Public Offering Registration - FIVE STAR QUALITY CARE INC - 3-1-2002 by FVE-Agreements

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As filed with the Securities and Exchange Commission on March 1, 2002 Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

FIVE STAR QUALITY CARE, INC.
(Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 8051 (Primary Standard Industrial Classification Code Number) 04-3516029 (I.R.S. Employer Identification Number)

400 Centre Street Newton, Massachusetts 02458 (617) 796-8387 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Evrett W. Benton, President Five Star Quality Care, Inc. 400 Centre Street Newton, Massachusetts 02458 (617) 796-8387 (Name, address, including zip code, telephone number, including area code, of agent for service)

Copy to:

William J. Curry, Esq. Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 (617) 338-2800

Frederick W. Kanner, Esq. Glenn R. Pollner, Esq. Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 (212) 259-8000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
//

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Amount to be Registered

Proposed Maximum Offering Price Per Unit

Proposed Maximum Aggregate Offering Price

Amount of Registration Fee(2)

Common Stock, $.01 par value 3,450,000(1) $8.38 $28,911,000 $2,660 (1) Includes 450,000 shares of common stock which may be purchased by the underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of the average high and low prices of the Registrant's common stock on February 25, 2002, as reported by the American Stock Exchange.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PRELIMINARY PROSPECTUS Subject to completion March [ ], 2002 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

3,000,000 Shares

Common Stock
We are selling all of the 3,000,000 shares of common stock offered in this prospectus. Our common shares are traded on the American Stock Exchange, under the symbol "FVE". On February 28, 2002, the last reported sale price of our common shares on the American Stock Exchange was $8.29 per share. Investment in our shares involves a high degree of risk. You should read carefully this entire prospectus, including the section entitled "Risk factors" that begins on page 5 of this prospectus, which describes the material risks. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful and complete. Any representation to the contrary is a criminal offense.
Per share Total

Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expenses, to us $ $ The underwriters may also purchase from us up to an additional 450,000 shares, at the public offering price less the underwriting discount, to cover over-allotments, if any, within 30 days from the date of this prospectus.

The underwriters are offering our shares as described in "Underwriting". Delivery of the shares will be made on or about March

, 2002.

UBS Warburg Jefferies & Company, Inc. Wachovia Securities

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not,

and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the cover. Changes may occur after that date and we may not update this information except as required by applicable law. TABLE OF CONTENTS

Prospectus summary The offering Summary historical and pro forma financial data Risk factors Forward-looking statements Use of proceeds Market price of common shares Dividend policy Capitalization Dilution Selected financial data Management's discussion and analysis of financial condition and results of operations Business Management Principal shareholders Certain relationships Federal income tax considerations for non-U.S. persons Shares eligible for future sale Description of capital stock Material provisions of Maryland law, our charter and bylaws Underwriting Legal matters Experts Where you can find more information Index to financial statements

1 3 4 5 11 12 12 12 13 13 14 15 21 41 48 49 50 53 54 55 63 64 65 65 F-1

References in this prospectus to "we", "us", "our", the "Company" or "Five Star" mean Five Star Quality Care, Inc. and its subsidiaries. In presenting "as adjusted" information in this prospectus, we have assumed that this offering has been completed and that we have applied the net proceeds as described in this prospectus. References in this prospectus to "Marriott" mean Marriott Senior Living Services, Inc., a subsidiary of Marriott International, Inc.

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Prospectus summary
The following summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information you should consider before investing in our common shares. You should read the entire prospectus carefully including "Risk factors" and the financial statements and related notes before making an investment decision. OUR COMPANY We operate independent living and congregate care communities, assisted living facilities and nursing homes. We were formed in 2000 as a subsidiary of Senior Housing Properties Trust, a publicly traded real estate investment trust, or REIT, with $1.2 billion of assets. On December 31, 2001, Senior Housing distributed substantially all of our common shares to its shareholders in a spin-off transaction and we became a separate publicly traded company. We currently operate 87 senior living facilities, all of which we lease from Senior Housing. Marriott manages 31 of these facilities for us. We recently agreed to acquire five additional senior living communities for $45.5 million. We intend to use substantially all of the proceeds from this offering to partially fund this acquisition. The following chart summarizes our operations for 2001, on a pro forma basis as if we had conducted our current operations, and had completed our pending acquisition, as of the beginning of that year:
Facilities Living Units Other Data

Indep. liv. apts. and mixed communities Asst. liv. facilities Nursing homes Total:

30 8 54 92

Indep. liv. apts. Asst. living suites Spec. care beds Nursing beds Total:

