstanding Amount of Obligations as of the beginning of such day.
 

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“ Debtor Relief Laws ” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
 
“ Debt Yield ” means the ratio, expressed as a percentage, as of any date of determination, of (a) annualized Adjusted Net Operating Income from the Borrowing Base Assets, as determined by Administrative Agent for a particular period, to (b) the outstanding principal balance of the Loan as of such date.
 
“ Default ” means any event, act or condition that, with notice, the passage of time, or both, would constitute an Event of Default.
 
“ Default Rate ” means an interest rate equal to the Contract Rate plus five percent (5%) per annum.
 
“ Defaulting Lender ” means any Lender that (a) has failed to fund any portion of the Advances required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder and has not cured such failure prior to the date of determination, (b) has notified the Borrowers, the Administrative Agent or any Lender that it does not intend to comply with its funding obligations or has made a public statement to that effect with respect to its funding obligations hereunder or under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by the Administrative Agent, to confirm in a manner satisfactory to the Administrative Agent that it will comply with its funding obligations, (d) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, and has not cured such failure prior to the date of determination, or (e) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, or (iii) taken any action in furtherance of, or indicated its consent to, approval of or acquiescence in any such proceeding or appointment; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority.
 
“ Depreciation and Amortization Expense ” means for any period, without duplication, the sum for such period of (i) total depreciation and amortization expense, whether paid or accrued, of the Parent and its Subsidiaries during such period, plus (ii) the Parent’s and its Subsidiaries’ pro rata share of depreciation and amortization expenses of Unconsolidated Joint Ventures for such period.  For purposes of this definition, the Parent’s and its Subsidiaries’ pro rata share of depreciation and amortization expense of any Unconsolidated Joint Venture shall be deemed equal to the product of (i) the depreciation and amortization expense of such Unconsolidated Joint Venture, multiplied by (ii) the percentage of the total outstanding Equity Interests of such Unconsolidated Joint Venture held by the Parent or such Subsidiary, expressed as a decimal.
 

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“ Determination Date ” has the meaning specified in Section 2.03 .
 
“ Disposition ” or “ Dispose ” means the sale, transfer, license, lease or other disposition (including any Sale and Leaseback Transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.
 
“ Disqualified Stock ” means any capital stock, warrants, options or other rights to acquire capital stock (but excluding any debt security which is convertible, or exchangeable, for capital stock), which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable prior to the Maturity Date, pursuant to a sinking fund obligation or otherwise, or is or may be redeemable at the option of the holder thereof, in whole or in part, prior to the Maturity Date.
 
“ Dollar ” or “ $ ” means the lawful currency of the United States.
 
“ Eligible Assignee ” means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; (d) a Permitted Investor; and (e) any other Person (other than a natural person) approved by the Administrative Agent (such approval not to be unreasonably withheld), (such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, “Eligible Assignee” shall not include the Parent or any of the Parent’s Affiliates or Subsidiaries other than Permitted Investors.
 
“ Eligible Ground Lease ” means, at any time, a ground lease (a) under which a Borrower is the lessee or holds equivalent rights and is the fee owner of the improvements located thereon, (b) that has a remaining term of not less than thirty (30) years, (c) under which any required rental payment, principal or interest payment or other payment due under such lease from such Borrower to the ground lessor is not more than sixty (60) days past due and any required rental payment, principal or interest payment or other payment due to such Borrower under any sublease of the applicable real property lessor is not more than sixty (60) days past due, (d) where no party to such lease is subject to a then-continuing Bankruptcy Event, (e) such ground lease (or a related document executed by the applicable ground lessor) contains customary provisions protective of any lender to the lessee and (f) where the Borrower’s interest in the underlying Real Property Asset or the lease is not subject to (i) any Lien other than Permitted Liens and other encumbrances acceptable to the Administrative Agent and the Required Lenders, in their discretion, or (ii) any Negative Pledge.
 
“ Eligible Tenant ” means an Operating Tenant which (a) is not in arrears on any required rental payment, principal or interest payment, payments of real property taxes or payments of premiums on insurance policies with respect to its lease or sublease beyond the later of (i) the applicable grace period with respect thereto, if any, and (ii) forty five (45) days; (b) is not subject to a then-continuing Bankruptcy Event; and (c) is reasonably acceptable in all material respects to the Administrative Agent and the Required Lenders (it being understood that for purposes of this clause (c), each Operating Tenant set forth on Schedule 5.12 hereto on the Closing Date is deemed acceptable).
 

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“ Environmental Laws ” means any and all federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.
 
“ Equity Interests ” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
 
“ ERISA ” means the Employee Retirement Income Security Act of 1974.
 
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) under common control with the Parent within the meaning of Section 414(b) or (c) of the Internal Revenue Code (and Sections 414(m) and (o) of the Internal Revenue Code for purposes of provisions relating to Section 412 of the Internal Revenue Code).
 
“ ERISA Event ” means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Parent or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Parent or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition that could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Parent or any ERISA Affiliate.
 
“ Eurodollar Base Rate ” means:
 
(a)           For any Interest Period, the rate determined by the Administrative Agent to be the offered rate for deposits of Dollars for the applicable Interest Period that appears on Reuters Screen LIBOR01 Page as of 11:00 a.m. (London, England time) on the second full Business Day next preceding the first day of each Interest Period.  In the event that such rate does not appear on the Reuters Screen LIBOR01 page at such time, the “ Eurodollar Base Rate ” shall be determined by reference to such other comparable publicly available service for displaying the
 

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offered rate for deposit in Dollars in the London interbank market as may be selected by the Administrative Agent and, in the absence of availability, such other method to determine such offered rate as may be selected by the Administrative Agent in its sole discretion.
 
(b)           Notwithstanding the foregoing, for purposes of this Agreement, the Eurodollar Base Rate shall in no event be less than 2.0% per annum at any time.
 
“ Eurodollar Rate ” means for any Interest Period, a rate per annum determined by the Administrative Agent pursuant to the following formula:
 

Eurodollar Rate  =
Eurodollar Base Rate
1.00 - Eurodollar Reserve Percentage

“ Eurodollar Reserve Percentage ” means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as “Eurocurrency liabilities”).  The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage.
 
“ Event of Acceleration ” means any of the events or conditions set forth in Sections 8.01(f) , (g) or (j) with respect to the Parent or any Borrower.
 
“ Event of Default ” has the meaning provided in Section 8.01 .
 
“ Extension of Credit ” means with respect to any Lender, collectively, all Advances made by such Lender under the Loan.
 
“ Facility Operating Lease SNDA ” shall have the meaning provided in the definition of “Borrowing Base Asset Deliverables” contained in this Section 1.01 .
 
“ Facility Operating Leases ” means each lease or master lease with respect to any Borrowing Base Asset from the applicable Borrower as lessor, to an Eligible Tenant, which, in the reasonable judgment of the Administrative Agent, is a triple net lease such that such Eligible Tenant is required to pay all taxes, utilities, insurance, maintenance, casualty insurance payments and other expenses with respect to the subject Borrowing Base Asset (whether in the form of reimbursements or additional rent) in addition to the base rental payments required thereunder such that net operating income for such Borrowing Base Asset (before non-cash items) equals the base rent paid thereunder; provided, that each such lease or master lease shall be in form and substance reasonably satisfactory to the Administrative Agent; as the foregoing may be amended and extended from time to time after the Closing Date in accordance with and subject to the terms of this Agreement and the Facility Operating Lease SNDA applicable thereto.
 
“ Federal Funds Rate ” means, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank
 

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of New York on the Business Day immediately succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the immediately preceding Business Day as so published on the immediately succeeding Business Day, and (b) if no such rate is so published on such immediately succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to the next 1/100 th of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
 
“ FIG ” means Fortess Investment Group LLC.
 
“ Flood Hazard Property ” has the meaning provided in the definition of “Borrowing Base Asset Deliverables” contained in this Section 1.01 .
 
“ Foreign Lender ” has the meaning provided in Section 10.15(a)(i) .
 
“ FRB ” means the Board of Governors of the Federal Reserve System of the United States.
 
“ Fund ” means any Person (other than a natural person) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
 
“ Funded Debt ” means, as to any Person (or consolidated group of Persons) at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:
 
(a)           all obligations for borrowed money, whether current or long-term (including the Obligations hereunder), and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments;
 
(b)           all purchase money indebtedness (including indebtedness and obligations in respect of conditional sales and title retention arrangements, except for customary conditional sales and title retention arrangements with suppliers that are entered into in the ordinary course of business) and all indebtedness and obligations in respect of the deferred purchase price of property or services (other than trade accounts payable incurred in the ordinary course of business and payable on customary trade terms);
 
(c)           all direct obligations under letters of credit (including standby and commercial), bankers’ acceptances and similar instruments (including bank guaranties, surety bonds, comfort letters, keep-well agreements and capital maintenance agreements) to the extent such instruments or agreements support financial, rather than performance, obligations;
 
(d)           the Attributable Principal Amount of Capital Leases and Synthetic Leases;
 
(e)           the Attributable Principal Amount of Securitization Transactions;
 
(f)           all preferred stock and comparable equity interests providing for mandatory redemption, sinking fund or other like payments;
 

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(g)           Support Obligations in respect of Funded Debt of another Person (other than Persons in such group, if applicable); and
 
(h)           Funded Debt of any partnership or joint venture or other similar entity in which such Person is a general partner or joint venturer, and, as such, has personal liability for such obligations, but only to the extent there is recourse to such Person (or, if applicable, any Person in such consolidated group) for payment thereof.
 
For purposes hereof, the amount of Funded Debt shall be determined based on (i) the outstanding principal amount in the case of borrowed money indebtedness under clause (a), (ii) the outstanding purchase money indebtedness and the deferred purchase obligations under clause (b), (iii) the maximum amount available to be drawn in the case of letter of credit obligations and the other obligations under clause (c), and (iv) the amount of Funded Debt that is the subject of the Support Obligations in the case of Support Obligations under clause (g).  For purposes of clarification, “Funded Debt” of Persons constituting a consolidated group shall not include inter-company indebtedness of such Persons, general accounts payable of such Persons which arise in the ordinary course of business, accrued expenses of such Persons incurred in the ordinary course of business or minority interests in joint ventures or limited partnerships (except to the extent set forth in clause (h) above).
 
“ GAAP ” means generally accepted accounting principles in effect in the United States as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board from time to time applied on a consistent basis, subject to the provisions of Section 1.03 .
 
“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof, and any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
 
“ Guarantor ” means the Parent.
 
“ Guaranty ” means the guaranty in the form of Exhibit G dated as of the date hereof executed by the Parent, as amended, supplemented or otherwise modified from time to time.
 
“ Hazardous Substance ” means any toxic or hazardous substance, including petroleum and its derivatives regulated under the Environmental Laws.
 
“ Healthcare Facilities ” means any skilled nursing facilities, mentally retarded and developmentally disabled facilities, rehab hospitals, long term acute care facilities, intermediate care facilities for the mentally disabled, medical office buildings, domestic assisted living facilities, independent living facilities or Alzheimer’s care facilities and any ancillary businesses that are incidental to the foregoing.
 
“ Healthcare Laws ” has the meaning provided in Section 5.19(a) .
 

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“ HIPAA ” means the Health Insurance Portability and Accountability Act of 1996 and the related regulations set forth at 45 CFR Parts 160 and 164.
 
“ HMO ” means any health maintenance organization, managed care organization, any Person doing business as a health maintenance organization or managed care organization, or any Person required to qualify or be licensed as a health maintenance organization or managed care organization under applicable federal or state law (including, without limitation, HMO Regulations).
 
“ Indebtedness ” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:
 
(a)           all Funded Debt;
 
(b)           all contingent obligations under letters of credit (including standby and commercial), bankers’ acceptances and similar instruments (including bank guaranties, surety bonds, comfort letters, keep-well agreements and capital maintenance agreements) to the extent such instruments or agreements support financial, rather than performance, obligations;
 
(c)           net obligations under any Swap Contract;
 
(d)           Support Obligations in respect of Indebtedness of another Person; and
 
(e)           Indebtedness of any partnership or joint venture or other similar entity in which such Person is a general partner or joint venturer, and, as such, has personal liability for such obligations, but only to the extent there is recourse to such Person for payment thereof.
 
For purposes hereof, the amount of Indebtedness shall be determined based on Swap Termination Value in the case of net obligations under Swap Contracts under clause (c) and based on the outstanding principal amount of the Indebtedness that is the subject of the Support Obligations in the case of Support Obligations under clause (d).
 
“ Indemnified Liabilities ” has the meaning provided in Section 10.05 .
 
“ Indemnitees ” has the meaning provided in Section 10.05 .
 
“ Intangible Assets ” means assets that are considered intangible assets under GAAP, including customer lists, goodwill, computer software, copyrights, trade names, trademarks, patents and Capitalized Loan Fees.
 
“ Interest Period ” means each period commencing on the first day of a calendar month and ending on the date three months thereafter, provided that:
 
(a)           any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the immediately succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Business Day;
 

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(b)           any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and
 
(c)           no Interest Period shall extend beyond the Maturity Date.
 
“ Internal Control Event ” means a material weakness in, or fraud that involves management or other employees who have a significant role in, the Borrower’s internal controls over financial reporting, in each case as described in the Securities Laws.
 
“ Internal Revenue Code ” means the Internal Revenue Code of 1986 as amended.
 
“ Investment ” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of Capital Stock of another Person, (b) a loan, advance or capital contribution to, guaranty or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit.  For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.
 
“ IRS ” means the United States Internal Revenue Service.
 
“ Joint Commission ” has the meaning given to such term in Section 5.19(b) .
 
“ Laws ” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.
 
“ Lender ” means each of the Persons identified as a “Lender” on the signature pages hereto and each Person who joins as a Lender pursuant to the terms hereof, together with their respective successors and assigns.
 
“ Lender Joinder Agreement ” means a joinder agreement in the form of Exhibit F , executed and delivered in accordance with the provisions of Section 2.01(b) .
 
“ Lending Office ” means, as to any Lender, the office or offices of such Lender set forth in such Lender’s Administrative Questionnaire or such other office or offices as a Lender may from time to time notify the Borrowers and the Administrative Agent.
 
“ Licenses ” has the meaning provided in Section 5.19(b)(i) .
 

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“ Lien ” means any mortgage, deed of trust, deed to secured debt, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, and any financing lease having substantially the same economic effect as any of the foregoing).
 
“ Loan ” means the revolving loan to be made pursuant to the terms of this Credit Agreement.
 
“ Loan Borrowing Notice ” means a notice of a Borrowing, which, if in writing, shall be substantially in the form of Exhibit A.
 
“ Management Agreements ” means, collectively, those certain agreements between Borrowers and the Property Managers or between Operating Tenants and the Property Managers for the management of certain of the Borrowing Base Assets, and as described on Part II of Schedule 5.12 .
 
“ Material Action ” means to file any insolvency, or reorganization case or proceeding, to institute proceedings to have any Borrower or any Credit Party be adjudicated bankrupt or insolvent, to institute proceedings under any applicable insolvency law, to seek any relief under any law relating to relief from debts or the protection of debtors, to consent to the filing or institution of bankruptcy or insolvency proceedings against any Borrower or any Credit Party, to file a petition seeking, or consent to, reorganization or relief with respect to any Borrower or any Credit Party under any applicable federal or state law relating to bankruptcy or insolvency, to seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian, or any similar official of or for any Borrower or any Credit Party or a substantial part of its respective property, to make any assignment for the benefit of creditors of any Borrower or any Credit Party, the admission in writing by any Borrower or any Credit Party of such Person’s inability to pay its debts generally as they become due, or to take action in furtherance of any of the foregoing.
 
“ Material Adverse Effect ” means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets, liabilities or prospects of (A) the Parent and its Consolidated Subsidiaries taken as a whole or (B) the Borrowers taken as a whole, (ii) the ability of the Parent or the Borrowers to perform any material obligation under the Credit Documents, or (iii) the rights and remedies of the Administrative Agent and the Lenders under the Credit Documents.
 
“ Material Contract ” means, collectively, any Facility Operating Lease, any property management agreement, any cash management agreement, or any similar agreement with respect to any Borrowing Base Asset.
 
“ Maturity Date ” means, as applicable, the earlier of (a) June 30, 2013, or (b) any earlier date on which the all of the Obligations are required to be paid in full, by acceleration or otherwise, under this Agreement or any of the other Credit Documents.
 

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“ Medicaid ” means the medical assistance programs administered by state agencies and approved by CMS pursuant to the terms of Title XIX of the Social Security Act, codified at 42 U.S.C. 1396 et seq .
 
“ Medical Services ” means medical and health care services provided to a Person, including, but not limited to, medical and health care services provided to a Person which are covered by a policy of insurance, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided to a Person for a necessary or specifically requested valid and proper medical or health purpose.
 
“ Medicare ” means the program of health benefits for the aged and disabled administered by CMS pursuant to the terms of Title XVIII of the Social Security Act, codified at 42 U.S.C. 1395 et seq .
 
“ Minority Interests ” means that portion of “minority interests” as set forth in the Parent’s financial statements which is attributable to the ownership interest in the Parent of Persons other than the Permitted Investors.
 
“ Moody’s ” means Moody’s Investors Service, Inc.  and any successor thereto.
 
“ Mortgage Instrument ” means, for any Real Property Asset, a first lien priority mortgage, deed of trust or deed to secure debt in favor of the Administrative Agent (for the benefit of the Lenders) with respect to such Real Property Asset.  Each Mortgage Instrument shall be in form and substance satisfactory to the Administrative Agent and suitable for recording in the applicable jurisdiction.
 
“ Mortgage Policies ” shall have the meaning assigned to such term in the definition of “Borrowing Base Asset Deliverables” contained in this Section 1.01 .
 
“ Multiemployer Plan ” means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Parent or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions.
 
“ Negative Pledge ”   means any agreement (other than this Credit Agreement or any other Credit Document) that in whole or in part prohibits the creation of any Lien on any assets of a Person; provided, however, that an agreement that establishes a maximum ratio of unsecured debt to unencumbered assets, or of secured debt to total assets, or that otherwise conditions a Person’s ability to encumber its assets upon the maintenance of one or more specified ratios that limit such Person’s ability to encumber its assets but that do not generally prohibit the encumbrance of its assets, or the encumbrance of specific assets, shall not constitute a “Negative Pledge” for purposes of this Credit Agreement.
 
“ Notes ” or “ Notes ” means the note or notes in the form of Exhibit B attached hereto given to the Lenders to evidence the Loan, as amended, restated, modified, supplemented, extended, renewed or replaced.
 

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“ Obligations ” means, without duplication, all advances to, and debts, liabilities, obligations, covenants and duties of, any Credit Party arising under any Credit Document or otherwise with respect to the Loan, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Credit Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
 
“ Occupancy Rate ” means, with respect to any Real Property Asset, the percentage of  (a) total patient days relating to such Real Property Asset for any reporting period divided by (b) the product of (i) total number of  in-service beds  (as determined as of the Closing Date) at such Real Property Asset and (ii) the total days in such reporting period.
 
“ Operating Tenant ” means any Person who is a lessee with respect to the Facility Operating Leases or any other lease of an entire Borrowing Base Asset held by any Borrower as lessor or as an assignee of the lessor thereunder.
 
“ Operator ”, individually, and “ Operators ”, collectively, means the applicable Property Manager, Operating Tenant and any successor to such Operator approved by Administrative Agent.  If there exists a Property Manager, Operating Tenant, or any combination thereof, with respect to any Borrowing Base Asset, then “Operator” shall refer to all such entities, collectively and individually as applicable and as the context may require.
 
“ Organization Documents ” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.
 
“ Other Taxes ” has the meaning provided in Section 3.01 .
 
“ Outstanding Amount ” means the aggregate outstanding principal amount of the Loan after giving effect to any Borrowings and prepayments or repayments of the Loan, as the case may be, occurring on such date.
 
“ Outstanding Amount Percentage ” means a fraction, stated as a percentage, the numerator of which is the Outstanding Amount and the denominator of which is the Aggregate Committed Amount.
 
“ Overpaying Borrower ” has the meaning provided in Section 2.12(j) .
 
“ Overpayment Amount ” has the meaning provided in Section 2.12(j) .
 

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“ Parent ” means Brookdale Senior Living Inc., a Delaware corporation.
 
“ Parent Cash Management System ” has the meaning provided in Section 6.24 .
 
“ Parent Sweep Account ” means the account established at Bank of America, N.A., or another national bank or other financial institution approved by Administrative Agent into which deposits from the Portfolio General Receivables Account will be swept on a daily basis, all as more fully described in Section 6.24 .
 
“ Participant ” has the meaning provided in Section 10.07(d) .
 
“ Patriot Act ” - Means the USA Patriot Act, Pub. L. No. 107-56 et seq .
 
“ Payment Date ” has the meaning provided in Section 2.04(a)(ii) , and is the date that a regularly scheduled payment of interest is due.
 
“ PBGC ” means the Pension Benefit Guaranty Corporation.
 
“ Pension Plan ” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Parent or any ERISA Affiliate or to which the Parent or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
 
“ Permitted Investors ” means, collectively, FIG and its Control Investment Affiliates, provided that, the definition of “Permitted Investors” shall not include any Control Investment Affiliate whose primary purpose is the operation of an on-going business (excluding any business whose primary purpose is the investment of capital or assets).
 
“ Permitted Liens ” means, as to any Person: (a) Liens securing taxes, assessments and other charges or levies imposed by any Governmental Authority (excluding any Lien imposed pursuant to any of the provisions of ERISA), in each case, which are not yet due and payable; (b) Liens evidencing the claims of materialmen, mechanics, carders, warehousemen or landlords for labor, materials, supplies or rentals, in each case, incurred in the ordinary course of business and which are not at the time required to be paid or discharged; provided, that with respect to any Borrowing Base Asset, no exception is taken therefor in the related Mortgage Policy or such Mortgage Policy otherwise affirmatively insures over such Liens in form and substance satisfactory to the Administrative Agent; (c) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure payment of, obligations under workmen’s compensation, unemployment insurance or similar applicable Laws; (d) zoning restrictions, easements, rights-of-way, covenants, reservations and other rights, restrictions or encumbrances of record on the use of Real Property Assets, which do not materially detract from the value of such property or materially impair the use thereof for the business of such Person; (e) Liens in existence as of the Closing Date as set forth on Schedule 7.01 and, with respect to the Borrowing Base Assets, as set forth on the Mortgage Policies (or updates thereto) delivered in connection herewith; and (f) Liens, if any, in favor of the Administrative Agent for the benefit of the Lenders.
 

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“ Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
 
“ Plan ” means any “employee benefit plan” (as such term is defined in Section 3(3) of ERISA) established by the Parent or, with respect to any such plan that is subject to Section 412 of the Internal Revenue Code or Title IV of ERISA, any ERISA Affiliate.
 
“ Portfolio General Receivables Account ” means an account established at Bank of America, N.A., or another national bank or other financial institution approved by Administrative Agent into which the Borrowers will deposit, or cause to be deposited, all general receivables and other income generated from the operations of the Borrowing Base Assets and proceeds of the Third Party Payor Receivables Accounts, and which account will be (a) in the name of Borrower Representative, as agent for all Borrowers, and (b) subject to a Blocked Account Agreement in form satisfactory to Administrative Agent.
 
“ Principal Obligations ” has the meaning provided in Section 2.05(b) .
 
“ Prohibited Person ” means any Person (i) listed in the annex to, or who is otherwise subject to the provisions of, Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (the “ Executive Order ”); (ii) that is owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the annex to, or is otherwise subject to the provisions, of the Executive Order; (iii) with whom a Person is prohibited from dealing or otherwise engaging in any transaction by any terrorism or money laundering Law, including the Executive Order; (iv) who commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order; (v) that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website or at any replacement website or other replacement official publication of such list; or who is an Affiliate of a Person listed in clauses (i) - (v) above.
 
“ Property Manager ” means any manager under the Management Agreements listed on Part II of Schedule 5.12 and any successor property manager approved by Administrative Agent.
 
“ Proposal ” means the Proposal from GECC to the Parent, dated January 4, 2010, and accepted by the Parent on January 8, 2010.
 
“ Real Estate Taxes ” means any real estate taxes and assessments, franchise taxes and charges, and other governmental charges that may become a Lien upon the Borrowing Base Assets or become payable during the term of the Loan.
 
“ Real Property Asset ” means, a parcel of real property, together with all improvements (if any) thereon, owned in fee simple or leased pursuant to an Eligible Ground Lease by any Person; “ Real Property Assets ” means a collective reference to each Real Property Asset.
 
“ Register ” has the meaning provided in Section 10.07(c) .
 

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“ Registered Public Accounting Firm ” has the meaning specified in the Securities Laws and shall be independent of the Borrowers as prescribed by the Securities Laws.
 
“ Regulation T ” means Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time.
 
“ Regulation U ” means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time.
 
“ Regulation X ” means Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time.
 
“ Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person’s Affiliates.
 
“ Release Price ” has the meaning provided in Section 7.12 .
 
“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the thirty-day notice period has been waived.
 
“ Required Lenders ” means, as of any date of determination, two or more Lenders (except to the extent only one Lender exists as of such date) having at least (i) 66-2/3% of the Aggregate Commitments or, (ii) if the commitments of each Lender to make Advances have been terminated pursuant to Article VIII , Lenders holding in the aggregate at least 66-2/3% of the Obligations; provided that the Commitment of, and the portion of the Obligations held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.
 
“ Responsible Officer ” means the chief executive officer, the president, a co-president, an executive vice-president, the chief operating officer and the chief financial officer of any Credit Party.  Any document delivered hereunder that is signed by a Responsible Officer of a Credit Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Credit Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Credit Party.
 
“ Restoration Threshold ” means on a per Borrowing Base Asset basis, the lesser of (a) $1,000,000 or (b) an amount equal to 20% times the pre-casualty value of the affected Borrowing Base Asset, as determined by Agent.
 
“ S&P ” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.  and any successor thereto.
 
“ Sale and Leaseback Transaction ” means, with respect to the Parent or any Subsidiary, any arrangement, directly or indirectly, with any person whereby the Parent or such Subsidiary shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it
 

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intends to use for substantially the same purpose or purposes as the property being sold or transferred.
 
“ Sarbanes-Oxley ” means the Sarbanes-Oxley Act of 2002.
 