4,591 1,939 294 6,578 13,402

Revenues: -from residents' private resources -from Medicare / Medicaid Occupancy at 12/31/01 Locations

$521 million 60% 40% 90% 22 states

THE MARKET OPPORTUNITY We believe significant opportunities exist for us to expand because of current conditions in the senior living industry, including: A large number of senior living facilities are for sale. As a result of excessive development of senior living facilities in the 1990s, many operators experienced lower than expected occupancy. Newly developed facilities attracted residents from established facilities. These factors resulted in increased financial pressure on operators who had incurred significant debts to finance their growth. Further, significant Medicare rate reductions forced many nursing homes into bankruptcy. These factors have caused many operators to offer facilities for sale or to seek to exit the industry. The senior living business is improving. New development of senior living facilities has been curtailed and many outdated facilities have closed. At the same time, the U.S. population continues to age. These factors have created increased occupancy at many existing senior living facilities. Labor is a major cost at senior living facilities and the current economic slow-down has lessened wage pressures. Also, nursing homes are adjusting their operations to new payment levels. Many of our competitors are financially weak. As a result of financial difficulties resulting from the factors described above, many of our competitors have recently been focused more upon reorganizing their debt than upon growth. Many senior living companies started in the 1990s have experienced failed business plans and have had difficulty attracting new capital. Some of our competitors cannot access growth capital because they are in or have recently emerged from bankruptcy and are now controlled by their former creditors.

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OUR GROWTH STRATEGY Our growth strategy is to acquire facilities that provide high quality services to residents who pay with private resources. In January 2002, we leased 31 senior living communities from Senior Housing. Approximately 88% of the revenues from these communities is paid by residents from their private resources. At the five communities we have agreed to acquire, all of the revenues are paid by residents from private resources. Our nursing homes derive a majority of their revenue from Medicare and Medicaid. In the future we may decide to expand our nursing home operations; however, if we do so, we expect to price such acquisitions at levels which take account of the increased risks associated with Medicare and Medicaid revenues.

Our senior management team has significant experience in the senior living industry. Although we have substantial lease obligations, we currently have zero debt. We believe our relationship with our former parent company, Senior Housing, may provide us with capital to finance some acquisitions. We believe that this combination of our experienced management, our financial position and our relationship with Senior Housing will enable us to expand our operations and compete successfully in the senior living industry. OUR HISTORY We were formed in 2000 as a subsidiary of Senior Housing. In July 2000, Senior Housing repossessed senior living properties from former tenants and we began to operate those facilities. Between July 2000 and December 2001, we closed unprofitable facilities and stabilized operations of other facilities. At year end 2001, substantially all of our shares were distributed to Senior Housing shareholders and we became a separate company listed on the American Stock Exchange. At the time of our spin-off we leased 56 senior living facilities which we formerly operated for Senior Housing, consisting of 54 nursing homes and two assisted living communities with 5,211 living units. Our 2001 pro forma revenues from these facilities are $227 million, and our rent is $7 million annually. In January 2002, we leased 31 up-market retirement communities with 7,487 living units, a majority of which are independent living apartments. These communities are managed by Marriott. Our pro forma 2001 revenues from these facilities are $277 million, and our rent is $63 million annually plus a percentage of gross revenues which is escrowed as a capital expenditure reserve. In January 2002, we agreed to acquire five senior living communities for $45.5 million. These five communities are located in five states and contain 704 living units, including 531 independent living apartments and 173 assisted living suites. These communities are 88% occupied and 100% of their revenues are paid from residents' private resources. We expect to finance this acquisition with the proceeds of this offering and our cash on hand. Before or after this acquisition is closed, we may enter a financing transaction for some or all of these properties. We expect this acquisition will be completed in April 2002, but there is no assurance that it will close. The closing of this acquisition is subject to completion of various state licensing matters and other customary closing conditions. This offering is not contingent upon our closing this acquisition.

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The offering
Common stock being offered Common stock to be outstanding after the offering Use of proceeds 3,000,000 shares 7,624,333 shares The net proceeds to us from this offering will be $23.4 million, assuming a public offering price of $8.29 per share. We intend to use these net proceeds for our pending acquisition. If this acquisition does not occur, we will use these proceeds for general business purposes, possibly including other acquisitions which have not yet been identified. FVE An investment in our common shares involves significant risks. Before making an investment in our common shares, you should carefully review the information under the caption "Risk factors".

American Stock Exchange symbol Risk factors

The number of shares to be outstanding after the offering is based on 4,624,333 shares outstanding on February 28, 2002. If the underwriters exercise their over-allotment option in full, we will issue an additional 450,000 shares. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option we granted to the underwriters.

We are a Maryland corporation. Our principal place of business is 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.

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Summary historical and pro forma financial data
The following summary financial data has been derived from the financial statements included elsewhere in this prospectus, and shows, for the period or date presented, our summary historical and pro forma income statement and balance sheet data, giving effect to this offering and the transactions which have occurred and transactions that we expect to occur as described in detail in the footnotes to our pro forma financial statements included elsewhere in this prospectus. As discussed under "Risk factors" and "Management's discussion and analysis of financial condition and results of operations", we are a relatively new company and our historical financial information is not reflective of our current operations. Accordingly, you should not place undue reliance on our historical financial information. In addition, pro forma financial information may not be reflective of what our financial results or financial position would have been had these transactions been consummated as of the dates indicated in our pro forma financial statements.
Year Ended December 31, 2001 As adjusted for this offering and after giving pro forma effect to the spin off, the FSQ merger, the lease of 31 Marriott communities and the pending acquisition

Statement of operations data

Historical

After giving pro forma effect to the spin off, the FSQ merger and the lease of 31 Marriott communities

As adjusted for this offering and after giving pro forma effect to the spin off, the FSQ merger and the lease of 31 Marriott communities

($ in thousands, except per share data)

Revenues Expenses: Property operating expenses Rent Depreciation and amortization Interest, net General and administrative Total expenses Income before income taxes Provision for income taxes Net income

$229,235

$506,734

$506,734

$520,951

211,850 — 1,274 (43 ) 15,627 228,708 527 — $527

396,892 77,354 406 — 32,137 506,789 (55 ) (20 ) $(35 )

396,892 77,354 406 — 32,137 506,789 (55 ) (20 ) $(35 )

405,397 77,354 1,441 — 32,222 516,414 4,537 1,587 $2,950

Net income per share Weighted average shares Other data: Occupancy Total units Private pay % of revenues EBITDA (1) Balance sheet data

$0.12 4,374 88 % 5,211 24 % 1,758

$(0.01 ) 4,624 90 % 12,698 59 % 351
At December 31, 2001 ($ in thousands)

$0.00 7,624 90 % 12,698 59 % 351

$0.39 7,624 90 % 13,402 60 % 5,978

Cash and cash equivalents Total assets Total debt Total liabilities Shareholders' equity

$24,943 68,043 — 17,810 $50,233

$30,608 81,297 — 32,018 $49,279

$53,986 104,675 — 32,018 $72,657

$7,986 104,675 — 32,018 $72,657

(1) EBITDA consists of earnings before interest, taxes, depreciation and amortization. We consider EBITDA to be an indicative measure of our operating performance. EBITDA is also useful in measuring our ability to service debt, fund capital expenditures and expand our business. Furthermore, we believe that EBITDA is a meaningful disclosure that will help shareholders and the investment community to understand better our financial performance, including comparing our performance to other companies. However, EBITDA as presented may not be comparable to amounts calculated by other companies. This information should not be considered as an alternative to net income, operating profit, cash from operations, or any other operating or liquidity performance measure prescribed by accounting principles generally accepted in the United States. Cash expenditures for various long term assets, interest expense and income taxes have been or will be incurred which are not reflected in EBITDA.

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Risk factors
Investing in our common shares entails significant risk. You should carefully consider the risks and uncertainties described below and elsewhere in this prospectus before making an investment decision. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks or uncertainties actually occur, our business could be adversely affected. In this event, the trading price of our common shares could decline and you could lose part or all of your investment. We have a short operating history. We are a recently formed company, have a limited operating history, limited historical financial data, and we have operated as an independent public company only since December 31, 2001. Accordingly, we may be unable to execute our business plans effectively. Also, you should not place undue reliance on our historical financial information. We cannot predict the trading market of our common shares. Although a trading market exists for our common shares on the American Stock Exchange, our shares recently began trading. We are selling 3,000,000 common shares, assuming the underwriters do not exercise their over-allotment option, which equals 65% of our outstanding common shares before the offering. We can make no prediction as to the effect, if any, that market sales of our common shares or the availability of common shares for sale will have on liquidity, or your ability to readily buy or sell our common shares without adversely affecting the market price, or on the market prices prevailing from time to time. Sales of substantial amounts of our common shares in the public market, or the perception that such sales could occur, could adversely affect the liquidity of the market for our common shares and their price. The liquidity of the market and price of our common shares may be also adversely affected by changes in our financial performance or prospects, or in the prospects for companies in our industry generally. Our operating margins are narrow and a small percentage decline in our revenues or increase in our expenses can have a large percentage impact upon our profits. Our pro forma operating revenues for 2001 are $507 million, and our pro forma loss before income taxes for 2001 is $55,000. Assuming the pending acquisition is completed, our pro forma operating revenues for 2001 are $521 million, and our pro forma income before income taxes is $4.5 million. A small percentage decline in our revenues or increase in our expenses might have a dramatic negative impact upon our income, may produce losses or may produce a need for additional capital which may not be available on acceptable terms or at all. Our pending purchase of five senior living communities may not be completed. We have agreed to purchase five senior living communities with 704 living units for $45.5 million. We intend to use the proceeds of this offering to partially fund this purchase. This purchase is subject to licensing and other customary conditions. Although we expect to complete this purchase during April 2002 it may not occur by then if at all. If this purchase does not occur, we intend to use the proceeds of this offering for our general business purposes including possibly other acquisitions which have not been identified. Any alternative use of the proceeds of this offering may be less profitable to us than the pending acquisition.