“ SEC ” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
 
“ Securities Laws ” means the Securities Act of 1933, the Securities Exchange Act of 1934, Sarbanes-Oxley and the applicable accounting and auditing principles, rules, standards and practices promulgated, approved or incorporated by the SEC or the Public Company Accounting Oversight Board, as each of the foregoing may be amended and in effect on any applicable date hereunder.
 
“ Securitization Transaction ” means any financing or factoring or similar transaction (or series of such transactions) entered by any member of the Consolidated Parties pursuant to which such member of the Consolidated Parties may sell, convey or otherwise transfer, or grant a security interest in, accounts, payments, receivables, rights to future lease payments or residuals or similar rights to payment (the “ Securitization Receivables ”) to a special purpose subsidiary or affiliate (a “ Securitization Subsidiary ”) or any other Person.
 
“ Security Agreement ” means the security agreement dated as of the date hereof in the form of Exhibit H , as amended, supplemented, restated or otherwise modified from time to time.
 
“ Senior Housing Units ” means, collectively, each skilled nursing bed, assisted living unit, memory care unit and independent living unit located on and comprising the Borrowing Base Assets.
 
“ Solvent ” means, with respect to any person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged.  In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
 
“ State Regulator ” means the applicable state department of health or other applicable state regulatory agency with jurisdiction over the Borrower, the Operators or the Real Property Assets with respect to the Healthcare Laws affecting the maintenance, use or operation of the Real Property Assets or the provision of services to the occupants of the Real Property Assets.
 

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“ Stockholders’ Equity ” means, as of any date of determination, the consolidated Stockholders’ Equity of the Parent as at such date determined in accordance with GAAP and shown in the financial consolidated statements of the Parent and its Subsidiaries, provided that, there shall be excluded from Stockholders’ Equity any amount attributable to Disqualified Stock.
 
“ Subsidiary ” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person.  Unless otherwise provided, “ Subsidiary ” shall refer to a Subsidiary of the Parent and shall include all of the Borrowers.
 
“ Support Obligations ” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person.  The amount of any Support Obligations shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Support Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith.
 
“ Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, that are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement,
 

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or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.
 
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination values determined in accordance therewith, such termination values, and (b) for any date prior to the date referenced in clause (a), the amounts determined as the mark-to-market values for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
 
“ Synthetic Lease ” means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing arrangement that is considered borrowed money indebtedness for tax purposes but is classified as an operating lease under GAAP.
 
“ Taxes ” has the meaning provided in Section 3.01 .
 
“ Third Party Payor Receivables Accounts ” means the accounts established at Bank of America, N.A., or another national bank or other financial institution approved by Administrative Agent for each Borrowing Base Asset that is a skilled nursing facility and into which the Borrowers will deposit, or cause to be deposited, all Medicaid, Medicare and Tricare receivables generated from the operations at such Borrowing Base Assets, and which accounts will be (a) in the names of the Borrowers to which such receivables are payable and (b) subject to a Blocked Account Agreement in form satisfactory to Administrative Agent.
 
“ Threshold Amount ” means (a) for any provision relating to the Borrowers as a whole, the Parent or the Consolidated Parties as a whole, $10,000,000 and (b) for any Borrower, individually, $500,000.
 
“ Treasury Rate ” means, as of any date of determination, (a) the yield reported, as of 10:00 a.m.  (New York City time) on such date (or to the extent such date is not a Business Day, the Business Day immediately preceding such date) on the display designated as page “PX-1” of the Bloomberg Financial Markets Services Screen (or such other display as may replace page “PX-1” of the Bloomberg Financial Markets Services Screen) for actively traded U.S.  Treasury securities having a ten (10) year maturity as of such date, or (b) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of such day in Federal Reserve Statistical Release H.15(519) (or any comparable successor publication) for actively traded U.S.  Treasury securities having a constant maturity equal to ten (10) years.
 
“ Tricare ” means the health care program of the United States Department of Defense Military Health System.
 
“ Unconsolidated Joint Venture ” means any Joint Venture of the Parent or any of its Subsidiaries in which the parent or such Subsidiary holds any Equity Interest but which would
 

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not be combined with the Parent in the consolidated financial statements of the Parent in accordance with GAAP.
 
“ Unfunded Pension Liability ” means the excess of a Pension Plan’s benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan’s assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Internal Revenue Code for the applicable plan year.
 
“ United States ” or “ U.S. ” means the United States of America.
 
“ Unused Fee ” shall have the meaning provided in Section 2.07(a) .
 
“ Wholly Owned ” means, with respect to any direct or indirect Subsidiary of any Person, that 100% of the Capital Stock with ordinary voting power issued by such Subsidiary (other than directors’ qualifying shares and investments by foreign nationals mandated by applicable Law) is beneficially owned, directly or indirectly, by such Person.
 
1.02.             Interpretive Provisions.
 
With reference to this Credit Agreement and each other Credit Document, unless otherwise provided herein or in such other Credit Document:
 
(a)            The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.
 
(b)            i)           The words “herein,” “hereto,” “hereof” and “hereunder” and words of similar import when used in any Credit Document shall refer to such Credit Document as a whole and not to any particular provision thereof.
 
(ii)            Unless otherwise provided or required by context, Article, Section, Exhibit and Schedule references are to the Credit Document in which such reference appears.
 
(iii)            The term “including” is by way of example and not limitation.
 
(iv)            The term “documents” includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced, whether in physical or electronic form.
 
(c)            In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”
 
(d)            Section headings herein and in the other Credit Documents are included for convenience of reference only and shall not affect the interpretation of this Credit Agreement or any other Credit Document.
 

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1.03.             Accounting Terms.
 
(a)            All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Credit Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the audited financial statements for the fiscal year ended December 31, 2008, except as otherwise specifically prescribed herein.
 
(b)            The Parent will provide a written summary of material changes in GAAP or in the consistent application thereof with each annual and quarterly Compliance Certificate delivered in accordance with Section 6.02(a) .  If at any time any change in GAAP or in the consistent application thereof would affect the computation of any financial ratio or requirement set forth in any Credit Document, and either the Parent or the Required Lenders shall object in writing to determining compliance based on such change, then such computations shall continue to be made on a basis consistent with the most recent financial statements delivered pursuant to Section 6.01(a) or (b) as to which no such objection has been made.
 
1.04.             Rounding.
 
Any financial ratios required to be maintained by the Parent pursuant to this Credit Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
 
1.05.             References to Agreements and Laws.
 
Unless otherwise expressly provided herein, (a) references to Organization Documents, agreements (including the Credit Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Credit Document; and (b) references to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law.
 
1.06.             Times of Day.
 
Unless otherwise provided, all references herein to times of day shall be references to Central time (daylight or standard, as applicable).
 
ARTICLE II
COMMITMENTS AND ADVANCES
 
2.01.             Commitments.
 
Subject to the terms and conditions set forth herein:
 

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(a)             Loan Advances .  During the Commitment Period, each Lender severally agrees to make revolving credit advances (each an “ Advance ” and collectively, the “ Advances ”) to the Borrower Representative on any Business Day; provided that after giving effect to any such Advance, (i) with regard to the Lenders collectively, the aggregate outstanding principal amount of the Obligations shall not exceed the lesser of (x) One Hundred Million Dollars ($100,000,000), (the “ Aggregate Committed Amount ”) and (y) the Borrowing Base Amount for such date and (ii) with regard to each Lender individually, such Lender’s Commitment Percentage of Obligations shall not exceed its respective Committed Amount.  The Loan may be repaid and reborrowed in accordance with the provisions hereof.
 
(b)             Increase in Commitments .  Subject to the terms and conditions set forth herein, the Borrower Representative shall have the one-time right, to be exercised at any time prior to the earlier of (i) the date that is two (2) years following the Closing Date or (ii) the exercise of its option to decrease the Aggregate Committed Amount under Section 2.01(c) below, cause an increase in the Aggregate Committed Amount by up to Twenty Million Dollars ($20,000,000) (to an aggregate amount not more than One Hundred Twenty Million Dollars ($120,000,000)); provided that such increase shall be conditioned and effective upon the satisfaction of the following conditions:
 
(i)            the Borrowers shall obtain commitments for the amount of the increase from existing Lenders or other commercial banks or financial institutions reasonably acceptable to the Administrative Agent, which other commercial banks and financial institutions shall join in this Credit Agreement as Lenders by a Lender Joinder Agreement substantially in the form of Exhibit F attached hereto or other arrangement reasonably acceptable to the Administrative Agent (it being understood that  in no case shall any Lender be required to increase its Commitment without its written consent);
 
(ii)            if any Advances are outstanding at the time of any such increase, the Borrowers shall make such payments and adjustments on the Advances (including payment of any break-funding amounts owing under Section 3.05 ) as may be necessary to give effect to the revised commitment percentages and commitment amounts;
 
(iii)            the Borrowers shall pay to the Administrative Agent the following fees:  (1) for payment to each Lender making such increased commitment, a commitment fee equal to one percent (1%) of the increase to the Aggregate Committed Amount of such Lender and (2) for payment to Administrative Agent for its own account, an arrangement fee equal to one-half of one percent (.5%) times the amount of the increase to the Aggregate Committed Amount.
 
(iv)            the Borrowers shall have executed any new or amended and restated Notes (to the extent requested by the Lenders) to reflect the revised commitment amounts; and
 
(v)            the conditions to the making of an Advance set forth in Section 4.02 shall be satisfied.
 
In connection with any such increase in the Commitments, Schedule 2.01 shall be revised to reflect the modified Commitments and Commitment Percentages of the Lenders, and the
 

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Borrowers shall provide supporting corporate resolutions, legal opinions, promissory notes and other items as may be reasonably requested by the Administrative Agent and the Lenders in connection therewith.
 
(c)             Reduction of Commitments .  Subject to the terms and conditions set forth herein, the Borrower Representative shall have the one-time right, at any time prior to the date that is two (2) years following the Closing Date, upon written notice to the Administrative Agent, to permanently reduce the Aggregate Committed Amount.  Once decreased, the Aggregate Committed Amount may no longer be increased under Section 2.01(b) .  Any such decrease shall be conditioned and effective upon the satisfaction of the following conditions:
 
(i)            any such notice thereof must be received by 11:00 a.m. at least five (5) Business Days prior to the date of reduction or termination; and
 
(ii)            the Commitments may not be reduced to an amount less than the Obligations then outstanding.  The Administrative Agent will give prompt notice to the Lenders of any such reduction in Commitments.  Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender according to its Commitment Percentage thereof.  All commitment or other fees accrued until the effective date of any termination of the Aggregate Commitments shall be paid on the effective date of such termination;
 
In connection with any such decrease in the Commitments, Schedule 2.01 shall be revised to reflect the modified Commitments and Commitment Percentages of the Lenders, and the Borrowers shall provide supporting corporate resolutions, legal opinions, promissory notes and other items as may be reasonably requested by the Administrative Agent and the Lenders in connection therewith.
 
(d)             Temporary Cap on Commitments .  Anything in this Agreement to the contrary notwithstanding, until such time as a Person other than General Electric Capital Corporation is added as a Lender pursuant to Section 10.07 hereof with a Commitment of not less than $20,000,000.00, the Aggregate Commitment Amount hereunder shall not exceed the lesser of (x) $80,000,000.00 and (y) the Borrowing Base Amount.
 
2.02.             Advances of the Loan.
 
(a)            Each Advance of the Loan shall be made upon the Borrower Representative’s irrevocable Loan Borrowing Notice to the Administrative Agent, which may be given by telephone.  Each such notice must be received by the Administrative Agent not later than 11:00 a.m., three (3) Business Days prior to the requested date of any Advance.  Each telephonic notice pursuant to this Section 2.02(a) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Borrowing Notice, appropriately completed and signed by a Responsible Officer of the Parent.  Each Borrowing shall be in a principal amount of not less than $500,000.  Each Loan Borrowing Notice (whether telephonic or written) shall specify (i) the requested date of such Borrowing (which shall be a Business Day) and (ii) the principal amount of Advances to be borrowed.
 

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(b)            Following receipt of a Loan Borrowing Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Commitment Percentage of the applicable Advance.  Each Lender shall make the amount of its Advance available to the Administrative Agent in immediately available funds at the Administrative Agent’s Office not later than 2:00 p.m. on the Business Day specified in the applicable Loan Borrowing Notice.  Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Borrowing is the initial Advance, Section 4.01 ), the Administrative Agent shall make all funds so received available to the party referenced in the applicable Loan Borrowing Notice in like funds as received by the Administrative Agent either by (i) crediting the account of the applicable party on the books of the Administrative Agent with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower Representative.
 
2.03.             Calculation of Availability Amount.
 
(a)            The Availability Amount shall be calculated as of the end of each calendar quarter (the “ Determination Date ”); provided that the Borrowing Base Amount shall be reduced to the Availability Amount only if (a) the Availability Amount is less than the Collateral Value for two (2) consecutive calendar quarters in which case the provisions of Section 2.05(b)(i) shall apply or (b) if the Debt Yield is less than ten percent (10%) for any calendar quarter, in which event the provisions of Section 2.05(b)(ii) shall apply.
 
(b)            Anything herein to the contrary notwithstanding, with respect to the calculation of the Availability Amount for the Borrowing Base Asset located in Akron, Summit County, Ohio (the “ Bath Asset ”) on the first two Determination Dates following the Closing Date only, in lieu of using the ANOI for the trailing six (6) month period prior to the Determination Date for the Bath Asset (i) on the first Determination Date following the Closing Date, the Availability Amount will be calculated using the ANOI for the first six (6) months of 2010 as reflected in the pro forma budget for the Bath Asset provided to Administrative Agent and (b) on the second Determination Date following the Closing Date, the Availability Amount will be calculated using the ANOI for the first three(3) months of 2010 as reflected in the pro forma budget for the Bath Asset provided to Administrative Agent, plus the actual ANOI of the Bath Asset for the trailing three (3) month period prior to the Determination Date.
 
2.04.             Repayment of the Loan.
 
The Loan shall be payable as follows:
 
(a)             Interest Payments .
 
(i)            The Borrowers shall pay a payment of interest only on the Closing Date for the period from the date hereof through the last day of the current month computed at the Contract Rate.
 
(ii)            Commencing on April 1, 2010, and continuing on the first (1st) day of each calendar month thereafter (each such date a “ Payment Date ”), the Borrowers shall pay interest only in arrears computed at the Contract Rate on the outstanding principal balance of the Loan.
 

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(b)             Maturity .  On the Maturity Date, the Borrower shall pay to the Lender all outstanding principal, accrued and unpaid interest, default interest, late charges and any and all other Obligations due under the Credit Documents.
 
2.05.             Prepayments.
 
(a)             Voluntary Prepayments .  The Loan may be repaid in whole or in part without premium or penalty (except amounts payable pursuant to Section 3.05 ); provided that notice thereof must be received by 11:00 a.m. by the Administrative Agent at least three (3) Business Days prior to the date of prepayment.  Each such notice of voluntary prepayment hereunder shall be irrevocable and shall specify the date and amount of prepayment.  The Administrative Agent will give prompt notice to the applicable Lenders of any prepayment on the Loan and the Lender’s interest therein.  Prepayments hereunder shall be accompanied by accrued interest thereon and breakage amounts, if any, under Section 3.05 .
 
(b)             Mandatory Prepayments .
 
(i)            If at any Determination Date, the aggregate principal amount of the Obligations (the “ Principal Obligations ”) shall exceed the lesser of (x) the Aggregate Committed Amount and (y) the Borrowing Base Amount for such date, Borrowers shall within thirty (30) days after such determination, make a prepayment on the Loan in an amount equal to such excess.
 
(ii)            If at any Determination Date, the Debt Yield is less than ten percent (10%), Borrowers shall, within thirty (30) days following the Determination  Date, reduce the Principal Obligations by an amount necessary to achieve a Debt Yield of not less than 10.0%.
 
(c)             Application .  Prepayments on the Obligations will be paid by the Administrative Agent to the Lenders ratably in accordance with their respective interests therein.
 
2.06.             Interest.
 
(a)            Subject to the provisions of subsection (b) below, the Loan and all Advances thereunder shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Contract Rate.
 
(b)            If any amount payable by the Borrowers under any Credit Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Law.  Furthermore, upon the written request of the Required Lenders, while any Event of Default exists, the Borrowers shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Law.  Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.
 

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(c)            In addition to the application of the Default Rate of interest to past due amounts hereunder, if Borrower fails to pay any installment of interest or principal within five (5) days after the date on which the same is due, Borrowers shall pay to Administrative Agent a late charge on such past due amount, as liquidated damages and not as a penalty, equal to five percent (5%) of such amount, but not in excess of the maximum amount of interest allowed by applicable Law.  The foregoing late charge is intended to compensate Administrative Agent and Lenders for the expenses incident to handling any such delinquent payment and for the losses incurred by Administrative Agent and Lenders as a result of such delinquent payment.  Borrowers agree that, considering all of the circumstances existing on the date this Agreement is executed, the late charge represents a reasonable estimate of the costs and losses Administrative Agent and Lenders will incur by reason of late payment.  Borrowers, Administrative Agent and Lenders further agree that proof of actual losses would be costly, inconvenient, impracticable and extremely difficult to fix.  Acceptance of the late charge shall not constitute a waiver of the Default or Event of Default arising from the past due installment, and shall not prevent Administrative Agent from exercising any other rights or remedies available to Administrative Agent with respect to such Default or Event of Default.
 
(d)            Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.
 
2.07.             Fees and Expenses.
 
(a)             Unused Fee .  From and after the Closing Date, the Borrowers agree to pay the Administrative Agent for the ratable benefit of the Lenders an unused fee (the “ Unused Fee ”) for each calendar quarter (or portion thereof) in an amount equal to the sum of the Daily Unused Fees incurred during such period.  The Unused Fee shall accrue at all times during the Commitment Period (and thereafter so long as Obligations shall remain outstanding), including periods during which the conditions to Advances in Section 4.02 may not be met, and shall be payable quarterly in arrears on the last day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Maturity Date (and, if applicable, thereafter on demand); provided, that (i) no Unused Fee shall accrue on the Commitment of a Defaulting Lender so long as such Lender shall be a Defaulting Lender and (ii) any Unused Fee accrued with respect to the Commitment of a Defaulting Lender during the period prior to the time such Lender became a Defaulting Lender and unpaid at such time shall not be payable by the Borrower so long as such Lender shall be a Defaulting Lender.  The Administrative Agent shall distribute the Unused Fee to the Lenders pro rata in accordance with the respective Commitments of the Lenders.
 
(b)             Annual Administrative Fee .  From and after the Closing Date, the Borrowers agree to pay Administrative Agent, for its sole benefit, an annual administrative agent fee in the amount of $100,000.00.  Such fee shall be payable in twelve (12) equal installments of $8,333.303 each, which installments shall be due and payable on each Payment Date.
 
(c)             Arrangement Fee .  On the Closing Date, the Borrowers shall pay to the Administrative Agent, for its sole benefit and account, an arrangement fee equal to one half of one percent (.5%) times the Aggregate Committed Amount in excess of $80,000,000.
 

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(d)             Collateral Monitoring Fee .  The Borrowers shall pay to the Administrative Agent on the first (1st) day of each month during the term of the Loan, in addition to all other amounts due under the Credit Documents, the sum of One Hundred Fifty and No/100 Dollars ($150.00) per Borrowing Base Asset as a collateral monitoring fee.
 
2.08.             Computation of Interest.
 
All computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year).
 
2.09.             Payments Generally.
 
(a)            All payments to be made by the Borrowers shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff.  Except as otherwise expressly provided herein, all payments by the Borrowers hereunder shall be made to the Administrative Agent, for the account of the Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m.  on the date specified herein.  The Administrative Agent will promptly distribute to each Lender its Commitment Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office.  All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the immediately succeeding Business Day and any applicable interest or fee shall continue to accrue.
 
(b)            Subject to the definition of “Interest Period,” if any payment to be made by the Borrowers shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.
 
(c)            Unless the Borrowers or any Lender has notified the Administrative Agent, prior to the date any payment is required to be made by it to the Administrative Agent hereunder, that the Borrowers or such Lender, as the case may be, will not make such payment, the Administrative Agent may assume that the Borrowers or such Lender, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto.  If and to the extent that such payment was not in fact made to the Administrative Agent in immediately available funds, then:
 
(i)            if the Borrowers fail to make such payment, each Lender shall forthwith on demand repay to the Administrative Agent the portion of such assumed payment that was made available to such Lender in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid to the Administrative Agent in immediately available funds at the Federal Funds Rate from time to time in effect; and
 
(ii)            if any Lender failed to make such payment, such Lender shall forthwith on demand pay to the Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made
 

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available by the Administrative Agent to the Borrowers to the date such amount is recovered by the Administrative Agent (the “ Compensation Period ”) at a rate per annum equal to the Federal Funds Rate from time to time in effect.  If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Advance included in the applicable Borrowing.  If such Lender does not pay such amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent may make a demand therefor upon the Borrowers, and the Borrowers shall pay such amount to the Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable to the applicable Borrowing.  Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights that the Administrative Agent or the Borrowers may have against any Lender as a result of any default by such Lender hereunder.
 
A notice of the Administrative Agent to any Lender or the Borrowers with respect to any amount owing under this subsection (c) shall be conclusive, absent manifest error.
 
(d)            If any Lender makes available to the Administrative Agent funds for any Advance to be made by such Lender as provided in the foregoing provisions of this Article II, and such funds are not made available to the Borrowers by the Administrative Agent because the conditions to the applicable Advance set forth in Section 4.02 are not satisfied or waived in accordance with the terms hereof or for any other reason, the Administrative Agent shall return such funds (in like funds as received from such Lender) to such Lender, without interest.
 
(e)            The obligations of the Lenders hereunder to make Advances are several and not joint.  The failure of any Lender to make any Advance or to fund any such participation on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, nor relieve Borrowers from any obligations hereunder to the Lenders which fulfill such obligations and no Lender shall be responsible for the failure of any other Lender to so make its Loan or purchase its participation.
 
(f)            Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Advance in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Advance in any particular place or manner.
 
(g)            If at any time insufficient funds are received by or are available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, toward costs and expenses (including Attorney Costs and amounts payable under Article III) incurred by the Administrative Agent and each Lender, (ii) second, toward repayment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (iii) third, toward repayment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.
 

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2.10.             Sharing of Payments.
 
If any Lender shall obtain on account of the Advances made by it, any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, but excluding any payments made to a Lender in error by the Administrative Agent (which such payments shall be returned by the Lender to the Administrative Agent immediately upon such Lender’s obtaining knowledge that such payment was made in error)) in excess of its ratable share (or other share contemplated hereunder) thereof, such Lender shall immediately (a) notify the Administrative Agent of such fact, and (b) purchase from the other Lenders such participations in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment in respect of such Advances or such participations, as the case may be, pro rata with each of them; provided , however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender under any of the circumstances described in Section 10.06 (including pursuant to any settlement entered into by the purchasing Lender in its discretion), such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender’s ratable share (according to the proportion of (i) the amount of such paying Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered, without further interest thereon.  The Borrowers agree that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.09 ) with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation.  The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments.  Each Lender that purchases a participation pursuant to this Section shall from and after such purchase have the right to give all notices, requests, demands, directions and other communications under this Credit Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased.
 
2.11.             Evidence of Debt.
 
The Advances made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business.  The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Advances made by the Lenders to the Borrowers and the interest and payments thereon.  Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrowers hereunder to pay any amount owing with respect to the Obligations.  In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.  The Borrowers shall execute and deliver to the Administrative Agent a Note for each Lender requesting a Note, which Note shall evidence the Advances made by such Lender under its Commitment in addition to such accounts or
 

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records.  Each Lender may attach schedules to its Note and endorse thereon the date, amount and maturity of its Extension of Credit and payments with respect thereto.
 
2.12.             Joint and Several Liability of the Borrowers.
 
(a)            Each of the Borrowers is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under this Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Borrowers and in consideration of the undertakings of each of the Borrowers to accept joint and several liability for the obligations of each of them.
 
(b)            Each Borrower hereby agrees such Borrower is, and each such Borrower’s heirs, personal representatives, successors and assigns are, jointly and severally liable for, and hereby absolutely and unconditionally guarantees to Administrative Agent and Lenders and their respective successors and assigns, the full and prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of, all of the Obligations arising under this Credit Agreement and the other Credit Documents, it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each of the Borrowers without preferences or distinction among them.  Each Borrower agrees that its guaranty obligation hereunder is a continuing guaranty of payment and performance and not of collection, that its obligations under this Section 2.12 shall not be discharged until payment and performance, in full, of the Obligations has occurred, and that its obligations under this Section 2.12 shall be absolute and unconditional.
 
(c)            If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Obligations hereunder as and when due or to perform any of such Obligations in accordance with the terms thereof, then in each such event, the other Borrowers will make such payment with respect to, or perform, such Obligation.
 
(d)            The guaranty obligations of each Borrower under the provisions of this Section 2.12 constitute full recourse obligations of such Borrower, enforceable against it to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Credit Agreement or any other circumstances whatsoever, including without limitation, the following:
 
(i)            the genuineness, validity, regularity, enforceability or any future amendment of, or change in, this Credit Agreement, any other Credit Document or any other agreement, document or instrument to which any other Borrower is or may become a party;
 
(ii)            the absence of any action to enforce this Credit Agreement (including this Section 2.12 ) or any other Credit Document or the waiver or consent by Administrative Agent and Lenders with respect to any of the provisions thereof;
 
(iii)            the existence, value or condition of, or failure to perfect any Lien or any security for the Obligations or any action, or the absence of any action, by Administrative Agent and Lenders in respect thereof (including the release of any such security);
 

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(iv)            the insolvency of any other Borrower;
 
(v)            the institution of any proceeding under the Federal Bankruptcy Code, or any similar proceeding, by or against a Borrower or Administrative Agent’s election in any such proceeding of the application of Section 1111(b)(2) of the Federal Bankruptcy Code;
 
(vi)            any borrowing or grant of a security interest by any Borrower as debtor-in-possession, under Section 364 of the Federal Bankruptcy Code;
 
(vii)            the disallowance, under Section 502 of the Federal Bankruptcy Code, of all or any portion of Administrative Agent’s claim(s) for repayment of any of the Obligations; or
 
(viii)            any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor other than the payment and performance, in full, of the Obligations.
 
Each Borrower shall be regarded, and shall be in the same position, as principal debtor with respect to the Obligations guaranteed hereunder.