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Our growth strategy may not succeed.

Our business plan includes acquiring additional senior living facilities, some of which will be owned and some of which will be leased. An acquisition strategy involves risks. For example: –> we may be unable to locate facilities available for purchase at acceptable prices; –> we may be unable to obtain waivers of Senior Housing's rights of first refusal if the acquisition involves real estate; –> we may be unable to access the capital to acquire or operate additional facilities because we have limited financeable assets, because our charter prohibits ownership of greater than 9.8% of our shares by any party or for other reasons; –> acquired operations may bring with them contingent liabilities which mature; and –> combining our present operations with newly acquired operations may be disruptive. For these reasons and others, our business plan to grow may not succeed, the benefits which we hope to achieve by growing may not be achieved and our existing operations could suffer from a lack of management attention or financial resources if such attention and resources are devoted to a failed growth strategy. Medicare or Medicaid rate reductions or a failure of those rates to match increasing costs could cause us to earn less or become unprofitable. At some of our facilities, operating revenues are received from the Medicare and Medicaid programs. On a pro forma basis, giving effect to all of the transactions described in the notes to our pro forma financial statements, 40% of our total revenues in 2001, 41% if our pending acquisition does not close, was derived from these programs. Since 1998, a Medicare prospective payment system has generally lowered Medicare rates paid for services at facilities such as those that we operate. Many states have adopted formulas to limit Medicaid rates. As a result, in some instances Medicare and Medicaid rates no longer cover costs incurred by operators, including us. Eleven of our nursing homes generated operating expenses in excess of operating revenues for 2001. These eleven facilities derived an average of 81% of their revenues from Medicare or Medicaid programs during 2001. At present there is an active debate within the federal government and within many state governments regarding whether current Medicare and Medicaid rates should remain at their current level. Medicare or Medicaid rate reductions or a failure of those rates to match our increasing costs could cause us to earn less or become unprofitable. Nursing home and senior living operators like us are being subjected to increased litigation and insurance costs. There are various federal and state laws prohibiting fraud by healthcare providers, including criminal provisions that prohibit filing false claims for Medicare and Medicaid payments and laws that govern patient referrals. The state and federal governments seem to be devoting increasing resources to anti-fraud initiatives against healthcare providers. In some states, advocacy groups have been created to monitor the quality of care at senior living facilities, and these groups have brought litigation against operators. Also, in several instances private litigation by nursing home patients has succeeded in winning very large damage awards for alleged abuses. The effect of this litigation and potential litigation has been to increase materially the costs of monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice insurance has increased and may continue to

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increase so long as the present litigation environment affecting the operations of nursing homes and other senior living facilities continues. We may be unable to increase the rates which we are paid to cover these increased costs and we may become unprofitable. If we fail to comply with complex regulations which govern our operations we may be unable to operate profitably. Physical characteristics of senior living facilities are mandated by various governmental authorities. Changes in these regulations may require significant expenditures. Our leases with Senior Housing require us to maintain our facilities in compliance with applicable laws. In the future, our facilities may require significant expenditures to address ongoing required maintenance and make them attractive to residents. Our available financial resources may be insufficient to fund these expenditures. State licensing and Medicare and Medicaid laws also require operators of nursing homes and assisted living facilities to comply with extensive standards governing operations. Federal and State agencies administering these laws regularly inspect such facilities and investigate