(e)            Except as otherwise expressly provided herein, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of occurrence of any Default or Event of Default (except to the extent notice is expressly required to be given pursuant to the terms of this Credit Agreement), or of any demand for any payment under this Credit Agreement (except to the extent demand is expressly required to be given pursuant to the terms of this Credit Agreement), notice of any action at any time taken or omitted by the Administrative Agent or any Lender under or in respect of any of the Obligations hereunder, any requirement of diligence and, generally, all demands, notices and other formalities of every kind in connection with this Credit Agreement.  Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations hereunder, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by the Lenders at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Credit Agreement, any and all other indulgences whatsoever by the Lenders in respect of any of the Obligations hereunder, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of such Obligations or the addition, substitution or release, in whole or in part, of any Borrower.  Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or any failure to act on the part of the Lender, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder which might, but for the provisions of this Section 2.12 , afford grounds for terminating, discharging or relieving such Borrower, in whole or in part, from any of its obligations under this Section 2.12 , it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the obligations of such Borrower under this Section 2.12 shall not be discharged except by performance and then only to the extent of such performance.  The obligations of each Borrower under this Section 2.12 shall not be diminished or rendered unenforceable by any winding up,
 

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reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or any Lender.  The joint and several liability of the Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any Borrower or any Lender.
 
(f)            Notwithstanding anything to the contrary in this Agreement or in any other Credit Document, and except as set forth in Section 2.12(j) , each Borrower hereby expressly and irrevocably subordinates to payment of the Obligations any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off and any and all defenses available to a surety, guarantor or accommodation co-obligor until the Obligations are indefeasibly paid in full in cash.  Each Borrower acknowledges and agrees that this subordination is intended to benefit Administrative Agent and Lenders and shall not limit or otherwise affect such Borrower’s liability hereunder or the enforceability of this Section 2.12 , and that Administrative Agent, Lenders and their respective successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this Section 2.12 .
 
(g)            If Administrative Agent or any Lender may, under applicable Law, proceed to realize its benefits under any of the Credit Documents giving Administrative Agent or such Lender a Lien upon any Collateral, whether owned by any Borrower or by any other Person, either by judicial foreclosure or by non-judicial sale or enforcement, Administrative Agent or any Lender may, at its sole option, determine which of its remedies or rights it may pursue without affecting any of its rights and remedies under this Section 2.12 .  If, in the exercise of any of its rights and remedies, Administrative Agent or any Lender shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Borrower or any other Person, whether because of any applicable Laws pertaining to “election of remedies” or the like, each Borrower hereby consents to such action by Administrative Agent or such Lender and waives any claim based upon such action, even if such action by Administrative Agent or such Lender shall result in a full or partial loss of any rights of subrogation that each Borrower might otherwise have had but for such action by Administrative Agent or such Lender.  Any election of remedies that results in the denial or impairment of the right of Administrative Agent or any Lender to seek a deficiency judgment against any Borrower shall not impair any other Borrower’s obligation to pay the full amount of the Obligations.  In the event Administrative Agent or any Lender shall bid at any foreclosure or trustee’s sale or at any private sale permitted by law or the Credit Documents, Administrative Agent or such Lender may bid all or less than the amount of the Obligations and the amount of such bid need not be paid by Administrative Agent or such Lender but shall be credited against the Obligations.  The amount of the successful bid at any such sale, whether Administrative Agent, Lender or any other party is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the  Obligations guaranteed under this Section 2.12 , notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Administrative Agent or any Lenders might otherwise be entitled but for such bidding at any such sale.
 
(h)            The provisions of this Section 2.12 are made for the benefit of the Administrative Agent, the Lenders and their respective successors and assigns, and may be enforced by any such
 

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Person from time to time against any of the Borrowers as often as occasion therefor may arise and without requirement on the part of any Lender first to marshal any of its claims or to exercise any of its rights against any of the other Borrowers or to exhaust any remedies available to it against any of the other Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations or to elect any other remedy.  The provisions of this Section 2.12 shall remain in effect until all the Obligations hereunder shall have been paid in full or otherwise fully satisfied.  If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by the Lenders upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this Section 2.12 will forthwith be reinstated and in effect as though such payment had not been made.
 
(i)            Each Borrower’s liability under this Section 2.12 shall be limited to an amount not to exceed as of any date of determination the greater of the following:
 
(i)            the amount of the Loan allocated to each Borrower as set forth on Schedule 2.12 hereto  (the “ Allocable Amount ”); and
 
(ii)            the amount that could be claimed by Administrative Agent and any Lender from such Borrower under this Section 2.12 without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law after taking into account, among other things, such Borrower’s right of contribution and indemnification from each other Borrower under Section 2.12(j) below.
 
(j)            Contribution with Respect to Guaranty Obligations.
 
(i)            To the extent that any Borrower (the “ Overpaying Borrower ”) incurs (i) any payment in excess of its Allocable Amount, or (ii) a loss of its Collateral due to the foreclosure (or other realization by lenders) of, or the delivery of deeds in lieu of foreclosure relating to it Collateral, and the value of such Collateral exceeded its Allocable Share (the “ Overpayment Amount ”), then such Overpaying Borrower shall be entitled, after indefeasible payment in full and the satisfaction of all Obligations to Lenders under the Credit Agreement, to contribution from each of the benefited Borrowers, on a pro rata basis, for the amounts so paid, advanced or benefited, in an amount equal to the difference between the Overpayment Amount and such benefited Borrower’s then current Allocable Amount.  Any such contribution payments shall be made within ten (10) Business Days after demand therefor.
 
(ii)            This Section 2.12(j) is intended only to define the relative rights of Borrowers and nothing set forth in this Section 2.12(j) is intended to or shall impair the obligations of Borrowers, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement, including Section 2.12(a) above.  Nothing contained in this Section 2.12(j) shall limit the liability of any Borrower to pay all or any part of the Loan made directly or indirectly to that
 

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Borrower and accrued interest, fees and expenses with respect thereto for which such Borrower shall be primarily liable.
 
(iii)            The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Borrower to which such contribution and indemnification is owing.
 
(iv)            The rights of the indemnifying Borrowers against other Borrowers under this Section 2.12(j) shall be exercisable only upon the full and indefeasible payment of the Obligations.
 
(k)            The liability of Borrowers under this Section 2.12 is in addition to and shall be cumulative with all liabilities of each Borrower to Agent and Lender under this Agreement and the other Credit Documents to which such Borrower is a party or in respect of any Obligations or obligation of the other Borrower, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary.
 
2.13.             Appointment of Parent as Legal Representative for Credit Parties.
 
Each of the Credit Parties hereby appoints the Parent to act as its exclusive legal representative for all purposes under this Credit Agreement and the other Credit Documents (including, without limitation, with respect to all matters related to Borrowings and the repayment of the Loan as described in Article II and Article III hereof) (in such capacity, the “ Borrower Representative ”).  Each of the Credit Parties acknowledges and agrees that (a) the Borrower Representative may execute such documents on behalf of all the Credit Parties (whether as Borrowers or Guarantor) as the Borrower Representative deems appropriate in its reasonable discretion and each Credit Party shall be bound by and obligated by all of the terms of any such document executed by the Borrower Representative on its behalf, (b) any notice or other communication delivered by the Administrative Agent or any Lender hereunder to the Borrower Representative shall be deemed to have been delivered to each of the Credit Parties and (c) the Administrative Agent and each of the Lenders shall accept (and shall be permitted to rely on) any document or agreement executed by the Borrower Representative on behalf of the Credit Parties (or any of them).  The Borrowers must act through the Borrower Representative for all purposes under this Credit Agreement and the other Credit Documents.  Notwithstanding anything contained herein to the contrary, to the extent any provision in this Credit Agreement requires any Credit Party to interact in any manner with the Administrative Agent or the Lenders, such Credit Party shall do so through the Borrower Representative.
 
2.14.             Establishment of Impounds.
 
(a)             Real Estate Tax Impounds .  Borrowers shall deposit with Administrative Agent, monthly on each Payment Date, a sum of money (the “ Tax Impound ”) equal to one-twelfth (1/12th) of the annual Real Estate Taxes.  At or before the initial Advance of the Loan, Borrowers shall deposit with Administrative Agent a sum of money which together with the monthly installments will be sufficient to make each of such payments thirty (30) days prior to the date any delinquency or penalty becomes due with respect to such payments.  Deposits shall be made on the basis of Administrative Agent’s estimate from time to time of the Real Estate
 

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Taxes for the current year (after giving effect to any reassessment or, at Administrative Agent’s election, on the basis of the Real Estate Taxes for the prior year, with adjustments when the Real Estate Taxes are fixed for the then current year).  All funds so deposited shall be held by Administrative Agent or its servicer. So long as no Default or Event of Default exists hereunder, Administrative Agent shall credit for Borrowers’ account interest at the interest rate actually available to Administrative Agent’s or its servicer on the funds held in such account, as determined by Administrative Agent in its sole discretion. These sums may be commingled with Administrative Agent’s general funds and shall not be deemed to be held in trust for the benefit of Borrowers.  Borrowers hereby grant to Administrative Agent for the benefit of the Lenders a security interest in all funds so deposited with Administrative Agent for the purpose of securing the Loan.  Until an Event of Default exists, Administrative Agent shall apply the funds deposited to pay the Real Estate Taxes as provided herein.  While an Event of Default exists, the funds deposited may be applied in payment of the charges for which such funds have been deposited, or to the payment of the Loan or any other charges affecting the security of Lenders, as Administrative Agent may elect, but no such application shall be deemed to have been made by operation of law or otherwise until actually made by Administrative Agent.  Borrowers shall furnish Administrative Agent with bills for the Real Estate Taxes for which such deposits are required at least thirty (30) days prior to the date on which the Real Estate Taxes first become payable.  If at any time the amount on deposit with Administrative Agent, together with amounts to be deposited by Borrowers before such Real Estate Taxes are payable, is insufficient to pay such Real Estate Taxes, Borrowers shall deposit any deficiency with Administrative Agent immediately upon demand.  Administrative Agent shall pay such Real Estate Taxes when the amount on deposit with Administrative Agent is sufficient to pay such Real Estate Taxes and Administrative Agent has received a bill for such Real Estate Taxes.  The obligation of Borrowers to pay the Real Estate Taxes, as set forth in the Credit Documents, is not affected or modified by the provision of this paragraph; provided, however, that Borrowers shall not be in default under the Loan for failure to pay Real Estate Taxes if and to the extent there are sufficient funds on deposit in the Tax Impound to timely pay such Real Estate Taxes.  On the Maturity Date, the monies then remaining on deposit with Administrative Agent under this Section 2.14(a) shall, at Administrative Agent’s option, be applied against the Obligations or if no Event of Default exists hereunder, returned to Borrowers.
 
(b)             Replacement Reserve .  Borrowers shall deposit with Administrative Agent on each Payment Date the product of Twenty-Five Dollars ($25.00) multiplied by the number of Senior Housing Units in the Borrowing Base Assets, which shall be held by Administrative Agent or its servicer for replacements and repairs required to be made to the Borrowing Base Assets during the term of the Loan (the “ Replacement Escrow Fund ”).  So long as no Default or Event of Default exists hereunder, Administrative Agent shall credit for Borrowers’ account interest at the interest rate actually available to Administrative Agent’s servicer on the funds held in such account, as determined by Administrative Agent in its sole discretion.  Borrowers hereby pledge to Administrative Agent for the benefit of the Lenders, and grant a security interest in, any and all monies now or hereafter deposited in the Replacement Escrow Fund as additional security for the payment of the Loan.  Administrative Agent may reasonably reassess its estimate of the amount necessary for the Replacement Escrow Fund from time to time and may adjust the monthly amounts required to be deposited into the Replacement Escrow Fund upon thirty (30) days notice to Borrowers.  Administrative Agent shall make disbursements from the Replacement Escrow Fund as requested by Borrowers, and approved by Administrative Agent in
 

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its reasonable discretion, on a quarterly basis in increments of no less than $5,000.00 upon delivery by Borrowers of Administrative Agent’s standard form of draw request accompanied by copies of paid invoices for the amounts requested and, if required by Administrative Agent for any draw request for an invoice exceeding $15,000.00, lien waivers and releases from all parties furnishing materials and/or services in connection with the requested payment.  Administrative Agent may require an inspection of the Borrowing Base Assets at Borrowers’ expense prior to making a quarterly disbursement in order to verify completion of replacements and repairs for which reimbursement is sought.  The Replacement Escrow Fund shall be held without interest in Administrative Agent’s name and may be commingled with Administrative Agent’s general funds at financial institutions selected by Administrative Agent in its reasonable discretion.  Upon the occurrence of an Event of Default, Administrative Agent may apply any sums then present in the Replacement Escrow Fund to the payment of the Loan in any order in its reasonable discretion.  Until expended or applied as above provided, the Replacement Escrow Fund shall constitute additional security for the Loan.  Administrative Agent shall have no obligation to release any of the Replacement Escrow Fund while any Event of Default or Default exists.  All costs and expenses incurred by Administrative Agent in the disbursement of any of the Replacement Escrow Fund shall be paid by Borrowers promptly upon demand or, at Administrative Agent’s sole discretion, deducted from the Replacement Escrow Fund.
 
2.15.             Defaulting Lenders .
 
(a)             Adjustments .  Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:
 
(i)             Waivers and Amendments .  That Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 10.01 .
 
(ii)             Reallocation of Payments .  Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of that Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VIII or otherwise, and including any amounts made available to the Administrative Agent by that Defaulting Lender pursuant to Section 10.06 ), shall be applied at such time or times as may be determined by the Administrative Agent as follows: first , to the payment of any amounts owing by that Defaulting Lender to the Administrative Agent hereunder; second , as the Borrower Representative may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; third , if so determined by the Administrative Agent and the Borrower Representative, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of that Defaulting Lender to fund Loans under this Agreement; fourth , to the payment of any amounts owing to the Lenders, as a result of any judgment of a court of competent jurisdiction obtained by any Lender against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; fifth , so long as no Default or Event of Default exists, to the payment of
 

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any amounts owing to the Borrowers as a result of any judgment of a court of competent jurisdiction obtained by the Borrowers against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; and sixth , to that Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Advances in respect of which that Defaulting Lender has not fully funded its appropriate share and (y) such Advances were made at a time when the conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Advances all non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Advances owed to that Defaulting Lender.  Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.15(a)(ii) shall be deemed paid to and redirected by that Defaulting Lender, and each Lender irrevocably consents hereto.  
 
(b)             Defaulting Lender Cure .   If the Borrowers and the Administrative Agent agree in writing in their sole discretion that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein, that Lender will, to the extent applicable, purchase that portion of outstanding Advances of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Advances (in the aggregate) to be held on a pro rata basis by the Lenders in accordance with their applicable Commitment Percentages, whereupon that Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrowers while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.
 
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
 
3.01.             Taxes.
 
(a)            Any and all payments by any Credit Party to or for the account of the Administrative Agent or any Lender under any Credit Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of the Administrative Agent and each Lender, taxes imposed on or measured by its overall net income, and franchise and excise taxes imposed on it (in lieu of net income taxes), as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent’s or such Lender’s having executed, delivered or performed its obligations or received a payment under, or enforced, this Credit Agreement or any other Credit Document) (all such non-excluded taxes, duties, levies, imposts, deductions,
 

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assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as “ Taxes ”).  If any Credit Party shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), each of the Administrative Agent and such Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Credit Party shall make such deductions, (iii) such Credit Party shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within thirty (30) days after the date of such payment, such Credit Party shall furnish to the Administrative Agent (which shall forward the same to such Lender) the original or a certified copy of a receipt evidencing payment thereof.
 
(b)            In addition, the Borrowers agree to pay any and all present or future stamp, court or documentary taxes or charges or similar levies which arise from any payment made under any Credit Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Credit Document (hereinafter referred to as “ Other Taxes ”).  For the avoidance of doubt, “Other Taxes” shall not include any taxes assessed on the net or gross income of a taxpayer, regardless of whether such taxes are designated excise or property taxes.
 
(c)            If the Borrowers shall be required to deduct or pay any Taxes or Other Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, the Borrowers shall also pay to the Administrative Agent or to such Lender, as the case may be, at the time interest is paid, such additional amount that the Administrative Agent or such Lender specifies is necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) that the Administrative Agent or such Lender would have received if such Taxes or Other Taxes had not been imposed.
 
(d)            The Borrowers agree to indemnify the Administrative Agent and each Lender for (i) the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) that are paid by the Administrative Agent and such Lender and that are the responsibility of the Borrowers, (ii) amounts payable under Section 3.01(c) and (iii) any liability (including additions to tax, penalties, interest and expenses) arising therefrom or with respect thereto, in each case whether or not such Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority.  Payment under this subsection (d) shall be made within thirty (30) days after the date the Lender or the Administrative Agent makes a written demand therefor.
 
3.02.             Illegality.
 
If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund its Extension of Credit using the Eurodollar Rate, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by such Lender to the Borrowers through the Administrative Agent, any obligation of such Lender to continue its Extension of Credit or make Advances at the Eurodollar Rate shall be suspended until such Lender notifies the Administrative Agent and the Borrowers that the circumstances giving rise to
 

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such determination no longer exist.  Upon receipt of such notice, the Borrowers shall either (a) agree to substitute the Base Rate for the Eurodollar Base Rate on the outstanding Extension of Credit or (b) upon demand from such Lender (with a copy to the Administrative Agent), prepay such Lender’s Extension of Credit on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain its Extension of Credit to such day, or immediately, if such Lender may not lawfully continue to maintain its Extension of Credit.  Upon any such prepayment or substitution of the Base Rate, the Borrowers shall also pay accrued interest on the amount so prepaid or converted.  Each Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender.
 
3.03.             Inability to Determine Rates.
 
If the Required Lenders determine that for any reason adequate and reasonable means do not exist for determining the Eurodollar Rate with respect to a proposed Advance under the Loan, or that the Eurodollar Rate for any requested proposed Advance does not adequately and fairly reflect the cost to such Lenders of funding such Advance, the Administrative Agent will promptly so notify the Parent and each Lender.  Thereafter, the obligation of the Lenders to make further Advances or maintain the Extensions of Credit using the Eurodollar Rate shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice.  Upon receipt of such notice, the Borrowers may revoke any pending request for a Borrowing at the Eurodollar Rate or may substitute a request for a Borrowing using the Base Rate.
 
3.04.             Increased Cost and Reduced Return; Capital Adequacy; Reserves.
 
(a)            If any Lender determines that as a result of the introduction of or any change in or in the interpretation of any Law, or such Lender’s compliance therewith, there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining the Loan, or a reduction in the amount received or receivable by such Lender in connection with any of the foregoing (excluding for purposes of this subsection (a) any such increased costs or reduction in amount resulting from (i) Taxes or Other Taxes (as to which Section 3.01 shall govern), (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or any foreign jurisdiction or any political subdivision of either thereof under the Laws of which such Lender is organized or has its Lending Office, and (iii) reserve requirements contemplated by Section 3.04(c) ), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrowers shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction.
 
(b)            If any Lender determines that the introduction of any Law regarding capital adequacy or any change therein or in the interpretation thereof, or compliance by such Lender (or its Lending Office) therewith, has the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender’s desired return on capital), then from time to time upon demand of such Lender
 

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(with a copy of such demand to the Administrative Agent), the Borrowers shall pay to such Lender such additional amounts as will compensate such Lender for such reduction.
 
(c)            The Borrowers shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as “ Eurocurrency liabilities ”), additional interest on the unpaid principal amount of the Advances made by such Lender under the Loan equal to the actual costs of such reserves allocated to such portion of the Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on the Loan, provided the Borrowers shall have received at least fifteen (15) days’ prior written notice (with a copy to the Administrative Agent) of such additional interest from such Lender.  If a Lender fails to give notice fifteen (15) days prior to the relevant Payment Date, such additional interest shall be due and payable fifteen (15) days from receipt of such notice.
 
3.05.             Funding Losses.
 
Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrowers shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
 
(a)            any payment or prepayment of all or any portion of the Loan on a day other than the last day of the Interest Period for the Loan or portion thereof (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
 
(b)            any failure by the Borrowers (for a reason other than the failure of such Lender to make an Advance) to prepay or borrow any Advance on the date or in the amount notified by the Borrowers; or
 
(c)            any assignment of any portion of the Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrowers pursuant to Section 10.16 ;
 
including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain the Loan or portion thereof or from fees payable to terminate the deposits from which such funds were obtained.  The Borrowers shall also pay any customary administrative fees charged by such Lender in connection with the foregoing.
 
For purposes of calculating amounts payable by the Borrowers to the Lenders under this Section 3.05 , each Lender shall be deemed to have funded each Advance made by it at the Eurodollar Base Rate used in determining the Eurodollar Rate for such Advance by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Advance was in fact so funded.
 
3.06.             Matters Applicable to all Requests for Compensation.
 
(a)            A certificate of the Administrative Agent or any Lender claiming compensation under this Article III and setting forth the additional amount or amounts to be paid to it
 

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hereunder shall be conclusive in the absence of manifest error.  In determining such amount, the Administrative Agent or such Lender may use any reasonable averaging and attribution methods.
 
(b)            Upon any Lender’s making a claim for compensation under Section 3.01 or 3.04 , the Borrowers may replace such Lender in accordance with Section 10.16 .
 
(c)            Failure or delay on the part of any Lender to demand compensation pursuant to the foregoing provisions of this Article III shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrowers shall not be required to compensate a Lender pursuant to the foregoing provisions of this Article III for any increased costs incurred or reductions suffered more than nine (9) months prior to the date that such Lender notifies the Borrowers of the change in Law or other matter giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefore (except that, if the change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).
 
3.07.             Survival.
 
All of the Borrowers’ obligations under this Article III shall survive termination of the Aggregate Commitments and repayment of all other Obligations hereunder.
 
ARTICLE IV
CONDITIONS PRECEDENT TO ADVANCES
 
The obligation of each Lender to make Advances hereunder is subject to satisfaction of the following conditions precedent:
 
4.01.             Conditions to Initial Advance.
 
The obligation of the Lenders to make the initial Advance hereunder is subject to the satisfaction of such of the following conditions in all material respects on or prior to the Closing Date as shall not have been expressly waived in writing by the Administrative Agent and Lenders.
 
(a)             Credit Documents, Organization Documents, Etc .  The Administrative Agent’s receipt of the following, each of which shall be originals or facsimiles (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Credit Party, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Administrative Agent and its legal counsel:
 
(i)            executed counterparts of this Credit Agreement and the other Credit Documents;
 
(ii)            a Note executed by the Borrowers in favor of each Lender requesting a Note;
 

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(iii)            copies of the Organization Documents of the Parent and each Borrower certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation or organization , where applicable, and certified by a secretary or assistant secretary of Parent and Borrowers to be true and correct as of the Closing Date;
 
(iv)            such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Credit Party as the Administrative Agent may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Credit Agreement and the other Credit Documents to which such Credit Party is a party; and
 
(v)            such documents and certifications as the Administrative Agent may reasonably require to evidence that the Parent and Borrowers are duly organized or formed, and are validly existing, in good standing and qualified to engage in business in (A) the jurisdiction of their incorporation or organization and (B) each jurisdiction where their ownership, lease or operation of properties or the conduct of their business requires such qualification.
 
(b)             Opinions of Counsel .  The Administrative Agent shall have received, in each case dated as of the Closing Date and in form and substance reasonably satisfactory to the Administrative Agent:
 
(i)            a legal opinion of counsel for the Credit Parties;
 
(ii)            a legal opinion of special local counsel for the Borrowers for the states in which each Borrowing Base Asset is located with respect to licensing matters and for any other state in which the Parent or any Borrower is organized, in each case addressed to the Administrative Agent, its counsel and the Lenders.
 
(c)             Personal Property Collateral .  The Administrative Agent shall have received (in each case in form and substance reasonably satisfactory to the Administrative Agent):
 
(i)            searches of Uniform Commercial Code filings in the state of organization of each Borrower or where a filing would need to be made in order to perfect the Administrative Agent’s security interest in the tangible personal property Collateral, copies of the financing statements on file in such jurisdictions and evidence that no Liens exist other than Permitted Liens;
 
(ii)            UCC financing statements for each appropriate jurisdiction as is necessary, in the Administrative Agent’s sole discretion, to perfect the Administrative Agent’s security interest in the Collateral;
 
(iii)            duly executed notices of grant of security interest as are necessary, in the Administrative Agent’s sole discretion, to perfect the Administrative Agent’s security interest in the Collateral;
 

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(iv)            all instruments and chattel paper in the possession of any of the Borrowers, together with allonges or assignments as may be necessary or appropriate to perfect the Administrative Agent’s security interest in the Collateral;
 
(v)            duly executed consents as are necessary, in the Administrative Agent’s sole discretion, to perfect the Administrative Agent’s security interest in the Collateral;
 
(vi)            in the case of any tangible personal property Collateral located at a premises leased by a Borrower, such estoppel letters, consents and waivers from the landlords on such real property as may be required by the Administrative Agent; and
 
(vii)            a copy of each Material Contract.
 
(d)             Real Property Collateral (Borrowing Base Assets) .  The Administrative Agent shall have received, in form and substance reasonably satisfactory to the Administrative Agent and the Lenders, each of the Borrowing Base Asset Deliverables with respect to each Real Property Asset set forth on Schedule 5.12 attached hereto and shall have approved each such Real Property Asset as a Borrowing Base Asset hereunder.
 
(e)             Property and Liability Insurance .  The Administrative Agent shall have received copies of all insurance policies held by (or for the benefit of) the Parent, Borrowers and Operators with respect to the Real Property Assets of the Borrowers, each such policy shall name the Administrative Agent (on behalf of the Lenders) as an additional insured or sole loss payee under a standard mortgagee endorsement, as applicable and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent (i) thirty (30) days prior written notice before any such policy or policies shall be canceled and (ii) fifteen (15) days prior written notice before any such policy or policies shall be altered.
 
(f)             Officer’s Certificates .  The Administrative Agent shall have received a certificate or certificates executed by a Responsible Officer of the Parent as of the Closing Date, in a form satisfactory to the Administrative Agent, stating that (i) each Borrower is in compliance with all existing financial obligations (whether pursuant to the terms and conditions of this Credit Agreement or otherwise) and Parent is in compliance with all financial obligations except when the failure to so comply would not reasonably be expected to have a Material Adverse Effect, (ii) all governmental, shareholder and third party consents and approvals, if any, with respect to the Credit Documents and the transactions contemplated thereby have been obtained, (iii) no action, suit, investigation or proceeding is pending or threatened in any court or before any arbitrator or governmental instrumentality that purports to affect any Consolidated Party or any transaction contemplated by the Credit Documents, if such action, suit, investigation or proceeding could reasonably be expected to have a Material Adverse Effect, (iv) immediately prior to and following the transactions contemplated herein, each of the Credit Parties shall be Solvent, and (v) immediately after the execution of this Credit Agreement and the other Credit Documents, (A) no Default or Event of Default exists and (B) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects.
 

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(g)             Opening Borrowing Base Certificate .  Receipt by the Administrative Agent of a Borrowing Base Certificate as of the Closing Date, substantially in the form of Exhibit C-2 , duly completed and executed by a Responsible Officer of the Parent.
 
(h)             Financial Statements .  Receipt by the Administrative Agent and the Lenders of (i) pro forma projections of financial statements (balance sheet, income and cash flows) for each of the fiscal years of the Consolidated Parties through December 31, 2010 and (ii) such other information relating to the Consolidated Parties as the Administrative Agent may reasonably require in connection with the structuring and syndication of credit facilities of the type described herein.
 
(i)             Opening Compliance Certificate .  Receipt by the Administrative Agent of a Compliance Certificate as of the Closing Date signed by a Responsible Officer of the Parent and including (i) pro forma calculations for the current fiscal quarter based on the amounts set forth in the Audited Financial Statements and taking into account any Advances made or requested hereunder as of such date and (ii) pro forma calculations of all financial covenants contained herein for each of the following four (4) fiscal quarters (based on the projections set forth in the materials delivered pursuant to clause (h) of this Section 4.01 ).
 
(j)             Consents/Approvals .  The Credit Parties shall have received all approvals, consents and waivers, and shall have made or given all necessary filings and notices as shall be required to consummate the transactions contemplated hereby without the occurrence of any default under, conflict with or violation of (i) any applicable Law or (ii) any agreement, document or instrument to which any Credit Party is a party or by which any of them or their respective properties is bound, except for such approvals, consents, waivers, filings and notices the receipt, making or giving of which would not reasonably be likely to (A) have a Material Adverse Effect, or (B) restrain or enjoin, impose materially burdensome conditions on, or otherwise materially and adversely affect the ability of any Borrower or any other Credit Party to fulfill its respective obligations under the Credit Documents to which it is a party.
 
(k)             Material Adverse Change .  No material adverse change shall have occurred since December 31, 2009   in the condition (financial or otherwise), business, assets, operations, management or prospects of (i) the Parent, (ii) the Parent and its Consolidated Subsidiaries taken as a whole, or (iii) the Borrowers taken as a whole.
 
(l)             Litigation .  There shall not exist any pending or threatened action, suit, investigation or proceeding against any Credit Party that could reasonably be expected to have a Material Adverse Effect or could otherwise materially and adversely effect the transactions set forth herein or contemplated hereby.
 
(m)             Fees and Expenses .  Payment by the Credit Parties to the Administrative Agent of all fees and expenses relating to the preparation, execution and delivery of this Credit Agreement and the other Credit Documents which are due and payable on the Closing Date, including, without limitation, payment to the Administrative Agent of the fees set forth in the Proposal, and reasonable and documented Attorney Costs, consultants’ fees, travel expenses and all fees and expenses associated with the due diligence done in connection with and the preparation of documentation with respect to the Borrowing Base Assets or other Collateral.
 

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(n)             Other .  Receipt by the Lenders or the Administrative Agent of such other documents, instruments, agreements or information as reasonably requested by any Lender or the Administrative Agent, including, but not limited to, additional legal opinions, contribution agreements, corporate resolutions, indemnifications, information regarding litigation, tax, accounting, labor, insurance, pension liabilities (actual or contingent), real estate leases, material contracts, debt agreements, property ownership and contingent liabilities of the Credit Parties.
 
4.02.             Conditions to Advances.
 
The obligation of any Lender to make any Advance after the initial Advance hereunder is subject to the satisfaction of such of the following conditions on or prior to the proposed date of the making of such Advance:
 
(a)            The Administrative Agent shall receive the applicable Loan Borrowing Notice and the conditions set forth in Section 4.01 for the initial Advance shall have been met as of the Closing Date;
 
(b)            No Default or Event of Default shall have occurred and be continuing immediately before the making of such Advance and no Default or Event of Default shall exist immediately thereafter;
 
(c)            The representations and warranties of the Borrowers made in or pursuant to the Credit Documents shall be true in all material respects on and as of the date of such Extension of Credit, except for those (i) which expressly relate to an earlier date and (ii) relating to a Real Property Asset or a Borrower or an Operator of a Real Property Asset that is no longer qualified as a Borrowing Base Asset and is not included in the Borrowing Base Amount; and
 
(d)            Immediately following the making of such Advance the sum of the outstanding principal balance of the Obligations shall not exceed the lesser of (i) the Aggregate Committed Amount and (ii) the Borrowing Base Amount for such date.
 
The making of such Advance hereunder shall be deemed to be a representation and warranty by the Borrowers on the date thereof as to the facts specified in clauses (b), (c), and (d) of this Section.
 
ARTICLE V
REPRESENTATIONS AND WARRANTIES
 
The Borrowers hereby represent and warrant (on behalf of themselves, the Parent or the Credit Parties as a whole, as applicable) that:
 
5.01.             Financial Statements; No Material Adverse Effect; No Internal Control Event.
 
(a)            The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Consolidated Parties as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted
 

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therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Consolidated Parties as of the date thereof, including liabilities for taxes, material commitments and Indebtedness.
 
(b)            During the period from December 31, 2009, to and including the Closing Date, there has been no sale, transfer or other disposition by any Consolidated Party of any material part of the business or Property of the Consolidated Parties, taken as a whole, and no purchase or other acquisition by any of them of any business or property (including any Capital Stock of any other Person) material in relation to the consolidated financial condition of the Consolidated Parties, taken as a whole, in each case, which is not reflected in the foregoing financial statements or in the notes thereto and has not otherwise been disclosed in writing to the Lenders on or prior to the Closing Date.
 
(c)            The financial statements delivered pursuant to Section 6.01(a) and (b) have been prepared in accordance with GAAP (except as may otherwise be permitted under Section 6.01(a) and (b) ) and present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the Consolidated Parties as of such date and for such periods.
 
(d)            Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.
 
(e)            Since the date of the Audited Financial Statements, no Internal Control Event has occurred.
 
5.02.             Corporate Existence and Power.
 
Each of the Credit Parties is a corporation, partnership or limited liability company duly organized or formed, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all organizational powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification.
 
5.03.             Corporate and Governmental Authorization; No Contravention.
 
The execution, delivery and performance by each Credit Party of each Credit Document to which such Person is party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, (i) any Contractual Obligation to which such Person is a party or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law (including Regulation U or Regulation X issued by the FRB).
 

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5.04.             Binding Effect.
 
This Credit Agreement has been, and each other Credit Document, when delivered hereunder, will have been, duly executed and delivered by each Credit Party that is a party thereto.  This Credit Agreement constitutes, and each other Credit Document when so delivered will constitute, a legal, valid and binding obligation of such Credit Party, enforceable against each Credit Party that is a party thereto in accordance with its terms except as enforceability may be limited by applicable Debtor Relief Laws and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
 
5.05.             Litigation.
 
There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Responsible Officers of the Credit Parties, threatened at law, in equity, in arbitration or before any Governmental Authority, by or against any Credit Party or against any of its properties or revenues that (a) purport to affect or pertain to this Credit Agreement or any other Credit Document, or any of the transactions contemplated hereby or (b) either individually or in the aggregate, if determined adversely, would reasonably be expected to have a Material Adverse Effect.
 
5.06.             Compliance with ERISA.
 
(a)            Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state Laws.  Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the knowledge of the Responsible Officers of the Credit Parties, nothing has occurred which would prevent, or cause the loss of, such qualification.  The Parent and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.
 
(b)            There are no pending or, to the knowledge of the Responsible Officers of the Credit Parties, threatened claims (other than routine claims for benefits), actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect.  Neither the Parent nor any ERISA Affiliate or, to the knowledge of the Responsible Officers of the Credit Parties, any other Person has engaged in any prohibited transaction or violation of the fiduciary responsibility rules under ERISA or the Code with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect.
 
(c)            No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability except any such that would not reasonably be expected to have a Material Adverse Effect; (iii) neither the Parent nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Parent nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a
 

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Multiemployer Plan; and (v) the Parent nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA.
 
5.07.             Environmental Matters.
 
(a)            Each of the Borrowing Base Assets and all operations with respect to each of the Borrowing Base Assets and the Real Property Assets owned by the Borrowers are in compliance with all applicable Environmental Laws in all material respects and there are no conditions relating to the Borrowing Base Assets, the other Real Property Assets owned by the Borrowers or the Businesses of the Borrowers that are likely to give rise to liability under any applicable Environmental Laws.
 
(b)            None of the Borrowing Base Assets or other Real Property Assets owned by the Borrowers contains, or, to the knowledge of the Responsible Officers of the Parent and the Borrowers, has previously contained, any Hazardous Substances at, on or under such property in amounts or concentrations that constitute a violation of, or could give rise to liability under, applicable Environmental Laws.
 
(c)            Neither the Parent nor any Borrower has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Borrowing Base Assets, any of the other Real Property Assets owned by the Borrowers or the Businesses of the Borrowers, nor does any Responsible Officer of the Parent or any Borrower have knowledge or reason to believe that any such notice will be received or is being threatened.
 
(d)            Neither the Parent nor any Borrower has generated, treated, stored or disposed of Hazardous Substances at, on or under any of the Borrowing Base Assets or any of the other Real Property Assets owned by the Borrowers in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law.  No Hazardous Substances have been transported or disposed of from the Borrowing Base Assets or the other Real Property Assets owned by the Borrowers, in each case by or on behalf of any Borrower, in violation of, or in a manner that is likely to give rise to liability under, any applicable Environmental Law.
 
(e)            No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Responsible Officers of the Parent and the Borrowers, threatened, under any Environmental Law to which any Borrower is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Borrowers, the Borrowing Base Assets, the other Real Property Assets owned by the Borrowers or the Businesses of the Borrowers.
 
5.08.             Margin Regulations; Investment Company Act.
 
(a)            No Credit Party is engaged or will engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying
 

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margin stock and no part of the proceeds of the Loan will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock.
 
(b)            None of the Parent or any Borrower (i) is or is required to be registered as an “investment company” under the Investment Company Act of 1940 or (ii) is subject to regulation under any other Law which limits its ability to incur the Obligations.
 
5.09.             Compliance with Laws.
 
(a)            Each Credit Party is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted.
 
(b)            Each of the Borrowing Base Assets, and the uses of the Borrowing Base Assets, are in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to the Borrowing Base Assets (including, without limitation, building and zoning laws and Healthcare Laws), except in such instances in which such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted.
 
5.10.             Ownership of Property; Liens.
 
Each Borrower has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business (including, in any case, each of the Borrowing Base Assets).  Each Borrowing Base Asset is subject to no Liens, other than Permitted Liens.  No Borrower owns any material intellectual property.
 
5.11.             Corporate Structure; Capital Stock, Etc.
 
As of the Closing Date and as of each date on which such schedule is subsequently updated pursuant to the terms hereof through the delivery of a Compliance Certificate, Schedule 5.11 correctly sets forth the corporate structure of Parent and the entity and ownership structure of the Borrowers and the correct legal name and the jurisdiction of formation of the Parent and each of the Borrowers.  Also included on Schedule 5.11 is a listing of the number of shares of each class of Capital Stock outstanding with respect to each Borrower, the Persons holding equity interests in such Borrowers, their percentage equity or voting interest in the Borrowers and the number and effect, if exercised, of all outstanding options, warrants, rights of conversion or purchase and all other similar rights with respect thereto.  Except as set forth on Schedule 5.11 , as of the Closing Date: (i) no Borrower has issued to any third party any securities convertible into any equity interest in such Borrower, or any options, warrants or other rights to acquire any securities convertible into any such equity interest, and (ii) the outstanding Capital Stock of each Borrower is owned by the Persons indicated on Schedule 5.11 , is validly issued, fully paid and non-assessable, and is free and clear of all Liens, warrants, options and rights of others of any kind whatsoever.  Each Borrower is a Wholly Owned Subsidiary of the Parent.  No Borrower holds or otherwise has any interest in any Capital Stock of any other Person.
 

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5.12.             Real Property Assets; Leases.
 
(a)            Part I of Schedule 5.12 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) is a true and complete list as of the Closing Date of (i) the street address of each Borrowing Base Asset, (ii) the Borrower which owns each such Borrowing Base Asset, (iii) the facility type of each such Borrowing Base Asset, (iv) the number of Senior Housing Units at such Borrowing Base Asset, (v) the Facility Operating Leases to which each such Borrowing Base Asset is subject, and (vi) the name and address of the applicable Operating Tenant.  The applicable Borrower has a fee simple title to or holds a ground lease interest pursuant to an Eligible Ground Lease in each Borrowing Base Asset listed on Schedule 5.12 hereto and such schedule correctly sets forth the type of interest (fee or leasehold) held by each Borrower in each Borrowing Base Asset.  Each parcel of real property identified on Part I of Schedule 5.12 is a Real Property Asset that qualifies as a Borrowing Base Asset pursuant to the terms hereof and which is subject to a first priority lien (subject to Permitted Liens) in favor of the Administrative Agent (for the benefit of the Lenders) pursuant to a properly-recorded Mortgage Instrument and Assignment of Leases.
 
(b)            Part II of Schedule 5.12 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) properly sets forth all Management Agreements in existence as of the date hereof with respect to the Borrowing Base Assets, together with the applicable Property Manager.  There are no other Management Agreements affecting the Borrowing Base Assets.
 
(c)            Part III of Schedule 5.12 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) properly sets forth the names and addresses of all Operating Tenants with respect to the Real Property Assets who are (i) delinquent in paying any franchise, business, intangible, personal property taxes or real estate taxes due beyond the later of the applicable grace period with respect thereto, if any, and forty five (45) days and/or (ii) the subject of any Bankruptcy Event.
 
(d)            Part IV of Schedule 5.12 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) properly identifies all Facility Operating Leases in existence as of the date hereof with respect to the Borrowing Base Assets, together with the applicable Operating Tenant and the remaining term of each such Facility Operating Lease.  There are no other Facility Operating Leases affecting the Borrowing Base Assets.
 
(e)            Part V of Schedule 5.12 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) properly sets forth all subleases relating to any of the Borrowing Base Assets, the termination of which could result in a Material Adverse Effect on the operation of the Borrowing Base Asset, together with the applicable subtenant with respect thereto, the remaining term of such sublease and whether or not such subtenant is current on payments due thereunder.  There are no other subleases affecting the Borrowing Base Assets.
 
(f)            Each of the facilities located on the Borrowing Base Assets owned by the Borrowers is currently in good repair, working order and condition without any material structural or engineering defects or conditions.  No Condemnation has been instituted and remained undismissed for a period in excess of ninety (90) consecutive days, in each case, with
 

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respect to a material portion of any Real Property Asset listed as a Borrowing Base Asset on Part I of Schedule 5.12 .  No material casualty event has occurred with respect to the improvements located on any Real Property Asset listed as a Borrowing Base Asset on Part I of Schedule 5.12 which has not been (or, if applicable, will not be able to be) fully remediated with available insurance proceeds.
 
(g)            No required rental payment, principal or interest payment, payments of real property taxes or payments of premiums on insurance policies payable to the Borrowers with respect to such Real Property Asset is past due beyond the earlier of the applicable grace period with respect thereto, if any, and sixty (60) days.
 
5.13.             Material Contracts; Additional Contractual Obligations.
 
(a)             Schedule 5.13 (as updated pursuant to the terms hereof through the delivery of a Compliance Certificate) is a true, correct and complete listing of all Material Contracts with respect to the Borrowing Base Assets (other than those set forth on Part V of Schedule 5.12 ).  No event of default, or event or condition which with the giving of notice, the lapse of time, a determination of materiality, the satisfaction of any other condition or any combination of the foregoing, would constitute such an event of default, exists with respect to any such Material Contract. Except as set forth on Schedule 5.13 , no Borrower is a party to any contract or agreement that is subject to the Federal Assignment of Claims Act, as amended (31 U.S.C. Section 3727) or any similar state or local law.
 
(b)            With respect to the Borrowing Base Asset located in Peoria, Arizona (the “ Arizona Facility ”), residents of the independent living facility located adjacent to the Arizona Facility have the right to receive services at the Arizona Facility at discounted rates.  The existence of this program does not, and will not during the term of this Credit Agreement, result in a Material Adverse Effect on the operations of the Arizona Facility.
 
5.14.             Investments.
 
All Investments of each Borrower are Investments permitted pursuant to Section 7.04(b) .
 
5.15.             Solvency.
 
The Credit Parties are Solvent on a consolidated basis.
 
5.16.             Taxes.
 
The Credit Parties have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other material governmental charges levied or imposed upon them or their properties (including all Real Property Assets), income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been established in accordance with GAAP.  To the knowledge of the Responsible Officers of the Parent and the Borrowers, there is no proposed tax assessment against any Credit Party that would, if made, have a Material Adverse Effect.
 

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5.17.             Reserved.
 
5.18.             Insurance.
 
All insurance coverage of the Borrowers and all insurance coverage of the Operators with respect to the Borrowing Base Assets, in each case, as in existence as of the Closing Date and as of each date on which such schedule is subsequently updated pursuant to the terms hereof through the delivery of a Compliance Certificate, is in compliance with the requirements set forth on Schedule 5.18 .
 
5.19.             Healthcare; Facility Representations and Warranties.
 
(a)             Compliance With Healthcare Laws .  Without limiting the generality of Section 5.09 hereof or any other representation or warranty made herein, no Borrower and no Operator with respect to a Borrowing Base Asset is in material violation of any applicable statutes, laws, ordinances, rules and regulations of any Governmental Authority governing patient healthcare or the operation of any Healthcare Facility (including without limitation Section 1128B(b) of the Social Security Act, as amended, 42 U.S.C. Section 1320a-7(b) (Criminal Penalties Involving Medicare or State Health Care Programs), commonly referred to as the “Federal Anti-Kickback Statute,” and the Social Security Act, as amended, Section 1877, 42 U.S.C. Section 1395nn (Prohibition Against Certain Referrals), commonly referred to as “Stark Statute” (collectively, “ Healthcare Laws ”).  Each of the Borrowers (if applicable) and each of the Operators, comply in all material respects with the applicable requirements of the Joint Commission, the Food and Drug Administration, Drug Enforcement Agency and State Boards of Pharmacy and the federal and state Medicare and Medicaid programs as required by the Healthcare Laws and there are no notices of material violations of the Healthcare Laws with respect to the Borrowers, any of the Borrowing Base Assets or the Operators, in their capacity as an operator of a Borrowing Base Asset.
 
(b)             Licenses, Permits, and Certifications .
 
(i)            Each Borrower and/or Operator has such permits, licenses, franchises, certificates and other approvals or authorizations (collectively, the “ Licenses ”) of Governmental Authorities as are necessary under applicable law or regulations to own its properties and to conduct its business.  Each Borrower and each Operator which owns or operates a Borrowing Base Asset that is a skilled nursing facility has such Licenses as are necessary under applicable law or regulations to provide any Medical Services offered at the Borrowing Base Asset and receive reimbursement under Medicare, Tricare (if applicable) and Medicaid (including without limitation such permits as are required under such federal, state and other health care laws, and under such HMO or similar licensure laws and such insurance laws and regulations, as are applicable thereto).
 
(ii)            Each Borrower and/or each Operator which owns or operates a Borrowing Base Asset that is a skilled nursing facility has all Medicare, Tricare (if applicable), Medicaid and related provider or supplier billing number(s) and related documentation necessary to submit reimbursement claims to Medicare, Tricare and/or Medicaid for any Medical Service furnished by such Person in any jurisdiction where it conducts business.
 

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No such Borrower or Operator is currently subject to suspension, revocation, renewal or denial of its Medicare, Tricare and/or Medicaid certification, supplier billing number(s), or Medicare, Tricare and/or Medicaid participation agreement(s).
 
(iii)            Each of the facilities located on the Borrowing Base Assets is currently accredited by The Joint Commission (the “ Joint Commission ”) or certified by any required Governmental Authority and is duly licensed to operate in the manner currently operated, as required under applicable Laws.  In addition, each such facility is in compliance in all material respects with the applicable provisions of every Law of any Governmental Authority having jurisdiction over the operation thereof, including, without limitation, Healthcare Laws and fire safety codes.
 
(c)             Covered Entities .  Each of the Borrowers listed on Schedule 5.19 is a “covered entity” within the meaning of HIPAA.
 
(d)             No Investigations or Proceedings .  Neither the Parent nor any Borrower nor any Operator is the subject of any civil or criminal penalty, process, claim, action or proceeding, investigation or any administrative or other regulatory review, survey, process or proceeding with respect to a Borrowing Base Asset (other than routine surveys or reviews conducted by any government health plan or other accreditation entity) that if determined adversely would reasonably be expected to have a Material Adverse Effect.
 
5.20.             Disclosure.
 
Each Credit Party has disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.  No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Credit Party to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Credit Document (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
 
5.21.             Collateral Documents .
 
The Collateral Documents create valid security interests in, and Liens on, the Collateral purported to be covered thereby, which security interests and Liens are currently perfected security interests and Liens, prior to all other Liens other than Permitted Liens which by operation of law or contract would have priority over the Liens securing the Obligations.
 

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ARTICLE VI
AFFIRMATIVE COVENANTS
 
The Borrowers hereby covenant and agree (on their own behalf and on behalf of the Parent, as applicable) that until the Obligations, together with interest, fees and other obligations hereunder, have been paid in full and the Commitments hereunder shall have terminated:
 
6.01.             Financial Statements.
 
The Borrowers shall deliver to the Administrative Agent (and the Administrative Agent shall disseminate such information pursuant to the terms of Section 6.02 hereof), in form and detail reasonably satisfactory to the Administrative Agent and the Required Lenders:
 
(a)            as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Parent (or if earlier, the date that is five (5) days after the reporting date for such information required by the SEC), a consolidated balance sheet of the Consolidated Parties as at the end of such fiscal year, and the related consolidated statements of earnings, shareholders’ equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with GAAP, audited and accompanied by (i) a report and opinion of a Registered Public Accounting Firm of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and applicable Securities Laws and shall not be subject to any “going concern” or like qualification or exception or any qualification or exception as to the scope of such audit and (ii) an attestation report of such Registered Public Accounting Firm as to the Borrower’s internal controls pursuant to Section 404 of Sarbanes-Oxley expressing a conclusion that the Parent has maintained effective internal controls over financial reporting based on COSO criteria; provided, that the Administrative Agent hereby agrees that a Form 10-K of the Parent in form similar to that delivered as part of the Audited Financial Statements shall satisfy the requirements of this Section 6.01(a) ; and
 
(b)            as soon as available, but in any event within forty-five (45) days after the end of each of the first three (3) fiscal quarters of each fiscal year of the Parent (or if earlier, the date that is five (5) days after the reporting date for such information required by the SEC), a consolidated balance sheet of the Consolidated Parties as at the end of such fiscal quarter, and the related consolidated statements of earnings, shareholders’ equity and cash flows for such fiscal quarter and for the portion of the Parent’s fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail and certified by a Responsible Officer of the Parent as fairly presenting the financial condition, results of operations, shareholders’ equity and cash flows of the Consolidated Parties in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes; provided, that the Administrative Agent hereby agrees that a Form 10-Q of the Parent in form similar to that delivered to the SEC shall satisfy the requirements of this Section 6.01(b) .
 

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6.02.             Certificates; Other Information.
 
The Borrowers shall deliver to the Administrative Agent (and the Administrative Agent shall disseminate such information pursuant to the terms of this Section 6.02 ), in form and detail reasonably satisfactory to the Administrative Agent and the Required Lenders:
 
(a)            concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b) , a duly completed Compliance Certificate signed by a Responsible Officer of the Parent;
 
(b)            within thirty (30) days after the end of each fiscal quarter, a Borrowing Base Certificate calculated as of the end of the immediately prior fiscal quarter, duly completed and executed by a Responsible Officer of the Parent; provided, however, the Borrower Representative may, at its option, provide an updated Borrowing Base Certificate more frequently than quarterly;
 
(c)            within thirty (30) days after the end of each calendar month for each Borrowing Base Asset, (A) a detailed operating statement (showing monthly activity and year-to-date) stating operating revenues, operating expenses and operating income for the calendar month just ended and year-to-date and (B) a current revenue journal which includes a schedule showing pay or mix in respect of Third Party Payor Programs and Occupancy Rate Calculations;
 
(d)            within thirty (30) days after the end of each calendar quarter, internally prepared quarterly income statements prepared for the Borrowers with respect to the Borrowing Base Assets on a consolidated basis which fairly present the financial condition for the Borrowers with respect to the Borrowing Base Assets on a consolidated basis for such period and year-to-date;
 
(e)            within thirty (30) days after the end of each fiscal year of the Parent, beginning with the fiscal year ending December 31, 2009, an annual operating forecast of the Parent containing, among other things, pro forma financial statements for the then current fiscal year and updated versions of the pro forma financial projections delivered in connection with Section 4.01(h) hereof;
 
(f)            promptly after any request by the Administrative Agent, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors by the independent accountants of the Parent (or the audit committee of the board of directors of the Parent) in respect of the Parent (and, to the extent any such reports, letters or recommendations are prepared separately for any one or more of the Borrowers, such Borrower(s)) by independent accountants in connection with the accounts or books of the Parent (or such Borrower(s)) or any audit of the Parent (or such Borrower(s));
 
(g)            promptly after the same are available, (i) copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Parent, and copies of all annual, regular, periodic and special reports and registration statements which the Parent may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934 or to a holder of any Indebtedness owed by the Parent in its capacity as such holder and not otherwise required to be delivered to the Administrative Agent pursuant hereto and (ii) upon the request of the Administrative Agent, all reports and written information
 

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to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters;
 
(h)            promptly upon receipt thereof, a copy of any other report or “management letter” submitted by independent accountants to the Parent or any Borrower in connection with any annual, interim or special audit of the books of the Parent (or any such Borrower(s));
 
(i)            promptly upon any Responsible Officer of the Parent or the Borrowers becoming aware thereof, notice of (i) the existence of any contemplated offering, placement or arrangement which will constitute an Event of Default under the terms of Section 8.01(k) , (ii) any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, (iii) the occurrence of any Internal Control Event and (iv) any other Default or Event of Default;
 
(j)            within ten (10) days upon any Responsible Officer of the Parent or the Borrowers becoming aware thereof, reports detailing income or expenses of any assets directly owned or operated, or which will be included on the balance sheet for purposes of FIN 46, other than as previously disclosed in the Parent’s Form 10-K, 10-Q or any other publicly available information;
 
(k)            promptly, such additional information regarding the business, financial or corporate affairs of the Borrowers, or compliance with the terms of the Credit Documents, as the Administrative Agent or any Lender (through the Administrative Agent) may from time to time reasonably request; and
 
(l)            promptly after receipt, copies of all financial statements and other reports and information required to be delivered by (i) the Operating Tenants under the Facility Operating Leases and (ii) the Property Managers under the Management Agreements.
 
Documents required to be delivered pursuant to Section 6.01(a) or (b) or Section 6.02(b) , (c) , (d) , or (e) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Parent or the Borrowers post such documents, or provides a link thereto on the Parent’s website on the Internet at the website address listed on Schedule 10.02 ; or (ii) on which such documents are posted by the Administrative Agent (on the Borrowers’ behalf) on IntraLinks/IntraAgency or another relevant website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (A) the Borrowers shall deliver paper copies of such documents to the Administrative Agent or any Lender (through the Administrative Agent) that requests the Borrowers to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender (through the Administrative Agent) and (B) the Borrowers shall notify (which may be by facsimile or electronic mail) the Administrative Agent and each Lender (through the Administrative Agent) of the posting of any such documents (each Lender to which delivery of such documents shall be made by posting to any such website shall have been given access to such website on or prior to the date of such posting) and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents.  Notwithstanding
 

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anything contained herein, in every instance the Parent shall be required to provide paper copies of the Compliance Certificates required by Section 6.02(a) to the Administrative Agent and each of the Lenders (through the Administrative Agent).  Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Parent or the Borrowers with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
 
6.03.             Preservation of Existence and Franchises.
 
Each Credit Party will do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority.  Each Credit Party shall remain qualified and in good standing in each jurisdiction in which it is required to so qualify.
 
6.04.             Books and Records.
 
Each Credit Party will keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP.
 
6.05.             Compliance with Law.
 
Each Borrower will comply with, and cause the Operators to comply in all material respects with, all Laws, rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities (including, without limitation, building and zoning laws and all Healthcare Laws), applicable to each Borrowing Base Asset.  Each Borrower will comply in all material respects with all terms and conditions of all Material Contracts to which it is a party.
 
6.06.             Payment of Taxes and Other Indebtedness.
 
Each Credit Party will pay and discharge (or cause to be paid or discharged) (a) all taxes (including, without limitation, any corporate or franchise taxes), assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties (including, without limitation, each Borrowing Base Asset), before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien (other than a Permitted Lien) upon any of its properties, and (c) except as prohibited hereunder, all of its other Indebtedness as it shall become due; provided, however, that (i) no Borrower shall be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (1) could give rise to an immediate right to foreclose on a Lien securing such amounts in respect of any Borrowing Base Assets or (2) could be reasonably expected to have a Material Adverse Effect and (ii) Parent shall not be required to pay such tax, assessment, charge, levy, claim or Indebtedness unless failure to do so could be reasonably expected to have a Material Adverse Effect.

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6.07.             Insurance .
 
In addition to the requirements of any of the other Credit Documents, the Parent and the Borrowers shall maintain, or with respect to any Borrowing Base Asset leased by a Borrower to an Eligible Tenant, cause the applicable Eligible Tenant, to maintain, insurance policies and coverages described on Schedule 5.18 attached hereto, subject to changes in policies and coverages based on the availability of insurance for Persons engaged in ownership and operation similar types of properties in the applicable location, in each case as approved by the Administrative Agent in its reasonable discretion.  The Borrowers will deliver to the Administrative Agent (a) within ten (10) days of receipt of notice from any insurer a copy of any notice of cancellation or material change in coverage from that existing on the date hereof or with respect to the Borrowing Base Assets and (b) promptly upon receipt, notice of any cancellation or nonrenewal of coverage by the Parent or any Borrower thereof.  The Administrative Agent shall be named as loss payee or mortgagee, as its interest may appear, and/or additional insured with respect to any insurance procured with respect to the Borrowing Base Assets and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent (i) thirty (30) days prior written notice before any such policy or policies shall be canceled and (ii) fifteen (15) days prior written notice before any policy or policies shall be altered.
 
6.08.             Maintenance of Property.
 
In addition to the requirements of any of the other Credit Documents, the Borrowers shall (a) protect and preserve, or cause to be protected and preserved all Borrowing Base Assets and maintain, or cause to be maintained, in good repair, working order and condition all Borrowing Base Assets, ordinary wear and tear excepted, and (b) from time to time make, or cause to be made, all needed and appropriate repairs, renewals, replacements and additions to such Borrowing Base Assets, so that the business carried on in connection therewith may be properly and advantageously conducted at all times.
 
6.09.             Performance of Obligations.
 
The Credit Parties will pay and discharge at or before maturity, or prior to expiration of applicable notice, grace and curative periods, all their respective material obligations and liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same.
 
6.10.             Visits and Inspections.
 
The Borrowers (subject to applicable Facility Operating Leases and privacy rights of residents), shall permit representatives or agents of any Lender or the Administrative Agent, from time to time, and, if no Event of Default shall have occurred and be continuing, after reasonable prior notice, but not more than twice annually and only during normal business hours to: (a) visit and inspect all Borrowing Base Assets to the extent any such right to visit or inspect is within the control of such Person; (b) inspect and make extracts from their respective books and records, including but not limited to management letters prepared by independent accountants but excluding any private records of residents; and (c) discuss with its principal
 

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officers, and its independent accountants, its business, properties, condition (financial or otherwise), results of operations and performance.  If requested by the Administrative Agent, the Parent or the Borrowers, as applicable, shall execute an authorization letter addressed to its accountants authorizing the Administrative Agent or any Lender to discuss the financial affairs of the Parent or any Borrower with its accountants.
 
6.11.             Use of Proceeds/Purpose of Loan.
 
The Borrowers shall use the proceeds of the Loan only for the purpose of (i) on the Closing Date to refinance existing Indebtedness of the Borrowers and (ii) on and after the Closing Date to finance general corporate working capital (including asset acquisitions and capital expenditures) or other corporate purposes of the Borrowers and the other Credit Parties (to the extent not inconsistent with the Credit Parties’ covenants and obligations under this Credit Agreement and the other Credit Documents).
 
6.12.             Financial Covenants.
 
(a)             Consolidated Fixed Charge Coverage Ratio .  The Borrowers shall cause the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive calendar quarters ending on the last day of any calendar quarter, to be equal to or greater than 1.20 to 1.00.
 
(b)             Consolidated Tangible Net Worth .  The Borrowers shall cause the Consolidated Tangible Net Worth as of the end of any calendar quarter to be equal to or greater than $800,000,000.
 
6.13.             Environmental Matters.
 
(a)            The Borrowers shall comply, and cause the Operators to comply, with all Environmental Laws in respect of the Borrowing Base Assets.  The Borrowers shall promptly take, or cause the Operators to take, all actions necessary to prevent the imposition of any Liens on any of the Borrowing Base Assets arising out of or related to any Environmental Laws.
 
(b)            In respect of any Borrowing Base Asset, if any of the Parent or any Borrower shall (a) receive notice that any violation of any Environmental Law may have been committed or is about to be committed by such Person, (b) receive notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Parent or any Borrower alleging violations of any Environmental Law or requiring any such Person to take any action in connection with the release of any Hazardous Substance or (c) receive any notice from a Governmental Authority or private party alleging that any such Person may be liable or responsible for costs associated with a response to or cleanup of a release of a Hazardous Substance or any damages caused thereby, the Parent or the applicable Borrower shall provide the Administrative Agent with a copy of such notice within ten (10) Business Days after the receipt thereof by the Parent or any Borrower.  To the extent requested by the Administrative Agent, any Borrower owning any Borrowing Base Asset or any Real Property Asset which is proposed for qualification as such shall execute and deliver to the Administrative Agent an environmental indemnity agreement with respect to thereto in form and substance acceptable to the Administrative Agent.
 

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6.14.             Single Purpose Entity/Separateness.
 
Each Borrower represents, warrants and covenants as follows:
 
(a)             Limited Purpose .  The sole purpose conducted or promoted by each Borrower is to engage in the following activities:
 
(i)            to acquire, own, hold, lease, operate, manage, maintain, develop and improve the Borrowing Base Asset owned or leased by it (or an undivided interest therein) and to contract for the operation, maintenance, management and development of such Borrowing Base Asset;
 
(ii)            to enter into and perform its obligations under the Credit Documents;
 
(iii)            to sell, transfer, service, convey, dispose of, pledge, assign, borrow money against, finance, refinance or otherwise deal with the Borrowing Base Assets to the extent permitted under the Credit Documents; and
 
(iv)            to engage in any lawful act or activity and to exercise any powers permitted to limited liability companies, limited partnerships or corporations organized under the laws of the state in which the applicable Borrower was formed that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above mentioned purposes.
 
(b)             Limitations on Indebtedness, Actions .  Notwithstanding anything to the contrary in the Credit Documents or in any other document governing the formation, management or operation of each Borrower, each Borrower shall not:
 
(i)            other than with respect to the Indebtedness permitted under Section 7.02(d) and the pledge of its assets to secure the Indebtedness of the other Borrowers hereunder, guarantee any obligation of any Person, including any Affiliate, or become obligated for the debts of any other Person or hold out its credit as being available to pay the obligations of any other Person;
 
(ii)            engage, directly or indirectly, in any business other than as required or permitted to be performed under this Section;
 
(iii)            incur, create or assume any Indebtedness other than (A) the Loan and (B) unsecured trade payables incurred in the ordinary course of its business that are related to the ownership and operation of the Borrowing Base Assets and which shall (1) not be evidenced by a note, and (2) be paid within sixty (60) days, and (C) Indebtedness described in Section 7.02 .
 
(iv)           make or permit to remain outstanding any loan or advance to, or own or acquire any stock or securities of, any Person, except that Borrowers may invest in those investments permitted under the Credit Documents;
 

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(iv)            to the fullest extent permitted by law, engage in any dissolution, liquidation, consolidation, merger, sale or other transfer of any of its assets outside the ordinary course of each Borrower’s business, except as permitted under Section 7.03 .
 
(v)            buy or hold evidence of indebtedness issued by any other Person (other than cash or investment-grade securities);
 
(vi)            form, acquire or hold any subsidiary (whether corporate, partnership, limited liability company or other) or own any equity interest in any other entity;
 
(vii)            own any asset or property other than the Borrowing Base Assets (or an undivided interest therein) and incidental personal property necessary for the ownership or operation of the Borrowing Base Assets; or
 
(viii)            take any Material Action without the unanimous written approval of all members or partners of each Borrower.
 
(c)             Separateness Covenants .  In order to maintain its status as a separate entity and to avoid any confusion or potential consolidation with any Affiliate, each Borrower covenants that it will observe the following covenants:
 
(i)            maintain books and records separate from those of any other Person;
 
(ii)            maintain its assets in such a manner that it is not costly or difficult to segregate, identify or ascertain such assets;
 
(iii)            comply with all organizational formalities necessary to maintain its separate existence;
 
(iv)            hold itself out to creditors and the public as a legal entity separate and distinct from any other entity;
 
(v)            maintain separate financial statements, showing its assets and liabilities separate and apart from those of any other Person;
 
(vi)            other than with respect to the consolidated tax returns of its Affiliates, prepare and file its own tax returns separate from those of any Person to the extent required by applicable law, and pay any taxes required to be paid by applicable law;
 
(vii)            allocate and charge fairly and reasonably any common employee or overhead shared with Affiliates;
 
(viii)            not enter into any transaction with Affiliates except as permitted under Section 7.06 and except on an arm’s-length basis on terms which are intrinsically fair and no less favorable than would be available for unaffiliated third parties, and pursuant to written, enforceable agreements;
 
(ix)            conduct business in its own name;
 

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(x)            not commingle its assets or funds with those of any other Person, other than as (A) permitted or required by this Agreement and (B) contemplated by the Parent Cash Management System;
 
(xi)            not assume, guarantee or pay the debts or obligations of any other Person, other than with respect to the pledge of its assets to secure the indebtedness of the other Borrowers hereunder and as described in Section 7.02(d) .
 
(xii)            correct any known misunderstanding as to its separate identity;
 
(xiii)            not permit any Affiliate to guarantee or pay its obligations (other than limited guarantees, indemnities and pledge of assets set forth in the Credit Documents and in the Hazardous Materials Indemnity Agreement) and as permitted under Section 7.06 ;
 
(xiv)            not make loans or advances to any other Person except as contemplated by the Parent Cash Management System;
 
(xv)            pay its liabilities and expenses out of and to the extent of its own funds or from advances permitted under Section 7.06 ;
 
(xvi)            maintain a sufficient number of employees in light of its contemplated business purpose and pay the salaries of its own employees, if any, only from its own funds or from advances permitted under Section 7.06 ;
 
(xvii)            maintain adequate capital in light of its contemplated business purpose, transactions and liabilities; provided, however, that the foregoing shall not require any equity owner to make additional capital contributions to any Borrower; and
 
(xviii)            cause the managers, officers, employees, agents and other representatives of each Borrower to act at all times with respect to such Borrower consistently and in furtherance of the foregoing and in the best interests of such Borrower.
 
Failure of any Borrower to comply with any of the foregoing covenants or any other covenants contained in this Agreement shall not affect the status of such Borrower as a separate legal entity.
 
6.15.             New Borrowers.
 
Upon the acquisition, incorporation or other creation of any direct or indirect Subsidiary of the Parent which owns or is to own a Borrowing Base Asset or the determination that any Real Property Asset owned by a Subsidiary is to become a Borrowing Base Asset, the Borrowers shall (i) cause such Subsidiary to become a Borrower hereunder through the execution and delivery to the Administrative Agent of a Borrower Joinder Agreement on or before the earlier of (A) the date on which a Real Property Asset owned by such Subsidiary is included in any calculation (pro forma or otherwise) of the Borrowing Base Amount and (B) the deadline for the delivery of the next Compliance Certificate pursuant to Section 6.02(a) , and (ii) cause such Subsidiary to deliver such other documentation as the Administrative Agent may reasonably request in
 

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connection with the foregoing, including, without limitation, certified resolutions and other organizational and authorizing documents of such Subsidiary, favorable opinions of counsel to such Subsidiary (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above), all in form, content and scope reasonably satisfactory to the Administrative Agent.
 
6.16.             Pledged Assets.
 
The Borrowers shall at all times subject all Borrowing Base Assets and all of their respective personal property to first priority Liens (subject in any case to Permitted Liens which by operation of law or contract would have priority over the Liens securing the Obligations) in favor of the Administrative Agent to secure the Obligations pursuant to the terms and conditions of the Credit Documents and such other additional security documents as the Administrative Agent shall reasonably request, and deliver all Borrowing Base Asset Deliverables (and any updates to any of the information or materials delivered as a portion thereof) and such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, all in form, content and scope reasonably satisfactory to the Administrative Agent.  In furtherance of the Borrowers’ obligations under this Section 6.16 , each of the Borrowers hereby agree that they shall, from time to time, at their own expense, promptly execute, deliver, file and/or record all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Administrative Agent may reasonably request (including, without limitation, the procurement of landlord consents with respect to the assignment of the applicable Borrower’s interests in any Borrowing Base Assets), in order to (a) properly evidence the Borrowers’ Obligations hereunder or under any Credit Document or (b) perfect, continue and protect the Liens and security interests granted or purported to be granted by any Collateral Documents and to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder and under any other Credit Document with respect to any Collateral.  The applicable Borrower(s) shall promptly deliver to the Administrative Agent a copy of each such instrument and evidence of its proper filing or recording, as necessary or desirable.
 
6.17.             Appraisals.
 
The Borrowers agree that the Administrative Agent shall have the right, once prior to the Maturity Date (but to the extent no Default or Event of Default has occurred and is continuing, not during the six (6) month period immediately prior to the Maturity Date), to request appraisals with respect to the Borrowing Base Assets, that the Administrative Agent shall engage all appraisers with respect to such appraisals and that the Borrowers shall pay or reimburse to the Administrative Agent all reasonable and documented costs and expenses associated therewith to the extent required by and subject to the provisions of Section 10.04 hereof.
 
6.18.             Anti-Terrorism Laws.
 
None of the Credit Parties nor any of their respective Consolidated Subsidiaries (i) will conduct any business or will engage in any transaction or dealing with any Prohibited Person, including making or receiving any contribution of funds, goods or services to or for the benefit of any Prohibited Person, (ii) will deal in, or will engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order; or (iii) will engage in
 

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or will conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order or the Patriot Act.  Each Borrower covenants and agrees to execute and/or deliver to Administrative Agent any certification or other evidence requested from time to time by Administrative Agent in its sole discretion, confirming such Borrower’s compliance with this Section including, without limitation, any documentation which is necessary for ongoing compliance with any anti-money laundering Laws applicable to any Lender.
 
6.19.             Compliance With Material Contracts.
 
Each Credit Party shall perform and observe all the material terms and provisions of each Material Contract to be performed or observed by it, maintain each such Material Contract in full force and effect, enforce each such Material Contract in accordance with its terms, take all such action to such end as may be from time to time reasonably requested by the Administrative Agent and, upon the reasonable request of the Administrative Agent, make to each other party to each such Material Contract such demands and requests for information and reports or for action as any Credit Party is entitled to make under such Material Contract.
 
6.20.             Health Care Covenants.
 
Without limiting the generality of the provisions of Section 6.05 , each Borrower hereby represents, covenants and agrees as follows:
 
(a)            If and to the extent required under applicable Laws, each Borrower shall, and shall cause each Operator to, maintain in full force and effect a valid certificate of need (“ CON ”) or similar certificate, license, or approval issued by the State Regulator for the requisite number of Senior Housing Units (other than the independent living units) in the Borrowing Base Assets, and a provider agreement or other required documentation of approved provider status for each provider payment or reimbursement program, if applicable.  Each Borrower shall, and shall cause each Operator to, operate the Borrowing Base Assets in a manner such that the Licenses shall remain in full force and effect.  True and complete copies of the Licenses have been delivered to Lender.
 
(b)            The Licenses:
 
(i)            Are not now and will not be (A) transferred to any location other than the applicable Borrowing Base Asset or (B) pledged as collateral security for any loan or indebtedness, other than the Loan; and
 
(ii)            Shall continue in full force and effect throughout the term of the Credit Facility and will remain free from restrictions or known conflicts, and shall not be provisional, probationary or restricted in any manner which would materially impair the use or operation of the applicable Borrowing Base Asset as a skilled nursing facility, assisted living facility, memory care facility, or senior independent living facility, as applicable.
 
(c)            The Borrowers shall not do, and shall not permit any Operator to do (or suffer to be done), any of the following with respect to the Borrowing Base Assets:
 

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(i)            Rescind, withdraw, revoke, or amend the number of Senior Housing Units permitted under the Licenses or otherwise amend the Licenses in such a manner that results in a Material Adverse Effect on the rates charged or otherwise diminish or impair the nature, tenor or scope of the Licenses or which could in any way be reasonably  expected to materially impair the use or operation of the applicable Borrowing Base Asset as a skilled nursing facility, assisted living facility, memory care facility, or senior independent living facility, as applicable;
 
(ii)            Replace or transfer all or any part of any Borrowing Base Asset’s licensed beds or CON to another site or location other than another Borrowing Base Asset;
 
6.21.             Public Company Status.
 
The Parent shall, at all times during the term hereof, maintain its status as a publicly traded company whose shares are or are intended to be listed on the New York Stock Exchange or such other nationally recognized stock exchange.

6.22.             Use and Application of Insurance Proceeds.
 
(a)             Notice; Repair Obligation .  If any Borrowing Base Asset shall be damaged or destroyed, in whole or in part, by fire or other casualty (a “ Casualty ”), the Borrowers shall give prompt notice thereof to the Administrative Agent.  Following the occurrence of a Casualty, the Borrowers, regardless of whether insurance proceeds are available, shall promptly proceed to restore, repair, replace or rebuild the same to be of at least equal value and of substantially the same character as prior to such damage or destruction, all to be effected in accordance with applicable law.
 
(b)             Application of Insurance Proceeds .  The Administrative Agent shall apply insurance proceeds to costs of restoring the applicable Borrowing Base Asset or to the payment of the Loan as follows:
 
(i)            if the loss is less than or equal to the Restoration Threshold, the Administrative Agent shall apply the insurance proceeds to restoration provided (A) no Event of Default exists, and (B) the applicable Borrower who owns the affected Borrowing Base Asset promptly commences and is diligently pursuing restoration of the applicable Borrowing Base Asset;
 
(ii)            if the loss exceeds the Restoration Threshold, the Administrative Agent shall apply the insurance proceeds to restoration provided that (A) at all times during such restoration no Event of Default exists; (B) the Administrative Agent determines throughout the restoration that there are sufficient funds available to restore and repair the affected Borrowing Base Asset to a condition approved by the Administrative Agent; (C) the Administrative Agent determines that the revenues from the affected Borrowing Base Asset and the other Borrowing Base Assets during restoration, taking into account rent loss or business interruption insurance, will be sufficient to pay debt service on the Loan; (D) the Administrative Agent determines that the ratio of the outstanding principal balance of the Loan to appraised value of the affected Borrowing Base Asset and other Borrowing Base Assets after restoration will not exceed the loan-to-value ratio that
 

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existed on the Closing Date; (E) the Administrative Agent determines that restoration and repair of the affected Borrowing Base Asset to a condition approved by the Administrative Agent will be completed within nine (9) months after the date of loss or casualty and in any event at least ninety (90) days prior to the Maturity Date; (F) the applicable Borrower promptly commences and is diligently pursuing restoration of the Borrowing Base Asset; and (G) the affected Borrowing Base Asset after the restoration will be in compliance with and permitted under all applicable Laws, including zoning, building and land use laws, rules, regulations and ordinances; and
 
(iii)            if the conditions set forth in (i) and (ii) above are not satisfied, in the Administrative Agent’s reasonable discretion, the Administrative Agent may apply any insurance proceeds it may receive to Obligations owing under the Credit Documents in such order and manner as the Administrative Agent in its sole discretion determines, or allow all or a portion of such proceeds to be used for the restoration of the affected Borrowing Base Asset.
 
(c)             Disbursement of Insurance Proceeds .  Insurance proceeds applied to restoration will be disbursed by the Administrative Agent on receipt of reasonably satisfactory plans and specifications, contracts and subcontracts, schedules, budgets, lien waivers and architects’ certificates, and otherwise in accordance with prudent commercial construction lending practices for construction loan advances (including appropriate retainages to ensure that all work is completed in a workmanlike manner).
 
6.23.             Condemnation Awards.
 
The Borrowers shall promptly give the Administrative Agent written notice of the actual or threatened commencement of any condemnation or eminent domain proceeding affecting any Borrowing Base Asset (a “ Condemnation ”) and shall deliver to the Administrative Agent copies of any and all papers served in connection with such Condemnation.  Following the occurrence of a Condemnation, the Borrower that owns the affected Borrowing Base Asset, regardless of whether any award or compensation (an “ Award ”) is available, shall promptly proceed to restore, repair, replace or rebuild the same to the extent practicable to be of at least equal value and of substantially the same character as prior to such Condemnation, all to be effected in accordance with applicable Law.  The Administrative Agent may participate in any such proceeding and the Borrowers will deliver to the Administrative Agent all instruments necessary or required by the Administrative Agent to permit such participation.  Without the Administrative Agent’s prior consent, the Borrowers (a) shall not agree to any Award, and (b) shall not take any action or fail to take any action which would cause the Award to be determined.  All Awards for the taking or purchase in lieu of condemnation of any Borrowing Base Asset or any part thereof are hereby assigned to and shall be paid to the Administrative Agent.  The Administrative Agent is hereby irrevocably appointed as each Borrower’s attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain any Award and to make any compromise or settlement in connection with any such Condemnation and to give proper receipts and acquittances therefor, and in the Administrative Agent’s sole discretion to apply the same toward the payment of the Loan, notwithstanding that the Loan may not then be due and payable, or to the restoration of the affected Borrowing Base Asset; provided, however, if the Award is less than or equal to $100,000 and the Borrowers request that such proceeds be used for non
 

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structural site improvements (such as landscape, driveway, walkway and parking area repairs) required to be made as a result of such Condemnation, the Administrative Agent will apply the Award to such restoration in accordance with disbursement procedures applicable to insurance proceeds provided there exists no Default or Event of Default.  The Borrowers, upon request by the Administrative Agent, shall execute all instruments requested to confirm the assignment of the Award to the Administrative Agent, free and clear of all liens, charges or encumbrances.  Anything herein to the contrary notwithstanding, if a Default or an Event of Default exists, the Administrative Agent is authorized to adjust such Award without the consent of the Borrowers and to collect such Award in the name of the Administrative Agent and the Borrowers.
 
6.24.             Cash Management System .
 
Borrowers covenant and agree that all revenue from the operations of the Borrowing Base Assets will be deposited on a daily basis into either the Portfolio General Receivables Account or the Third Party Payor Receivables Accounts, both of which accounts will be subject to a Blocked Account Agreement. Funds in the Third Party Payor Receivables Account will be swept on a daily basis into the Portfolio General Receivables Account, and all funds in the Portfolio General Receivables Account will then be swept on a daily basis into the Parent Sweep Account.  All expenses of each Borrowing Base Asset will be paid directly from Parent Sweep Account or other Parent accounts.  All cash swept to the Parent Sweep Account from a Borrowing Base Asset and remaining after payment of expenses of such Borrowing Base Asset shall be reflected in the accounting records of Parent and its Subsidiaries with respect to such Borrowing Base Asset as “due from Parent”, and all amounts by which expenses paid with respect to a Borrowing Base Asset exceed cash swept to the Parent Sweep Account from such Borrowing Base Asset shall be reflected in the accounting records of Parent and its Subsidiaries with respect to such Borrowing Base Asset as “due to Parent.”  Borrowers will not modify the cash management system described in this Section 6.24 (“ Parent Cash Management System ”) without the prior written consent of Administrative Agent.
 
ARTICLE VII
NEGATIVE COVENANTS
 
The Borrowers hereby covenant and agree (on their own behalf and on behalf of the Parent, as applicable) that until the Obligations, together with interest, fees and other obligations hereunder, have been paid in full and the Commitments hereunder shall have terminated:
 
7.01.             Liens.
 
No Borrower shall, at any time, create, incur, assume or suffer to exist any Lien upon any of its assets or revenues, whether now owned or hereafter acquired, other than Permitted Liens.  The Parent shall not create, or permit the creation of, any Lien upon the Capital Stock of any Borrower.
 
7.02.             Indebtedness.
 
No Borrower shall create, incur, assume or suffer to exist any Indebtedness, except:
 

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(a)            Indebtedness under the Credit Documents;
 
(b)            Indebtedness of the Borrowers set forth in Schedule 7.02 (and renewals, refinancings and extensions thereof on terms and conditions no less favorable to such Person than such existing Indebtedness);
 
(c)            unsecured intercompany Indebtedness of any Borrower to any Credit Party; provided, that such Indebtedness shall be expressly subordinate in all respects to the Obligations on terms reasonably acceptable to the Administrative Agent;
 
(d)            Indebtedness of the Borrowers under equipment leasing or financing arrangements for use at the Borrowing Base Assets, provided such Indebtedness shall not exceed (i) $100,000 for any Borrowing Base Asset with fewer than 150 units and (ii) $200,000 for any Borrowing Base Asset with 150 or more units.
 
7.03.             Fundamental Changes.
 
No Borrower shall merge, dissolve, liquidate, consolidate with or into another Person, provided , that, notwithstanding the foregoing provisions of this Section 7.03 , any Consolidated Party which is not a Borrower may be merged or consolidated with or into any Borrower provided that such Borrower shall be the continuing or surviving entity and such Borrower must continue to satisfy the requirements of Section 6.14 .
 
7.04.             Dispositions; Acquisitions.
 
(a)            The Borrowers shall not make any sale, lease, transfer or other Disposition of (i) any Borrowing Base Asset, except to the extent permitted pursuant to Section 7.12 hereof; or (ii) any material assets of the Borrowers unless (A) such sale, lease, transfer or other Disposition is performed in the ordinary course of the Borrowers’ Businesses or (B) the consideration paid in connection with such material assets (1) is in cash or Cash Equivalents, (2) is in an amount not less than the fair market value of the Property disposed of and (3) does not exceed, in the aggregate during any calendar year (for the all Borrowers and all such sales, leases, transfers or other Dispositions) $500,000.  The Parent shall not, in any case, transfer, sell, lease, pledge or otherwise Dispose of the Capital Stock of the Borrowers held by it without the prior written consent of the Administrative Agent (which consent may be granted or withheld in the sole discretion of the Administrative Agent).
 
(b)            The Borrowers shall not, without the prior written consent of the Administrative Agent (which consent may be granted or withheld in the sole discretion of the Administrative Agent), make any Investments or otherwise acquire any material real or personal property other than: (i) acquisitions of personal property in the ordinary course of business to the extent required to continue to operate the Borrowers’ Businesses in the manner in which they are currently being operated, (ii) investments in cash or Cash Equivalents, (iii) investments in Borrowing Base Assets and (iv) the amounts reflected as “due from Parent” on accounting records in connection with the operation of the Parent Cash Management System.
 

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7.05.             Business Activities.
 
No Borrower shall engage in any business activities other than owning, holding, leasing, operating, developing, managing, improving and providing secured financing for real and personal property and similar interests in leasehold properties which are owned by or net leased to healthcare operators for use as Healthcare Facilities and activities incidental thereto.
 
7.06.             Transactions with Affiliates and Insiders.
 
No Borrower shall, at any time, enter into or permit to exist any transaction or series of transactions with any officer, director or Affiliate of such Borrower other than (a) advances by such Person of working capital to any such Borrower, (b) transfer of assets to any Borrower, provided such transfer is made without obligation on the receiving Borrower to return the assets transferred, (c) intercompany transactions expressly permitted by Section 7.02 , Section 7.03 or Section 7.04 and under the Parent Cash Management System, (d) normal compensation and reimbursement of expenses of officers and directors and (e) except as otherwise specifically limited in this Credit Agreement, other transactions which are entered into in the ordinary course of such Borrower’s business on terms and conditions substantially as favorable to such Borrower as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director or Affiliate.
 
7.07.             Organization Documents; Fiscal Year.
 
No Credit Party shall (a) amend, modify or change its organization documents in a manner adverse to the Lenders or (b) change its fiscal year.
 
7.08.             Modifications to Other Documents.
 
The Borrowers shall not, without the prior written consent of the Required Lenders enter into any material amendment or modification or cancel or terminate any Material Contract (subject to the provisions of this Section 7.08 with respect to Facility Operating Leases) prior to its stated maturity.  Notwithstanding the foregoing, with respect to any Facility Operating Lease, the Borrowers may amend or modify or permit the amendment or modification of any Facility Operating Lease without the Required Lenders’ prior written consent, except to the extent such amendment or modification:  (a) decreases the rent or any other monetary obligations under any Facility Operating Lease (except as set forth in the proviso to this sentence); (b) shortens the term of any Facility Operating Lease; (c) releases or limits the liability of any guarantor under any Facility Operating Lease; (d) releases any security deposits or letters of credit or any other security or collateral under any Facility Operating Lease or under any guaranty of or pledge or security agreement in respect of any Facility Operating Lease; (e) consents to the assignment, delegation or other transfer of rights and obligations under any Facility Operating Lease; (f) changes the terms of any purchase option under any Facility Operating Lease, including the purchase price or the time during which such option may be exercised; or (g) makes any other material change to the terms and conditions of any Facility Operating Lease or increases in any material respect the obligations or liabilities of the applicable Borrower thereunder; provided, however, that to the extent such amendment, modification or restructuring of a Facility Operating Lease involves the replacement of an Operating Tenant, (A) the Borrowers shall have
 

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delivered to the Lenders and the Administrative Agent (1) the identity of such proposed new tenant (the “ New Tenant ”), (2) the proposed lease with such New Tenant (the “ New Lease ”) and (3) such other information as reasonably requested and (B) provided that (1) such New Tenant is an Eligible Tenant, (2) the New Lease provides for rent payments in each year which are at least eighty percent (80%) of the rent payments in each year due under the lease being amended, modified or replaced (the “ Existing Facility Operating Lease ”) and (3) the New Lease is otherwise substantially similar in all material respects to the Existing Facility Operating Lease, then within twenty (20) Business Days after receiving the foregoing information from the Borrowers, with a request that the Required Lenders approve the New Tenant and New Lease and which prominently states on the face of the request that it will be deemed approved if not approved or disapproved within twenty (20) Business Days after receipt by Administrative Agent, if the Required Lenders have not either approved or disapproved such proposal, the Required Lenders shall be deemed to have approved such proposal.
 
7.09.             Ownership of Subsidiaries.
 
Notwithstanding any other provisions of this Credit Agreement to the contrary, (a) no Borrower shall own any Capital Stock of any other entity; (b) no Person other than the Parent or its Wholly Owned Subsidiaries shall own any Capital Stock of any Borrower; and (c) no Borrower shall permit the creation, incurrence, assumption or existence of any Lien on any Capital Stock of any Borrower.
 
7.10.             No Further Negative Pledges.
 
No Borrower will enter into, assume or become subject to any Negative Pledges or agreement prohibiting or otherwise restricting the existence of any Lien upon any of its property in favor of the Administrative Agent (for the benefit of the Lenders) for the purpose of securing the Obligations, whether now owned or hereafter acquired, or requiring the grant of any security for any obligation if such property is given as security for the Obligations, except (a) in connection with any Permitted Lien or any document or instrument governing any Permitted Lien, provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien, and (b) pursuant to customary restrictions and conditions contained in any agreement relating to the sale of any property permitted under Section 7.04 , pending the consummation of such sale.
 
7.11.             Limitation on Restricted Actions.
 
The Borrowers will not directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Person to (a) pay dividends or make any other distributions to the Parent on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Indebtedness or other obligation owed to any Credit Party, (c) make loans or advances to any Credit Party, (d) sell, lease or transfer any of its properties or assets to any Credit Party, or (e) act as a Borrower and pledge its assets pursuant to the Credit Documents or any renewals, refinancings, exchanges, refundings or extension thereof, except (in respect of any of the matters referred to in clauses (a)-(d) above) for such encumbrances or restrictions existing under or by reason of (i) this Credit Agreement and the other Credit Documents, (ii) applicable Law, or (iii) any Lien or
 

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any documentation or instrument governing any Lien permitted under Section 7.01 provided that any such restriction contained therein relates only to the asset or assets subject to such Lien.
 
7.12.             Addition/Replacement of Borrowing Base Assets.
 
(a)            The Borrowers shall not request a release of any Borrowing Base Assets from the Liens established pursuant to the applicable Mortgage Instrument and Assignment of Leases with respect thereto or add any Real Property Assets as Borrowing Base Assets hereunder except in accordance with the following:
 
(i)            The Borrowers may at any time include additional Real Property Assets (which satisfy the requirements set forth in the definition of Borrowing Base Assets, including, without limitation, delivery of each of the Borrowing Base Asset Deliverables with respect thereto) as Borrowing Base Assets with the written approval of the Administrative Agent.
 
(ii)            The Borrowers may obtain releases of Borrowing Base Assets from the Liens and security interests of the Administrative Agent hereunder and under the Collateral Documents relating thereto through satisfaction of each of the following conditions:  (A) the applicable Borrower shall deliver to the Administrative Agent, not less than thirty (30) days prior to the date of such requested release a written request for release of the applicable Borrowing Base Asset, (B) the applicable Borrower shall deliver, together with such request for release, a pro forma Compliance Certificate showing that, on a pro forma basis, after giving effect to such release, (1) all financial covenants contained herein shall be satisfied and (2) the outstanding principal amount of Obligations shall not exceed the lesser of the Aggregate Committed Amount and the Borrowing Base Amount (after giving effect to the removal of such Borrowing Base Asset from the calculation of the Borrowing Base Amount or Borrowers shall pay to Administrative Agent an amount necessary to make such statement true (the “ Release Price ”)), (C) a Responsible Officer of the Borrowers shall certify in writing to the Administrative Agent that no Default or Event of Default shall exist immediately after giving effect to the applicable release and (D) the Administrative Agent shall have received evidence, acceptable to it in its discretion that the matters set forth in such request, Compliance Certificate and certification are true and correct in all material respects.  To the extent all such conditions to release are satisfied, including the payment of the Release Price, the Administrative Agent will, at the Borrowers’ expense, deliver to the applicable Borrower a partial release letter in the form of Exhibit I attached hereto.
 
(b)            The Borrowers shall not otherwise actively cause or willfully fail to take any commercially reasonable action that causes any Borrowing Base Asset to fail to qualify as such during the term of this Credit Agreement.
 
(c)            Immediately upon a Responsible Officer of any Borrower obtaining knowledge that a Borrowing Base Asset fails to qualify as such, Borrowers shall deliver a pro forma Borrowing Base Certificate (which certificate shall include an update to the information set forth on Schedule 5.12 ) demonstrating that, upon giving effect to the removal of the Collateral Value
 

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or Availability Amount attributable to such former Borrowing Base Asset from the calculation of the Borrowing Base Amount, the Borrowers shall be in compliance with Section 2.01(a) hereof.
 
(d)            The Borrowers shall not include any Real Property Asset as a Borrowing Base Asset on any schedule, Borrowing Base Certificate or Compliance Certificate delivered in connection with this Credit Agreement unless (i) such Real Property Asset meets the definition of Borrowing Base Asset and Borrowers have otherwise satisfied the requirements set forth in this Agreement and (ii) such Real Property Asset continues to qualify as a Borrowing Base Asset as of the date of such inclusion.
 
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES
 
8.01.             Events of Default.
 
The occurrence and continuation of any of the following shall constitute an Event of Default:
 
(a)             Non-Payment .  The Borrowers or any other Credit Party fails to pay when and as required to be paid herein (i) any amount of principal of the Loan when due, (ii) within five (5) days after the same becomes due, any interest on the Loan or any Unused Fee, (iii) within ten (10) Business Days after the earlier of (A) a Responsible Officer of the Parent or any Borrower becoming aware that the same has become due or (B) written notice from the Administrative Agent to the Borrowers, any other fee payable herein or any other amount payable herein or under any other Credit Document becomes due, or (iv) the Obligations at the Maturity Date, whether by acceleration or otherwise; or
 
(b)             Specific Covenants .  The Borrowers fail to perform or observe any term, covenant or agreement contained in (i) any of Sections 6.01 6.02 or 6.10 within ten (10) Business Days after the same becomes due or required or (ii) any of Sections 6.07 , 6.11 , 6.12 , 6.14 , 6.15 or Sections 7.02 , 7.03 , 7.05 , 7.07 , 7.09 through 7.12; or
 
(c)             Other Defaults .  Any Credit Party fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Credit Document on its part to be performed or observed and such failure continues for thirty (30) days after the earlier of (i) a Responsible Officer of the Parent or any Borrower becoming aware of such default or (ii) written notice thereof by the Administrative Agent to the Borrowers (or, if such failure cannot be reasonably cured within such period, sixty (60) days, so long as the applicable Credit Party has diligently commenced such cure and is diligently pursuing completion thereof); or
 
(d)             Representations and Warranties .  Any representation, warranty, certification or statement of fact made or deemed made by the Borrowers on behalf of the Borrowers, the Parent or any other Credit Party and contained in this Credit Agreement, in any other Credit Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading in any material respect when made or deemed made; or
 

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(e)             Cross-Default .  (i) Any Borrower (A) fails to perform or observe (beyond the applicable grace or cure period with respect thereto, if any) any Contractual Obligation, (B) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise and beyond the applicable grace or cure period with respect thereto, if any) in respect of any Indebtedness (other than Indebtedness hereunder) or otherwise fails to observe or perform any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which event of default is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or cash collateral in respect thereof to be demanded, in each case to the extent such Contractual Obligation or Indebtedness or other obligation is in an amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount or (ii) there occurs a “default” or an “event of default” (as such terms are defined in the Facility Operating Leases) under any Facility Operating Lease; or
 
(f)             Insolvency Proceedings, Etc .  The Parent, any Borrower or any Operator institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its properties; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of the Parent, such Borrower or such Operator and the appointment continues undischarged or unstayed for ninety (90) calendar days; or any proceeding under any Debtor Relief Law relating to the Parent, any Borrower or any Operator or to all or any material part of its property is instituted without the consent of the Parent, such Borrower or such Operator, as the case may be, and continues undismissed or unstayed for ninety (90) calendar days, or an order for relief is entered in any such proceeding; or
 
(g)             Inability to Pay Debts; Attachment .  (i) The Parent or any Borrower becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process in an amount in excess of the Threshold Amount is issued or levied against all or any material part of the properties of the Parent or any Borrower and is not released, vacated or fully bonded within sixty (60) days after its issue or levy; or
 
(h)             Judgments .  There is entered against the Parent or any Borrower (i) any one or more final judgments or orders for the payment of money in an aggregate amount exceeding the Threshold Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage or not otherwise paid in full), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of ten (10)
 

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consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or
 
(i)             ERISA .  (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of a Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount, or (ii) a Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or
 
(j)             Invalidity of Credit Documents; Guaranty .  (i) Any Credit Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or as a result of satisfaction in full of all the Obligations or as a result of the Administrative Agent’s failure to record and/or file where and/or when appropriate any Collateral Documents or any continuation statements, ceases to be in full force and effect; or any Credit Party contests in any manner the validity or enforceability of any Credit Document; or any Credit Party denies that it has any or further liability or obligation under any Credit Document, or purports to revoke, terminate or rescind any Credit Document; (ii) the Guaranty or the Hazardous Materials Indemnity Agreement shall cease to be in full force and effect, or the Guarantor shall deny or disaffirm its obligations under such Guaranty or Hazardous Materials Indemnity Agreement, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Guaranty or Hazardous Materials Indemnity Agreement; or (iii) any Facility Operating Lease shall cease to be in full force and effect, or the Operating Tenant shall deny or disaffirm such Operating Tenant’s obligations under such Facility Operating Lease; or (iv) any of the Eligible Ground Leases shall be terminated by the ground lessor thereunder or otherwise cease to be in full force and effect by action of the ground lessor thereunder; or
 
(k)             Change of Control .  There occurs any Change of Control.
 
8.02.             Remedies Upon Event of Default.
 
If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, upon written notice to the Borrowers in any instance, take any or all of the following actions:
 
(a)            declare the commitment of each Lender to make Advances to be terminated, whereupon such commitments and obligation shall be terminated;
 
(b)            declare the unpaid principal amount of the Loan, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Credit Document to be immediately due and payable, without presentment, demand, protest or additional notice of any kind, all of which are hereby expressly waived by the Borrowers; and
 
(c)            exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Credit Documents or applicable law;
 

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provided, however, that upon the occurrence of an Event of Acceleration, the obligation of each Lender to make Advances shall automatically terminate, the unpaid principal amount of the Loan and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Administrative Agent or any Lender.
 
8.03.             Application of Funds.
 
After the exercise of remedies in accordance with the provisions of Section 8.02 (or after the Loan has automatically become immediately due and payable as set forth in the proviso to Section 8.02 ), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order:
 
First , to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including Attorney Costs and amounts payable under Article III ) payable to the Administrative Agent in its capacity as such or incurred by Administrative Agent in the exercise of its rights and remedies under this Agreement;
 
Second , to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders (including Attorney Costs and amounts payable under Article III ), ratably among the Lenders in proportion to the amounts described in this clause Second payable to them;
 
Third , to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loan, ratably among the Lenders in proportion to the respective amounts described in this clause Third payable to them;
 
Fourth , to payment of that portion of the Obligations constituting unpaid principal of the Loan, ratably among such parties in proportion to the respective amounts described in this clause Fourth held by them; and
 
Last , the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrowers or as otherwise required by Law.
 
8.04.             Administrative Agent’s Right to Perform the Obligations.
 
Upon the occurrence of an Event of Default and during continuation thereof, then, without waiving or releasing any other right, remedy or recourse the Administrative Agent or Lenders may have because of such Event of Default, the Administrative Agent may (but shall not be obligated to) make such payment or perform any act required of the Borrowers under this Agreement for the account of and at the expense of the Borrowers, and shall have the right to enter upon the Borrowing Base Assets for such purpose and to take all such action thereon and with respect to the Borrowing Base Assets as it may deem necessary or appropriate.  The Borrowers shall indemnify, defend and hold the Administrative Agent and Lenders harmless from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs, or disbursements of any kind or nature whatsoever, including reasonable attorneys’ fees, incurred or accruing by reason of any acts performed by the Administrative Agent pursuant to the provisions of this Section  8.04 , including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent, except as a
 

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result of the Administrative Agent’s and/or Lenders’ gross negligence or willful misconduct.  All sums paid by the Administrative Agent pursuant to this Section 8.04 , and all other sums expended by the Administrative Agent to which it shall be entitled to be indemnified pursuant to this Section 8.04 , together with interest thereon at the Default Rate from the date of such payment or expenditure until paid, shall constitute additions to the Obligations, shall be secured by the Credit Documents and shall be paid by the Borrowers to the Administrative Agent upon demand.
 
8.05.             Special Cure Right .
 
Notwithstanding anything contained in this Article 8 to the contrary, if there occurs an Event of Default with respect to a particular Borrowing Base Asset  (the “ Defaulting Asset ”) or the Borrower who owns such Defaulting Asset (the “ Defaulting Borrower ”), then absent any other continuing Event of Default hereunder, such Event of Default with respect to the Defaulting Asset shall not constitute an “Event of Default” hereunder subject to satisfaction of each of the following:
 
(a)            Borrowers shall within five (5) days following such Event of Default deliver to Administrative Agent a pro forma Compliance Certificate showing, on a pro forma basis (after giving effect to the removal of the Defaulting Asset(s) from such calculation) (i) the Borrowing Base Amount, and (ii) the Debt Yield.
 
(b)            If the calculation of the Debt Yield is below 10%, Borrowers shall (i) within ten (10) days following the occurrence of such Event of Default, pay to the Administrative Agent a prepayment of principal in an amount necessary to achieve a Debt Yield of not less than 10.0% and (ii) within thirty (30) days following the occurrence of such Event of Default, cure the Event of Default to the satisfaction of Administrative Agent or pay to the Administrative Agent a prepayment of principal in an amount necessary to reduce the Principal Obligations to an amount that does not exceed the Borrowing Base Amount (excluding for purposes of such calculation, the Defaulting Asset(s)).
 
(c)            If the calculation of the Debt Yield is above 10%, Borrowers shall within thirty (30) days following the occurrence of such Event of Default, cure the Event of Default to the satisfaction of Administrative Agent or pay to the Administrative Agent a prepayment of principal in an amount necessary to reduce the Principal Obligations to amount that does not exceed the Borrowing Base Amount (excluding for purposes of such calculation, the Defaulting Asset(s)).
 
ARTICLE IX
ADMINISTRATIVE AGENT
 
9.01.             Appointment and Authorization of Administrative Agent.
 
Each Lender hereby irrevocably appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Credit Agreement and each other Credit Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Credit Agreement or any other Credit Document, together with such powers as are reasonably incidental thereto.  Notwithstanding any provision to the
 

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contrary contained elsewhere herein or in any other Credit Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any other Credit Document or otherwise exist against the Administrative Agent.  Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in the other Credit Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law.  Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.
 
9.02.             Delegation of Duties.
 
The Administrative Agent may execute any of its duties under this Credit Agreement or any other Credit Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties.  The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.
 
9.03.             Liability of Administrative Agent.
 
No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Credit Agreement or any other Credit Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set forth herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by any Credit Party or any officer thereof, contained herein or in any other Credit Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Credit Agreement or any other Credit Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Credit Agreement or any other Credit Document, or for any failure of any Credit Party or any other party to any Credit Document to perform its obligations hereunder or thereunder.  No Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Credit Agreement or any other Credit Document, or to inspect the properties, books or records of any Credit Party or any Affiliate thereof.
 
9.04.             Reliance by Administrative Agent.
 
(a)            The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, electronic mail message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to any Credit Party), independent accountants and
 

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other experts selected by the Administrative Agent.  The Administrative Agent shall be fully justified in failing or refusing to take any action under any Credit Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.  The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement or any other Credit Document in accordance with a request or consent of the Required Lenders (or such greater number of Lenders as may be expressly required hereby in any instance) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders.
 
(b)            For purposes of determining compliance with the conditions specified in Section 4.01 , each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
 
9.05.             Notice of Default.
 
The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or any Borrower referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default.”  The Administrative Agent will notify the Lenders of its receipt of any such notice.  The Administrative Agent shall take such action with respect to such Default or Event of Default as may be directed by the requisite Lenders in accordance herewith; provided, however, that unless and until the Administrative Agent has received any such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders.
 
9.06.             Credit Decision; Disclosure of Confidential Information by Administrative Agent.
 
Each Lender acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent to and acceptance of any assignment or review of the affairs of any Credit Party or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their possession (in each case, except to the extent the Administrative Agent has confirmed to any Lender in writing the satisfaction of conditions to funding as of the Closing Date).  Each Lender represents to the Administrative Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Credit Parties and their respective Subsidiaries, and all applicable bank or other regulatory
 

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Laws relating to the transactions contemplated hereby, and made its own decision to enter into this Credit Agreement and to extend credit to the Borrowers and the other Credit Parties hereunder.  Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement and the other Credit Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrowers and the other Credit Parties.  Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any of the Credit Parties or any of their respective Affiliates that may come into the possession of any Agent-Related Person.
 
9.07.             Indemnification of Administrative Agent.
 
Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of any Credit Party and without limiting the obligation of any Credit Party to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Liabilities incurred by it; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities to the extent determined in a final, nonappealable judgment by a court of competent jurisdiction to have resulted from such Agent-Related Person’s own gross negligence or willful misconduct; provided, however, that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section.  Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Credit Agreement, any other Credit Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Borrowers.  The undertaking in this Section shall survive termination of the Aggregate Commitments, the payment of all other Obligations and the resignation of the Administrative Agent.
 
9.08.             Administrative Agent in its Individual Capacity.
 
GECC and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with each of the Credit Parties and their respective Affiliates as though GECC were not the Administrative Agent hereunder and without notice to or consent of the Lenders.  The Lenders acknowledge that, pursuant to such activities, GECC or its Affiliates may receive information regarding any Credit Party or its Affiliates (including information that may be subject to confidentiality obligations in favor of such Credit
 

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Party or such Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide such information to them.  With respect to its Extension of Credit, GECC shall have the same rights and powers under this Credit Agreement as any other Lender and may exercise such rights and powers as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” include GECC in its individual capacity.
 
9.09.             Successor Administrative Agent.
 
The Administrative Agent may resign as Administrative Agent upon thirty (30) days’ notice to the Lenders.  If the Administrative Agent resigns under this Credit Agreement, the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders, which successor administrative agent shall be consented to by the Borrower Representative at all times other than during the existence of an Event of Default (which consent of the Borrower Representative shall not be unreasonably withheld or delayed).  If no successor administrative agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Borrower Representative, a successor administrative agent from among the Lenders.  Upon the acceptance of its appointment as successor administrative agent hereunder, the Person acting as such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” thereafter shall mean such successor administrative agent and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated without any other or further act or deed on the part of such retiring Administrative Agent or any other Lender.  After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Article IX and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement.  If no successor administrative agent has accepted appointment as Administrative Agent by the date thirty (30) days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.
 
9.10.             Administrative Agent May File Proofs of Claim.
 
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Credit Party, the Administrative Agent (irrespective of whether the principal of the Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrowers) shall be entitled and empowered, by intervention in such proceeding or otherwise:
 
(a)            to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loan and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their
 

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respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Section 2.07   and 10.04 ) allowed in such judicial proceeding; and
 
(b)            to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
 
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.07 and 10.04 .
 
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
 
ARTICLE X
MISCELLANEOUS
 
10.01.             Amendments, Etc.
 
No amendment or waiver of, or any consent to deviation from, any provision of this Credit Agreement or any other Credit Document shall be effective unless in writing and signed by the Borrowers, the Guarantor (if applicable) and the Required Lenders and acknowledged by the Administrative Agent, and each such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given; provided, however, that:
 
(a)            unless also signed by each Lender directly affected thereby, no such amendment, waiver or consent shall:
 
(i)            extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02 ), it being understood that the amendment or waiver of an Event of Default or a mandatory reduction or a mandatory prepayment in Commitments shall not be considered an increase in Commitments,
 
(ii)            waive non-payment or postpone any date fixed by this Credit Agreement or any other Credit Document for any payment of principal, interest, fees or other amounts due to any Lender hereunder or under any other Credit Document,
 
(iii)            reduce the principal of, or the rate of interest specified herein on the Loan, or any fees or other amounts payable hereunder or under any other Credit Document; provided, however, that only the consent of the Required Lenders shall be necessary (A) to amend the definition of “Default Rate” or to waive any obligation of the Borrowers to pay interest at the Default Rate or (B) to amend any financial covenant
 

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hereunder (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on the Loan or to reduce any fee payable hereunder,
 
(iv)            change any provision of this Credit Agreement regarding pro rata sharing or pro rata funding with respect to (A) the making of advances (including participations), (B) the manner of application of payments or prepayments of principal, interest, or fees, or (C) the manner of reduction of commitments and committed amounts,
 
(v)            change any provision of this Section 10.01(a) or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, or
 
(vi)            release the Parent from its obligations hereunder (other than as provided herein or as appropriate in connection with transactions permitted hereunder);
 
(b)            unless also signed by the Administrative Agent, no such amendment, waiver or consent shall affect the rights or duties of the Administrative Agent under this Credit Agreement or any other Credit Document;
 
provided , however, that notwithstanding anything to the contrary contained herein, (i) no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender, (ii) each Lender is entitled to vote as such Lender sees fit on any bankruptcy or insolvency reorganization plan that affects the Loan (iii) each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein, and (iv) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding.
 
10.02.             Notices and Other Communications; Facsimile Copies.
 
(a)             General .  Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission).  All such written notices shall be mailed certified or registered mail, faxed or delivered to the applicable address, facsimile number or (subject to subsection (c) below) electronic mail address, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
 
(i)           if to any Borrower or the Administrative Agent, to the address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 10.02 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties; and
 
(ii)           if to any other Lender, to the address, facsimile number, electronic mail address or telephone number specified in its Administrative Questionnaire or to such
 

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other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to any Borrower and the Administrative Agent.
 
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient).  Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).
 
(b)             Electronic Communications .  Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication.  The Administrative Agent or the Borrower Representative may, in its respective discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.
 
(c)             Effectiveness of Facsimile Documents and Signatures .  Credit Documents may be transmitted and/or signed by facsimile.  The effectiveness of any such documents and signatures shall, subject to applicable Law, have the same force and effect as manually-signed originals and shall be binding on all Loan Parties, the Administrative Agent and the Lenders.  The Administrative Agent may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.
 
(d)             Reliance by Administrative Agent and Lenders .  The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Committed Loan Notices) purportedly given by or on behalf of the Borrowers even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof.  The Borrowers shall indemnify each Agent-Related Person and each Lender from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrowers.  All telephonic notices to and other communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.
 
(e)             Change of Address, Etc .  Each of the Borrowers and the Administrative Agent may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto.  Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrowers and the Administrative Agent.  In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail
 

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address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
 
10.03.             No Waiver; Cumulative Remedies.
 
No failure by any Lender or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.  The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
 
Notwithstanding anything to the contrary contained herein or in any other Credit Document, the authority to enforce rights and remedies hereunder and under the other Credit Documents against the Credit Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Administrative Agent in accordance with Section 8.02 for the benefit of all the Lenders; provided , however , that the foregoing shall not prohibit (a) the Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Credit Documents, (b) any Lender from exercising setoff rights in accordance with Section 10.09 (subject to the terms of Section 2.10 ), or (d) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Credit Party under any Debtor Relief Law; and provided , further , that if at any time there is no Person acting as Administrative Agent hereunder and under the other Credit Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Administrative Agent pursuant to Section 8.02 and (ii) in addition to the matters set forth in clauses (b) and (c) of the preceding proviso and subject to Section 2.10 , any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
 
10.04.             Attorney Costs, Expenses and Taxes.
 
The Borrowers agree (a) to pay directly to the provider thereof or to pay or reimburse the Administrative Agent for all reasonable and documented costs and expenses incurred in connection with the development, preparation, negotiation and execution of this Credit Agreement and the other Credit Documents, the preservation of any rights or remedies under this Credit Agreement and the other Credit Documents, and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs, (b) to pay or reimburse the Administrative Agent and each Lender for all reasonable costs and expenses incurred following an Event of Default in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Credit Agreement or the other Credit Documents (including all such costs and expenses incurred during any “workout” or restructuring in respect of the Obligations and during any legal proceeding, including any proceeding under any Debtor Relief Law), including all Attorney Costs and (c) all reasonable and documented appraisal costs incurred by the Administrative Agent in connection with the
 

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Administrative Agent’s procurement of FIRREA-compliant MAI appraisals with respect to any Borrowing Base Asset or any other Real Property Asset owned by any Borrower, to the extent any such appraisal is requested by the Administrative Agent (provided, that the Borrowers shall not be required to pay the costs and expenses associated with any Administrative Agent-requested appraisal more than once during the term of the Loan with respect to any Borrowing Base Asset); and (iii) any re-appraisals requested by any Borrower.  The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and the reasonable and documented cost of independent public accountants and other outside experts retained by the Administrative Agent or any Lender.  All amounts due under this Section 10.04 shall be payable within twenty (20) Business Days after written invoice therefor is received by the Borrowers.  The agreements in this Section shall survive the termination of the Aggregate Commitments and repayment of all other Obligations.
 
10.05.             Indemnification by the Borrowers.
 
The Borrowers shall indemnify and hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents, trustees, advisors and attorneys-in-fact (collectively the “ Indemnitees ”) from and against any and all liabilities, obligations, losses, damages, penalties, claims, litigation, investigation, proceeding, demands, actions, judgments, suits, costs, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever (subject to the provisions of Section 3.01 with respect to Taxes and Other Taxes) that may at any time be imposed on, incurred by or asserted against any such Indemnitee (whether by a Credit Party or any other party) in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Credit Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Credit Documents, (b) any Commitment, Loan or the use or proposed use of the proceeds therefrom, (c) performance of any labor or services or the furnishing of any materials or other property in respect of any Real Property Asset or any part thereof, (d) violation by any Person of any Healthcare Laws, (e) the Facility Operating Leases, (f) the failure of any Person to file timely with the Internal Revenue Service an accurate Form 1099-B, Statement for Recipients of Proceeds from Real Estate, Broker and Barter Exchange Transactions, which may be required in connection with this Agreement, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which this Agreement is made, or (g) any actual or threatened claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the “ Indemnified Liabilities ”); provided , that such indemnification shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, litigation, investigation, proceeding, demands, actions, judgments, suits, costs, expenses or disbursements (x) are determined to have resulted from the gross negligence or willful misconduct of any Indemnitee or (y) result from a claim brought by any Credit Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other
 

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Credit Document, if such Credit Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.  No Indemnitee 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 Credit Agreement, and no Indemnitee shall have any liability for any indirect or consequential damages relating to this Credit Agreement or any other Credit Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date).  All amounts that may become due under this Section 10.05 shall be payable within twenty (20) Business Days after written invoice therefor is received by the Borrowers.  The agreements in this Section 10.05 shall survive the resignation of the Administrative Agent, the assignment by any Lender of any of its interests hereunder, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations.
 
10.06.             Payments Set Aside.
 
To the extent that any payment by or on behalf of the Borrowers is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect.
 
10.07.             Successors and Assigns.
 
(a)            The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Borrower may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) or (i) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.
 

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(b)            Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including all or a portion of its Commitment and Extension of Credit at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and Extension of Credit at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes the Extension of Credit outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $1,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower Representative otherwise consents (each such consent not to be unreasonably withheld or delayed) provided , however , that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met; (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Credit Agreement with respect to the Extension of Credit or the Commitment assigned; (iii) any assignment of a Commitment must be approved by the Administrative Agent, unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided , however , that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment.  Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Credit Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.01 , 3.04 , 3.05 , 10.04 and 10.05 with respect to facts and circumstances occurring prior to the effective date of such assignment).  Upon request, the Borrowers (at their expense) shall execute and deliver a Note to the assignee Lender and, if the assignor Lender retains a portion of the Loan, a Note to the assignor Lender.  Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
 
(c)            The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Extension of Credit owing to
 

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each Lender pursuant to the terms hereof from time to time (the “ Register ”).  The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrower Representative at any reasonable time and from time to time upon reasonable prior notice.  In addition, at any time that a request for a consent for a material or other substantive change to the Credit Documents is pending, any Lender wishing to consult with other Lenders in connection therewith may request and receive from the Administrative Agent a copy of the Register.
 
(d)            Any Lender may at any time, without the consent of, or notice to, the Borrowers or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrowers or any of the Borrowers’ Affiliates or Subsidiaries) (each, a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Commitment and/or the Extension of Credit owing to it); provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement.  Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any  provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification that extends the time for, reduces the amount or alters the application of proceeds with respect to such obligations and payments required therein that directly affects such Participant.  Subject to subsection (e) of this Section, the Borrowers agree that each Participant shall be entitled to the benefits of Sections 3.01 , 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section.  To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.09 as though it were a Lender, provided such Participant agrees to be subject to Section 2.10 as though it were a Lender.
 
(e)            A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant.  A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless the Borrower Representative is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrowers, to comply with Section 10.15 as though it were a Lender.
 
(f)            Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Credit Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
 

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(g)            Notwithstanding anything to the contrary contained herein, any Lender that is a Fund may (without notice to or the consent of any of the parties hereto) create a security interest in all or any portion of the Extension of Credit owing to it and the Note evidencing such Extension of Credit, if any, held by it to the trustee for holders of obligations owed, or securities issued, by such Fund as security for such obligations or securities, provided that unless and until such trustee actually becomes a Lender in compliance with the other provisions of this Section 10.07 , (i) no such pledge shall release the pledging Lender from any of its obligations under the Credit Documents and (ii) such trustee shall not be entitled to exercise any of the rights of a Lender under the Credit Documents even though such trustee may have acquired ownership rights with respect to the pledged interest through foreclosure or otherwise.
 
(h)            Anything herein to the contrary notwithstanding, with respect to any assignment by a Lender to a Permitted Investor under this Section 10.07 or if any Permitted Investor becomes a Lender hereunder pursuant to Section 10.16 or otherwise, the following shall apply:  (i) in no event may Permitted Investors own in the aggregate more than a thirty percent (30%) interest in the Loan; (ii) if as a result of any such transfer or series of transfers, Permitted Investors and GECC are the only Lenders hereunder, actions to be taken by Administrative Agent under this Credit Agreement or the other Credit Documents on behalf of the Lenders that require the consent of (A) all Lenders will not require the consent of the Permitted Investors and (B) the Required Lenders will not require the consent of the Permitted Investors; and (iii) if any action to be taken by Administrative Agent under this Agreement requires the consent of the Required Lenders, and the consent of the Permitted Investor causes the 66 2/3% percentage requirement set forth in the definition of “Required Investors” to be met, such action will nonetheless require the consent of one additional Lender hereunder. The execution by a Permitted Investor of an Assignment and Assumption Agreement and/or Lender Joinder Agreement will be sufficient to evidence such Permitted Investor’s agreement to the terms of this Section 10.06(h) , provided the Permitted Investor will execute any additional documents required by Administrative Agent to evidence the agreements contained in this Section 10.06(h) .
 
10.08.             Confidentiality.
 
Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of Confidential Information, except that Confidential Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Confidential Information and instructed to keep such Confidential Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent  required by applicable Law or regulations or by any subpoena or similar legal process; (d) to any other party to this Credit Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Credit Agreement or the enforcement of rights hereunder (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Confidential Information and instructed to keep such Confidential Information confidential); (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any Eligible Assignee of or Participant in, or any prospective Eligible Assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any direct or indirect contractual counterparty or prospective counterparty (or such contractual counterparty’s or prospective counterparty’s
 

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professional advisor) to any credit derivative transaction relating to obligations of the Credit Parties; (g) with the consent of the Borrower Representative; (h) to the extent such Confidential Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrowers; (i) to the National Association of Insurance Commissioners or any other similar organization (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Confidential Information and instructed to keep such Confidential Information confidential); or (j) to any nationally recognized rating agency that requires access to a Lender’s or an Affiliate’s investment portfolio in connection with ratings issued with respect to such Lender or Affiliate.  In addition, the Administrative Agent and the Lenders may disclose the existence of this Credit Agreement and information about this Credit Agreement to market data collectors, similar service providers to the lending industry, and service providers to the Administrative Agent and the Lenders in connection with the administration and management of this Credit Agreement, the other Credit Documents, the Commitments, and the Extensions of Credit.  Any Person required to maintain the confidentiality of Confidential Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Confidential Information as such Person would accord to its own confidential information.  For the purposes of this Section, “ Confidential Information ” means all information received from any Credit Party relating to any Credit Party, any of the other Consolidated Parties, or its or their business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by any Credit Party; provided , that, in the case of information received from a Credit Party after the date hereof, such information is clearly identified in writing at the time of delivery as confidential.
 
Each of the Administrative Agent and the Lenders acknowledges that (a) the Confidential Information may include material non-public information concerning the Borrowers or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable Law, including Federal and state securities Laws.
 
10.09.             Set-off.
 
In addition to any rights and remedies of the Lenders provided by law, upon the occurrence and during the continuance of any Event of Default, each Lender and each of its Affiliates are authorized at any time and from time to time, without prior notice to the Borrowers or any other Credit Party, any such notice being waived by the Borrowers (on their own behalf and on behalf of each Credit Party) to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Lender or Affiliate to or for the credit or the account of the respective Credit Parties against any and all Obligations owing to such Lender hereunder or under any other Credit Document (subject to Section 2.10 ), now or hereafter existing, irrespective of whether or not the Administrative Agent or such Lender shall have made demand under this Credit Agreement or any other Credit Document and although such Obligations may be contingent or unmatured or denominated in a currency different from that of the applicable deposit or indebtedness.  Each Lender agrees promptly to notify the Borrowers
 

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and the Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.
 
10.10.             Interest Rate Limitation.
 
Notwithstanding anything to the contrary contained in any Credit Document, the interest paid or agreed to be paid under the Credit Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the “ Maximum Rate ”).  If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loan or, if it exceeds such unpaid principal, refunded to the Borrowers.  In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.
 
10.11.             Counterparts.
 
This Credit Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
10.12.             Integration.
 
This Credit Agreement, together with the other Credit Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes all prior agreements, written or oral, on such subject matter.  In the event of any conflict between the provisions of this Credit Agreement and those of any other Credit Document, the provisions of this Credit Agreement shall control; provided that the inclusion of specific supplemental rights or remedies in favor of the Administrative Agent or the Lenders in any other Credit Document shall not be deemed a conflict with this Credit Agreement.  Each Credit Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof.
 
10.13.             Survival of Representations and Warranties.
 
All representations and warranties made hereunder and in any other Credit Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof.  Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or Event of Default at the time of any Extension of Credit, and shall continue in full force and effect as long as the Loan or any other Obligation hereunder shall remain unpaid or unsatisfied.
 

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10.14.             Severability.
 
If any provision of this Credit Agreement or the other Credit Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Credit Agreement and the other Credit Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions.  The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
 
10.15.             Tax Forms.
 
(a)            (i) Each Lender that is not a “United States person” within the meaning of Section 7701(a)(30) of the Internal Revenue Code (a “ Foreign Lender ”) shall deliver to the Administrative Agent, prior to receipt of any payment subject to withholding under the Internal Revenue Code (or upon accepting an assignment of an interest herein), two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Foreign Lender and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Foreign Lender by the Borrowers pursuant to this Credit Agreement) or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Foreign Lender by the Borrowers pursuant to this Credit Agreement) or such other evidence satisfactory to the Borrowers and the Administrative Agent that such Foreign Lender is entitled to an exemption from, or reduction of, U.S.  withholding tax, including any exemption pursuant to Section 881(c) of the Internal Revenue Code.  Thereafter and from time to time, each such Foreign Lender shall (A) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Borrowers and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Foreign Lender by the Borrowers pursuant to this Credit Agreement, (B) promptly notify the Administrative Agent of any change in circumstances that would modify or render invalid any claimed exemption or reduction, and (C) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable Law that the Borrowers make any deduction or withholding for taxes from amounts payable to such Foreign Lender.
 
(ii)           Each Foreign Lender, to the extent it does not act or ceases to act for its own account with respect to any portion of any sums paid or payable to such Lender under any of the Credit Documents (for example, in the case of a typical participation by such Lender), shall deliver to the Administrative Agent on the date when such Foreign Lender ceases to act for its own account with respect to any portion of any such sums paid or payable, and at such other times as may be necessary in the determination of the Administrative Agent (in the reasonable exercise of its discretion), (A) two duly signed completed copies of the forms or statements required to be provided by such Lender as
 

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set forth above, to establish the portion of any such sums paid or payable with respect to which such Lender acts for its own account that is not subject to U.S.  withholding tax, and (B) two duly signed completed copies of IRS Form W-8IMY (or any successor thereto), together with any information such Lender chooses to transmit with such form, and any other certificate or statement of exemption required under the Internal Revenue Code, to establish that such Lender is not acting for its own account with respect to a portion of any such sums payable to such Lender.
 
(iii)           The Borrowers shall not be required to pay any additional amount to any Foreign Lender under Section 3.01 (A) with respect to any Taxes required to be deducted or withheld on the basis of the information, certificates or statements of exemption such Lender transmits with an IRS Form W-8IMY pursuant to this Section 10.15(a) or (B) if such Lender shall have failed to satisfy the foregoing provisions of this Section 10.15(a) ; provided that if such Lender shall have satisfied the requirement of this Section 10.15(a) on the date such Lender became a Lender or ceased to act for its own account with respect to any payment under any of the Credit Documents, nothing in this Section 10.15(a) shall relieve the Borrowers of their obligation to pay any amounts pursuant to Section 3.01 in the event that, as a result of any change in any applicable Law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender or other Person for the account of which such Lender receives any sums payable under any of the Credit Documents is not subject to withholding or is subject to withholding at a reduced rate.
 
(iv)           The Administrative Agent may, without reduction, withhold any Taxes required to be deducted and withheld from any payment under any of the Credit Documents with respect to which the Borrowers are not required to pay additional amounts under this Section 10.15(a) .
 
(b)            Upon the request of the Administrative Agent, each Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Internal Revenue Code shall deliver to the Administrative Agent two duly signed completed copies of IRS Form W-9.  If such Lender fails to deliver such forms, then the Administrative Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable back-up withholding tax imposed by the Internal Revenue Code, without reduction.
 
(c)            If any Governmental Authority asserts that the Administrative Agent did not properly withhold or backup withhold, as the case may be, any tax or other amount from payments made to or for the account of any Lender, such Lender shall indemnify the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section, and costs and expenses (including Attorney Costs) of the Administrative Agent.  The obligation of the Lenders under this Section shall survive the termination of the Aggregate Commitments, repayment of all other Obligations hereunder and the resignation of the Administrative Agent.
 

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10.16.             Replacement of Lenders.
 
To the extent that Section 3.06(b) provides that the Borrowers shall have the right to replace a Lender as a party to this Credit Agreement, the Borrowers may, upon notice to such Lender and the Administrative Agent, replace such Lender by causing such Lender to assign its Commitment (with the related assignment fee to be paid by the Borrowers) pursuant to Section 10.07(b) to one or more Eligible Assignees procured by the Borrowers; provided, however, that if the Borrowers elect to exercise such right with respect to any Lender pursuant to such Section 3.06(b) , they shall be obligated to replace all Lenders that have made similar requests for compensation pursuant to Section 3.01 or 3 .04 .  The Borrowers shall pay in full all principal, interest, fees and other amounts owing to such Lender through the date of replacement (including any amounts payable pursuant to Section 3.05 ).  Any Lender being replaced shall execute and deliver an Assignment and Assumption with respect to such Lender’s Commitment and outstanding Extension of Credit.
 
10.17.             No Advisory or Fiduciary Responsibility.
 
In connection with all aspects of each transaction contemplated hereby, the Borrowers each acknowledge and agree, and acknowledge their respective Affiliates’ understanding, that: (a) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Credit Document) are an arm’s-length commercial transaction between the Borrowers and their respective Affiliates, on the one hand, and the Administrative Agent, on the other hand, and each Borrower is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Credit Documents (including any amendment, waiver or other modification hereof or thereof); (b) in connection with the process leading to such transaction, the Administrative Agent is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Borrowers or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (c) the Administrative Agent has not assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrowers with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Credit Document (irrespective of whether the Administrative Agent has advised or is currently advising the Borrowers or any of their respective Affiliates on other matters) and the Administrative Agent has no obligation to the Borrowers or any of their respective Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Credit Documents; (d) the Administrative Agent and its Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrowers and their respective Affiliates, and the Administrative Agent has no obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (e) the Administrative Agent has not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Credit Document) and each Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate.  Each Borrower hereby waives and releases, to the fullest extent permitted
 

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by law, any claims that it may have against the Administrative Agent with respect to any breach or alleged breach of agency or fiduciary duty.
 
10.18.             Source of Funds.
 
Each of the Lenders hereby represents and warrants to the Borrowers that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder:
 
(a)            no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest;
 
(b)            to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrowers the name of each employee benefit plan whose assets in such account exceed ten percent (10%) of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan);
 
(c)            to the extent that any part of such funds constitutes assets of an insurance company’s general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or
 
(d)            such funds constitute assets of one or more specific benefit plans that such Lender has identified in writing to the Borrowers.
 
As used in this Section, the terms “employee benefit plan” and “separate account” shall have the respective meanings provided in Section 3 of ERISA.
 
10.19.             GOVERNING LAW.
 
(a)            THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES; PROVIDED THAT THE ADMINISTRATIVE AGENT AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
 
(b)            ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITTING IN CHICAGO OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWERS, THE ADMINISTRATIVE Agent AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS.  THE BORROWERS, THE ADMINISTRATIVE Agent AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF
 

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VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS , WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY CREDIT DOCUMENT OR OTHER DOCUMENT RELATED THERETO.  THE BORROWERS, THE ADMINISTRATIVE Agent AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF SUCH STATE.
 
10.20.             WAIVER OF RIGHT TO TRIAL BY JURY.
 
EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY CREDIT DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY CREDIT DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
 
10.21.             No Conflict.
 
To the extent there is any conflict or inconsistency between the provisions hereof and the provisions of any other Credit Document, this Credit Agreement shall control.
 
10.22.             USA Patriot Act Notice.
 
Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), it is required to obtain, verify and record information that identifies the Borrowers (and to the extent applicable, the Parent), which information includes the name and address of the respective Borrowers (and to the extent applicable, the Parent) and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrowers (and to the extent applicable, the Parent) in accordance with the Act.  The Borrowers shall, promptly following a request by the Administrative Agent or any Lender, provide all documentation and other information that the Administrative Agent or such Lender reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Act.
 
10.23.             Entire Agreement.
 
THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
 

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CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
 
10.24.             California Real Property Assets.
 
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, AT ANY TIME THAT ANY OF THE OBLIGATIONS SHALL BE SECURED BY REAL PROPERTY ASSETS LOCATED IN CALIFORNIA, NO LENDER SHALL EXERCISE A RIGHT OF SETOFF, LENDER’S LIEN OR COUNTERCLAIM OR TAKE ANY COURT OR ADMINISTRATIVE ACTION OR INSTITUTE ANY PROCEEDING TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR ANY CREDIT DOCUMENT UNLESS IT IS TAKEN WITH THE CONSENT OF THE REQUIRED LENDERS, IF SUCH SETOFF OR ACTION OR PROCEEDING WOULD OR MIGHT (PURSUANT TO SECTIONS 580a, 580b, 580d AND 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR SECTION 2924 OF THE CALIFORNIA CIVIL CODE, IF APPLICABLE, OR OTHERWISE) AFFECT OR IMPAIR THE VALIDITY, PRIORITY, OR ENFORCEABILITY OF THE LIENS GRANTED TO THE ADMINISTRATIVE AGENT PURSUANT TO THE COLLATERAL DOCUMENTS OR THE ENFORCEABILITY OF THE OBLIGATIONS HEREUNDER, AND ANY ATTEMPTED EXERCISE BY ANY LENDER OR ANY SUCH RIGHT WITHOUT OBTAINING SUCH CONSENT OF THE PARTIES AS REQUIRED ABOVE, SHALL BE NULL AND VOID.  THIS SECTION 10.24 SHALL BE SOLELY FOR THE BENEFIT OF EACH OF THE LENDERS.
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK -
 
SIGNATURE PAGES AND SCHEDULES AND EXHIBITS TO FOLLOW]
 

CREDIT AGREEMENT
 DAL:0535130/00080:1910701v7
 
Page 109
 

IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed as of the date first above written.
 
BORROWERS:                                                                                  BLC ATRIUM-JACKSONVILLE SNF,
LLC , a Delaware limited liability
company
BLC WESTWOOD, LLC , a Delaware
limited liability company
BLC JACKSON OAKS, LLC , a Delaware
limited liability company
CAROLINA HOUSE OF BLUFFTON,
LLC , a North Carolina limited liability
company
CAROLINA HOUSE OF HILTON
HEAD, LLC , a North Carolina limited
liability company
ARC HDV, LLC , a Tennessee limited
liability company
FIT RAMSEY, LLC , a Delaware limited
liability company
AHC STERLING HOUSE OF
HARBISON, LLC , a Delaware limited
liability company
AHC PROPERTIES, INC. , a Delaware
corporation
BROOKDALE PLACE OF BATH, LLC ,
a Delaware limited liability company


   
By:
  /s/ George T. Hicks
 
   
Name:
George T. Hicks
 
   
Title:
Executive Vice President
 


[Signatures Continued on Next Page]

 

CREDIT AGREEMENT – Signature Page
 DAL:0535130/00080:1910701v7
 
 



ADMINISTRATIVE AGENT:
 
GENERAL ELECTRIC CAPITAL
 
   
CORPORATION , as Administrative Agent
 


   
By:
  /s/ Adam Zeiger  
   
Name:
  Adam Zeiger  
   
Title:
  Duly Authorized Signatory  




CREDIT AGREEMENT – Signature Page
 DAL:0535130/00080:1910701v7
 
 


LENDERS:
 
GENERAL ELECTRIC CAPITAL
 
   
CORPORATION , as a Lender
 


   
By:
  /s/ Adam Zeiger  
   
Name:
  Adam Zeiger  
   
Title:
  Duly Authorized Signatory  
 
 
 
CREDIT AGREEMENT – Signature Page
 DAL:0535130/00080:1910701v7

 
 
 

 
EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT


   
JURISDICTION
   
OF
   
INCORPORATION
SUBSIDIARY
 
OR FORMATION
 
Abingdon Place of Gastonia LP
NC
Abingdon Place of Greensboro LP
NC
Abingdon Place of Lenoir LP
NC
AH Battery Park Member LLC
OH
AH Battery Park Owner LLC
OH
AH Illinois Huntley Member LLC
OH
AH Illinois Huntley Owner LLC
OH
AH Illinois Owner LLC
DE
AH North Carolina Owner LLC
DE
AH Ohio Columbus Owner LLC
DE
AH Texas CGP Inc
OH
AH Texas Owner Limited Partnership
OH
AH Texas Subordinated LLC
OH
AHC Bayside Inc
DE
AHC Clare Bridge of Gainesville LLC
DE
AHC Exchange Corporation
DE
AHC Florham Park LLC
DE
AHC Monroe Township LLC
DE
AHC Niagara LLC
NY
AHC PHN I Inc
DE
AHC Properties Inc
DE
AHC Purchaser Inc
DE
AHC Purchaser Parent LLC
DE
AHC Richland Hills LLC
DE
AHC Shoreline Inc
DE
AHC Southland Lakeland LLC
DE
AHC Southland Longwood LLC
DE
AHC Southland Melbourne LLC
DE
AHC Southland Ormond Beach LLC
DE
AHC Sterling House of Brighton LLC
DE
AHC Sterling House of Corsicana LLC
DE
AHC Sterling House of Fairfield LLC
DE
AHC Sterling House of Gainesville LLC
DE
AHC Sterling House of Greenville LLC
DE
AHC Sterling House of Harbison LLC
DE
AHC Sterling House of Jacksonville LLC
DE
AHC Sterling House of Lehigh Acres LLC
DE


 
 
 


AHC Sterling House of Lewisville LLC
DE
AHC Sterling House of Mansfield LLC
DE
AHC Sterling House of Newark LLC
DE
AHC Sterling House of Oklahoma City West LLC
DE
AHC Sterling House of Panama City LLC
DE
AHC Sterling House of Port Charlotte LLC
DE
AHC Sterling House of Punta Gorda LLC
DE
AHC Sterling House of Urbana LLC
DE
AHC Sterling House of Venice LLC
DE
AHC Sterling House of Washington Township LLC
DE
AHC Sterling House of Weatherford LLC
DE
AHC Sterling House of Youngstown LLC
DE
AHC Trailside LLC
DE
AHC Villas of Albany Residential LLC
DE
AHC Villas of the Atrium LLC
DE
AHC Villas Wynwood of Courtyard Albany LLC
DE
AHC Villas Wynwood of River Place LLC
DE
AHC Wynwood of Rogue Valley LLC
DE
Alabama Somerby LLC
DE
ALS Clare Bridge Inc
DE
ALS Holdings Inc
DE
ALS Kansas Inc
DE
ALS Leasing Inc
DE
ALS National Inc
DE
ALS National SPE I Inc
DE
ALS North America Inc
DE
ALS Olathe I Inc
DE
ALS Properties Holding Company LLC
DE
ALS Properties Tenant I LLC
DE
ALS Properties Tenant II LLC
DE
ALS Stonefield Inc
DE
ALS Venture II Inc
DE
ALS Wisconsin Holdings Inc
DE
ALS Wovenhearts Inc
DE
Alternative Living Services Home Care Inc
NY
Alternative Living Services New York Inc
DE
American Retirement Corporation
TN
Arbors of Santa Rosa LLC
DE
Arbors of South Hills LLC
DE
ARC Air Force Village LP
TN
ARC Aurora LLC
TN
ARC Bahia Oaks Inc
TN
ARC Bay Pines Inc
TN
ARC Belmont LLC
TN
ARC Boca Raton Inc
TN
ARC Boynton Beach LLC
TN
ARC Bradenton HC Inc
TN
ARC Bradenton Management Inc
TN


 
 
 


ARC Bradenton RC Inc
TN
ARC Brandywine GP LLC
TN
ARC Brandywine LP
DE
ARC Brookmont Terrace Inc
TN
ARC Carriage Club of Jacksonville Inc
TN
ARC Castle Hills LP
TN
ARC Charlotte Inc
TN
ARC Cleveland Heights LLC
TN
ARC Cleveland Park LLC
TN
ARC Coconut Creek LLC
TN
ARC Coconut Creek Management Inc
TN
ARC Corpus Christi LLC
TN
ARC Countryside LLC
TN
ARC Creative Marketing LLC
TN
ARC Cypress LLC
TN
ARC Cypress Station LP
TN
ARC Deane Hill LLC
TN
ARC Delray Beach LLC
TN
ARC Denver Monaco LLC
DE
ARC Epic Holding Company Inc
TN
ARC Flint Inc
TN
ARC FM GP Holding Inc
DE
ARC FM Holding Company LLC
DE
ARC FM Limited LLC
DE
ARC Fort Austin Properties LLC
TN
ARC Freedom LLC
TN
ARC Freedom Square LLC
DE
ARC Freedom Square Management Inc
TN
ARC Galleria Woods Inc
TN
ARC Greenwood Village Inc
TN
ARC Hampton Post Oak Inc
TN
ARC HDV LLC
TN
ARC Heritage Club Inc
TN
ARC Holland Inc
TN
ARC Holley Court LLC
TN
ARC Holley Court Management Inc
TN
ARC Homewood Corpus Christi LP
TN
ARC Homewood Victoria Inc
TN
ARC Imperial Plaza Inc
TN
ARC Imperial Services Inc
TN
ARC Lady Lake Inc
TN
ARC Lakeway ALF Holding Company LLC
DE
ARC Lakeway II LP
TN
ARC Lakeway LP
TN
ARC Lakeway SNF LLC
TN
ARC Lakewood LLC
TN
ARC Lowry LLC
TN
ARCLP Holdings LLC
TN


 
 
 


ARC Management Corporation
TN
ARC Management LLC
TN
ARC Minnetonka LLC
DE
ARC Naples LLC
TN
ARC Northwest Hills Limited Partnership
TN
ARC Oakhurst Inc
TN
ARC Overland Park LLC
DE
ARC Park Regency Inc
TN
ARC Parklane Inc
TN
ARC Partners II Inc
TN
ARC Pearland LP
TN
ARC Pecan Park LP
TN
ARC Pecan Park Padgett Inc
TN
ARC Peoria II Inc
TN
ARC Peoria LLC
TN
ARC Pharmacy Services LLC
TN
ARC Pinegate LP
TN
ARC Post Oak LP
TN
ARC Richmond Heights LLC
TN
ARC Richmond Heights SNF LLC
TN
ARC Richmond Place Inc
DE
ARC Rossmoor Inc
TN
ARC Roswell LLC
DE
ARC Santa Catalina Inc
TN
ARC SCC Inc
TN
ARC Scottsdale LLC
TN
ARC Shadowlake LP
TN
ARC Shavano LP
TN
ARC Shavano Park Inc
TN
ARC Somerby Holdings Inc
TN
ARC Spring Shadow LP
TN
ARC Sun City Center Inc
TN
ARC Sun City Golf Course Inc
TN
ARC Sun City West LLC
DE
ARC Sweet Life Rosehill LLC
TN
ARC Sweet Life Shawnee LLC
TN
ARC Tanglewood GP LLC
DE
ARC Tanglewood LP
DE
ARC Tarpon Springs Inc
TN
ARC Tennessee GP Inc
TN
ARC Therapy Services LLC
TN
ARC Tucson LLC
DE
ARC Vegas LLC
DE
ARC Victoria LP
TN
ARC Villages IL LLC
DE
ARC Westlake Village Inc
TN
ARC Westlake Village SNF LLC
DE
ARC Westover Hills LP
TN


 
 
 


ARC Willowbrook LP
TN
ARC Willowbrook ME LLC
TN
ARC Wilora Assisted Living LLC
TN
ARC Wilora Lake Inc
TN
ARCLP Charlotte LLC
TN
ARCPI Holdings Inc
DE
Asheville Manor LP
NC
Assisted Living Properties Inc
KS
BKD Arbors of Santa Rosa LLC
DE
BKD Clare Bridge of Oklahoma City SW LLC
DE
BKD Clare Bridge of Olympia LLC
DE
BKD Clare Bridge of Spokane LLC
DE
BKD Clare Bridge of Wichita LLC
DE
BKD Cortona Park LLC
DE
BKD Freedom Plaza Arizona - Peoria LLC
DE
BKD Gaines Ranch LLC
DE
BKD HCR Master Lease 3 Tenant LLC
DE
BKD Kansas Properties LLC
DE
BKD Lebanon/Southfield LLC
DE
BKD Personal Assistance Services LLC
DE
BKD Robin Run Real Estate Inc
DE
BKD Sterling House of Bloomington LLC
DE
BKD Sterling House of Colorado Springs Briargate LLC
DE
BKD Sterling House of Deland LLC
DE
BKD Sterling House of Denton Parkway LLC
DE
BKD Sterling House of Junction City LLC
DE
BKD Sterling House of Kokomo LLC
DE
BKD Sterling House of Lawton LLC
DE
BKD Sterling House of Loveland Orchards LLC
DE
BKD Sterling House of Wichita Tallgrass LLC
DE
BKD Wynwood of Richboro Northampton LLC
DE
BLC Acquisitions Inc
DE
BLC Adrian GC LLC
DE
BLC AH Investor Acquisition LLC
DE
BLC Albuquerque GC LLC
DE
BLC Atrium at San Jose LLC
DE
BLC Atrium at San Jose LP
DE
BLC Atrium Jacksonville LLC
DE
BLC Atrium Jacksonville SNF LLC
DE
BLC Belleville GC LLC
DE
BLC Brendenwood LLC
DE
BLC Bristol GC LLC
DE
BLC Brookdale Place of San Marcos LLC
DE
BLC Brookdale Place of San Marcos LP
DE
BLC Cedar Springs LLC
DE
BLC Chancellor Lodi Inc
DE
BLC Chancellor Lodi LH LLC
DE
BLC Chancellor Lodi LP
DE


 
 
 


BLC Chancellor Murrieta Inc
DE
BLC Chancellor Murrieta LH LLC
DE
BLC Chancellor Murrieta LP
DE
BLC Chancellor Windsor Inc
DE
BLC Chancellor Windsor LP
DE
BLC Chatfield LLC
DE
BLC Club Hill LP
DE
BLC Crystal Bay LLC
DE
BLC Cypress Village LLC
DE
BLC Dayton GC LLC
DE
BLC Devonshire of Hoffman Estates LLC
DE
BLC Devonshire of Lisle LLC
DE
BLC Edina Park Plaza LLC
DE
BLC Emerald Crossings LLC
DE
BLC Farmington Hills GC LLC
DE
BLC Federal Way LH LLC
DE
BLC Federal Way LLC
DE
BLC Finance I LLC
DE
BLC Findlay GC LLC
DE
BLC Fort Myers GC LLC
DE
BLC Foxwood Springs LLC
DE
BLC Gables at Farmington LLC
DE
BLC Gables Monrovia Inc
DE
BLC Gables Monrovia LP
DE
BLC Gardens Chino Inc
DE
BLC Gardens Chino LH LLC
DE
BLC Gardens Chino LP
DE
BLC Gardens Santa Monica Inc
DE
BLC Gardens Santa Monica LH LLC
DE
BLC Gardens Santa Monica LP
DE
BLC Gardens Tarzana Holding LLC
DE
BLC Gardens Tarzana Inc
DE
BLC Gardens Tarzana LLC
DE
BLC Gardens Tarzana LP
DE
BLC GC Member LLC
DE
BLC GC Texas LP
DE
BLC GFB Member LLC
DE
BLC Glenwood Gardens AL LH LLC
DE
BLC Glenwood Gardens AL LP
DE
BLC Glenwood Gardens Inc
DE
BLC Glenwood Gardens SNF Inc
DE
BLC Glenwood Gardens SNF LH LLC
DE
BLC Glenwood Gardens SNF LP
DE
BLC Hawthorne Lakes LLC
DE
BLC Inn at the Park Inc
DE
BLC Inn at the Park LP
DE
BLC Island Lake LLC
DE
BLC Jackson Oaks LLC
DE


 
 
 


BLC Kansas City GC LLC
DE
BLC Kenwood of Lake View LLC
DE
BLC Las Vegas GC LLC
DE
BLC Lexington Inc
DE
BLC Lexington LP
DE
BLC Lexington SNF LLC
DE
BLC Lodge at Paulin Inc
DE
BLC Lodge at Paulin LP
DE
BLC Lubbock GC LLC
DE
BLC Lubbock GC LP
DE
BLC Management 3 LLC
DE
BLC Management of Texas LLC
DE
BLC Mirage Inn Inc
DE
BLC Mirage Inn LP
DE
BLC Montrose LLC
DE
BLC New York Holdings Inc
DE
BLC Nohl Ranch Inc
DE
BLC Nohl Ranch LP
DE
BLC Novi GC LLC
DE
BLC Oak Tree Villa Inc
DE
BLC Oak Tree Villa LP
DE
BLC Ocean House Inc
DE
BLC Ocean House LP
DE
BLC Overland Park GC LLC
DE
BLC Pacific Inn Inc
DE
BLC Pacific Inn LP
DE
BLC Park Place LLC
DE
BLC Patriot Heights LLC
DE
BLC Patriot Heights LP
DE
BLC Pennington Place LLC
DE
BLC Phoenix GC LLC
DE
BLC Pinecastle LLC
DE
BLC Ponce de Leon LLC
DE
BLC Properties I LLC
DE
BLC Ramsey LLC
DE
BLC Regency San Jose Inc
DE
BLC Regency San Jose LP
DE
BLC River Bay Club LLC
DE
BLC Robin Run LLC
DE
BLC Robin Run LP
DE
BLC Robinswood Pointe LLC
DE
BLC Roman Court LLC
DE
BLC Roswell LLC
DE
BLC Sand Point LLC
DE
BLC Sheridan LLC
DE
BLC Southerland Place Germantown LLC
DE
BLC Southerland Place Mandeville LLC
DE
BLC Southerland Place Midlothian LLC
DE


 
 
 


BLC Springfield GC LLC
DE
BLC Springs at East Mesa LLC
DE
BLC Tampa GC LLC
DE
BLC Tavares GC LLC
DE
BLC The Berkshire of Castleton LLC
DE
BLC The Berkshire of Castleton LP
DE
BLC The Fairways LH LLC
DE
BLC The Fairways LLC
DE
BLC The Gables at Brighton LLC
DE
BLC The Hallmark LLC
DE
BLC The Heritage of Des Plaines LLC
DE
BLC The Willows LLC
DE
BLC Victorian Manor LLC
DE
BLC Village at Skyline LLC
DE
BLC Wellington Athens LLC
DE
BLC Wellington Cleveland LLC
DE
BLC Wellington Colonial Heights LLC
DE
BLC Wellington Fort Walton Beach LLC
DE
BLC Wellington Gardens LLC
DE
BLC Wellington Greeneville TN LLC
DE
BLC Wellington Greenville MS LLC
DE
BLC Wellington Hampton Cove LLC
DE
BLC Wellington Hixson LLC
DE
BLC Wellington Johnson City LLC
DE
BLC Wellington Kennesaw LLC
DE
BLC Wellington Kingston LLC
DE
BLC Wellington Maryville LLC
DE
BLC Wellington Newport LLC
DE
BLC Wellington Sea LLC
DE
BLC Wellington Sevierville LLC
DE
BLC Wellington Shoals LLC
DE
BLC Westwood LLC
DE
BLC Williamsburg LLC
DE
BLC Windsor Place LLC
DE
BLC Woodside Terrace LLC
DE
BLC Woodside Terrace LP
DE
Brookdale Chancellor Inc
DE
Brookdale Corporate LLC
DE
Brookdale Development LLC
DE
Brookdale F&B LLC
DE
Brookdale Gardens Holding I LLC
DE
Brookdale Gardens Holding II LLC
DE
Brookdale Gardens Holding III LLC
DE
Brookdale Gardens Inc
DE
Brookdale Liberty Inc
DE
Brookdale Living Communities GC LLC
DE
Brookdale Living Communities GC Texas Inc
DE
Brookdale Living Communities Inc
DE


 
 
 


Brookdale Living Communities of Florida Inc
DE
Brookdale Living Communities of Florida PB LLC
DE
Brookdale Living Communities of Florida PO LLC
DE
Brookdale Living Communities of Illinois DNC LLC
DE
Brookdale Living Communities of Illinois GE Inc
DE
Brookdale Living Communities of Illinois GV LLC
DE
Brookdale Living Communities of Illinois Huntley LLC
DE
Brookdale Living Communities of Missouri CC LLC
DE
Brookdale Living Communities of New York BPC Inc
DE
Brookdale Living Communities of North Carolina Inc
DE
Brookdale Living Communities of Ohio SP LLC
DE
Brookdale Living Communities of Pennsylvania ML Inc
DE
Brookdale Living Communities of Texas Club Hill LLC
DE
Brookdale Management Akron LLC
DE
Brookdale Management DP LLC
DE
Brookdale Management Holding LLC
DE
Brookdale Management II LLC
DE
Brookdale Management of California LLC
DE
Brookdale Management of Florida PO LLC
DE
Brookdale Management of Illinois GV LLC
DE
Brookdale Management of Texas LP
DE
Brookdale Operations LLC
DE
Brookdale Palce at Fall Creek LLC
DE
Brookdale Palce at Finneytown LLC
DE
Brookdale Place at Kenwood LLC
DE
Brookdale Place at Oakwood LLC
DE
Brookdale Place at Willow Lake LLC
DE
Brookdale Place of Albuquerque LLC
DE
Brookdale Place of Ann Arbor LLC
DE
Brookdale Place of Augusta LLC
DE
Brookdale Place of Bath LLC
DE
Brookdale Place of Colorado Springs LLC
DE
Brookdale Place of Englewood LLC
DE
Brookdale Place of South Charlotte LLC
DE
Brookdale Place of West Hartford LLC
DE
Brookdale Place of Wilton LLC
DE
Brookdale Place of Wooster LLC
DE
Brookdale Provident Management LLC
DE
Brookdale Provident Properties LLC
DE
Brookdale Real Estate LLC
DE
Brookdale Senior Housing LLC
DE
Brookdale Senior Living Communities Inc (f/k/a Alterra Healthcare Corporation)
DE
Brookdale Services of New Jersey CC LLC
DE
Brookdale Vehicle Holding LLC
DE
Brookdale Wellington Inc
DE
Brookdale Wellington Lessee Inc
DE
Burlington Manor ALZ LLC
NC
Burlington Manor LLC
NC


 
 
 


Carolina House of Asheboro LLC
NC
Carolina House of Bluffton LLC
NC
Carolina House of Cary LLC
NC
Carolina House of Chapel Hill LLC
NC
Carolina House of Charlotte LLC
NC
Carolina House of Durham LLC
NC
Carolina House of Elizabeth City LLC
NC
Carolina House of Florence LLC
NC
Carolina House of Forest City LLC
NC
Carolina House of Greenville LLC
NC
Carolina House of Hilton Head LLC
NC
Carolina House of Lexington LLC
NC
Carolina House of Morehead City LLC
NC
Carolina House of Reidsville LLC
NC
Carolina House of Smithfield LLC
NC
Carolina House of the Village of Pinehurst LLC
NC
Carolina House of Wake Forest LLC
NC
Clare Bridge of Carmel LLC
DE
Clare Bridge of Virginia Beach Estates LLC
DE
Cloverset Place LP
MO
CMCP Club Hill LP
TX
CMCP Island Lake LLC
DE
CMCP Montrose LLC
DE
CMCP Pinecastle LLC
DE
CMCP Properties Inc
DE
CMCP Roswell LLC
DE
CMCP Texas Inc
DE
CMCP Williamsburg LLC
DE
Crossings International Corporation
WA
Crossings Management Inc
WA
Cypress Arlington & Leawood JV LLC
DE
Cypress Arlington GP LLC
DE
Cypress Arlington LP
TX
Cypress Dallas & Ft. Worth JV LLC
DE
Cypress Dallas GP LLC
DE
Cypress Dallas LP
DE
Cypress Ft. Worth GP LLC
DE
Cypress Ft. Worth LP
DE
Cypress Leawood LLC
DE
Danville Place I LLC
VA
Danville Place Special Management LLC
NC
Denver Lowry JV Holding Company LLC
DE
Denver Lowry JV LLC
DE
Denver Lowry JV SPE LLC
DE
Eden Estates LLC
NC
FEBC ALT Holdings Inc
DE
FIT Ramsey LLC
DE
FIT REN Holdings GP Inc
DE


 
 
 


FIT REN LLC
DE
FIT REN Mirage Inn LP
DE
FIT REN Nohl Ranch LP
DE
FIT REN Oak Tree LP
DE
FIT REN Ocean House LP
DE
FIT REN Pacific Inn LP
DE
FIT REN Park LP
DE
FIT REN Paulin Creek LP
DE
FIT REN The Gables LP
DE
FIT REN The Lexington LP
DE
Flint Michigan Retirement Housing LLC
MI
Fort Austin Limited Partnership
TX
Fortress CCRC Acquisition LLC
DE
Freedom Group Lake Seminole Square Inc
TN
Freedom Group Naples Management Company Inc
TN
Freedom Village of Bradenton Holding Company LLC
DE
Freedom Village of Bradenton LLC
DE
Freedom Village of Holland Michigan
MI
Freedom Village of Sun City Center Ltd
FL
FV Bradenton Residential Properties LLC
DE
FV SPE LLC
DE
Gaston Manor LLC
NC
Gaston Place LLC
NC
Gastonia Village LLC
NC
Greensboro Manor LP
NC
Heartland Retirement Services Inc
WI
Hickory Manor LLC
NC
High Point Manor at Skeet Club LP
NC
High Point Manor LP
NC
High Point Place LLC
NC
Homewood at Brookmont Terrace LLC
TN
Innovative Senior Care Home Health of Boston LLC
DE
Innovative Senoir Care Home Health of Chicago LLC
DE
Innovative Senior Care Home Health of Detroit LLC
DE
Innovative Senior Care Home Health of Fort Walton Beach LLC
DE
Innovative Senior Care Home Health of Houston LLC
DE
Innovative Senior Care Home Health of Indianapolis LLC
DE
Innovative Senior Care Home Health of Los Angeles LLC
DE
Innovative Senior Care Home Health of Minneapolis LLC
DE
Innovative Senior Care Home Health of Nashville LLC
DE
Innovative Senior Care Home Health of Ocala LLC
DE
Innovative Senior Care Home Health of Ohio LLC
DE
Innovative Senior Care Home Health of Portland LLC
DE
Innovative Senior Care Home Health of Richmond LLC
DE
Innovative Senior Care Home Health of San Antonio LLC
DE
Innovative Senior Care Home Health of St. Louis LLC
DE
Innovative Senior Care Home Health of Seattle LLC
DE
Innovative Senior Care Home Health of Tampa LLC
DE


 
 
 


Innovative Senior Care Rehabilitation Agency of Los Angeles LLC
DE
KGC Operator Inc
DE
KGC Shoreline Operator Inc
DE
LaBarc LP
TN
Lake Seminole Square Management Company Inc
TN
Liberty Place Associates
VA
Niagara Nash Road LLC
NY
Palm Coast Health Care Inc
FL
Park Place Investments LLC
KY
Plaza Professional Pharmacy Inc
VA
Pomacy Corporation
DE
Reynolda Park LP
NC
Roswell Therapy Services LLC
DE
SALI Acquisition 1 A/GP LLC
NC
SALI Acquisition 1 A/LP LLC
NC
SALI Acquisition III/GP LLC
NC
SALI Acquisition III/LP LLC
NC
SALI Assets LLC
NC
SALI Management Advisors LLC
NC
SALI Management Services I LLC
NC
SALI Management Services II LLC
NC
SALI Management Services III LLC
NC
SALI Martinsville LLC
NC
SALI Monroe Square LLC
NC
SALI Tenant LLC
NC
SALI Williamsburg LLC
NC
Salisbury Gardens LLC
NC
Senior Services Insurance Limited
Cayman Islands
SHP ARC II LLC
DE
Southern Assisted Living Inc
NC
Statesville Manor LP
NC
Statesville Manor on Peachtree ALZ LLC
NC
Statesville Place LLC
NC
T Lakes LC
FL
Trinity Towers Limited Partnership
TN
Union Park LLC
NC
Weddington Park LP
NC
Wovencare Systems Inc
WI
   
 


EXHIBIT 23



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We consent to the incorporation by reference in the Registration Statements (Form S-3, No. 333-159146; and Forms S-8, No. 333-129877, No. 333-151969, No. 333-153126, No. 333-160164 and No. 333-160354) of Brookdale Senior Living Inc. of our reports dated February 25, 2010 with respect to the consolidated financial statements and schedule of Brookdale Senior Living Inc. and the effectiveness of internal control over financial reporting of Brookdale Senior Living Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2009.


 
/s/ Ernst & Young LLP
 




Chicago, Illinois
25 February 2010




 
EXHIBIT 31.1



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, W.E. Sheriff, certify that:

1.  
I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living 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(s) 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; and
 
5.  
The registrant’s other certifying officer(s) 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:  February 26, 2010
 
/s/ W.E. Sheriff
   
W.E. Sheriff
   
Chief Executive Officer


EXHIBIT 31.2
 
 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark W. Ohlendorf, certify that:

1.  
I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living 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(s) 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; and
 
5.  
The registrant’s other certifying officer(s) 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:  February 26, 2010
 
/s/ Mark W. Ohlendorf
   
Mark W. Ohlendorf
   
Chief Financial Officer
 

 
EXHIBIT 32



CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER 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 Annual Report on Form 10-K of Brookdale Senior Living Inc. (the “Company”) for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), W.E. Sheriff, as Chief Executive Officer of the Company, and Mark W. Ohlendorf, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(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.


/s/ W.E. Sheriff
 
Name:
W.E. Sheriff
 
Title:
Chief Executive Officer
 
Date:
February 26, 2010
 




/s/ Mark W. Ohlendorf
 
Name:
Mark W. Ohlendorf
 
Title:
Chief Financial Officer
 
Date:
February 26, 2010