complaints. During the past three years, the Federal Centers for Medicare and Medicaid Services, or the Federal Centers, have increased their efforts to enforce Medicare and Medicaid standards and their oversight of state survey agencies which inspect senior living facilities and investigate complaints. When deficiencies are identified, sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil money penalties, state oversight and loss of Medicare and Medicaid participation may be imposed. The Federal Centers and the states are increasingly using such sanctions and remedies when deficiencies, especially those involving findings of substandard care or repeat violations, are identified. We and Marriott receive notices of potential sanctions and remedies from time to time, and such sanctions have been imposed on some of our nursing homes and assisted living facilities from time to time. Sanctions imposed on us or Marriott for deficiencies which are identified in the future, may have adverse financial consequences to us. We are subject to possible conflicts of interest. Our creation was, and our continuing business is, subject to possible conflicts of interest, as follows: –> All of our directors were members of the Board of Trustees of Senior Housing at the time we were created. –> Four of our five current directors are members of the Board of Trustees of Senior Housing. –> Our Chief Executive Officer and our Chief Financial Officer are also part time employees of Reit Management & Research LLC. Reit Management is the investment manager for Senior Housing, HRPT Properties Trust and Hospitality Properties Trust and we purchase various services from Reit Management pursuant to a shared services agreement. –> Our Managing Directors, Barry M. Portnoy and Gerard M. Martin, are also Managing Trustees of Senior Housing and of other REITs managed by Reit Management. Messrs. Portnoy and Martin also own Reit Management and another entity that leases office space to us, and they owned FSQ, Inc. at the time of our merger with FSQ, Inc. These conflicts may have caused, and in the future may cause, our business to be adversely affected, including as follows: –> The leases we entered with Senior Housing may be on terms less favorable to us than leases which would have been entered as a result of arm's length negotiations.

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–> The terms of our merger with FSQ, Inc., our shared services agreement with Reit Management or our office lease with another entity owned by Messrs. Portnoy and Martin may be less favorable to us than we could have achieved on an arm's length basis; specifically, the consideration we paid in the merger of 250,000 of our shares, our payments to Reit Management of 0.6% of our total revenues for shared services, equal to $3.1 million on a pro forma basis for 2001 after giving effect to the transactions described in the footnotes to our pro forma financial statements, or office rent of $531,069 per year may be greater than they would have been had these matters been negotiated with third parties. –> Future business dealings between us and Senior Housing, Reit Management, Messrs. Portnoy and Martin and their affiliates may be on terms less favorable to us than we could achieve on an arm's length basis. –> We have to compete with Senior Housing and Reit Management for the time and attention of our directors and officers, including Messrs. Portnoy and Martin. For more information regarding transactions involving us and related parties, you should read the information under the caption "Certain relationships". Anti-takeover provisions in our governing documents and material agreements may prevent you from receiving a takeover premium for your shares. Our charter prohibits any party from owning more than 9.8% of our outstanding common shares. Our leases with Senior Housing, our shared services agreement with Reit Management and the transaction agreement we entered in connection with our spin-off from Senior Housing also restrict our share ownership and prohibit any change of control of us. Our charter and bylaws contain other provisions that may increase the

difficulty of acquiring control of us by means of a tender offer, open market purchases, a proxy fight or otherwise, if the acquisition is not approved by our Board of Directors. These other anti-takeover provisions include the following: –> a staggered Board of Directors with separate terms for each class of directors; –> the availability, without a shareholders' vote, of additional shares and classes of shares that our Board of Directors may authorize and issue on terms that it determines; –> a 75% shareholder vote required for removal of directors for cause; and –> advance notice procedures with respect to nominations of directors and shareholder proposals. For all of these reasons, you may be unable to realize a change of control premium for the common shares that you purchase in this offering. Our business is highly competitive. We compete with numerous other companies which provide senior living alternatives, including home healthcare companies and other real estate based service providers. Historically, nursing homes have been somewhat protected from competition by state laws requiring certificates of need to develop new facilities; however, these barriers are being eliminated in many states. Also, there are few barriers to competition for home healthcare or for independent and assisted living services. Growth in availability of nursing home alternatives, including assisted living facilities, has and may in the future have the effect of reducing the occupancy or operating profitability at nursing homes including those we operate. Many of our existing competitors are larger and have greater financial resources than we do. Accordingly, we cannot provide any assurances that we will be able to attract a sufficient number of

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residents to our facilities or that we will be able to attract employees and keep wages and other employee costs at levels which will allow us to operate profitably, and we do not know whether we will be able to grow our business by acquiring additional operations. Default provisions in our leases may magnify the impact of a default in other agreements. We lease a substantial number of facilities from Senior Housing under two leases. In addition to being cross-defaulted with one another, events of default under each of these leases include, among other things, our failure to pay obligations under agreements other than the leases. In the future, if Senior Housing finances other facilities for us, we may agree to add facilities to existing leases or we may agree to further cross-default provisions. The existence of these cross-default provisions may create situations that we are unable to evaluate individually or that cause simultaneous defaults of several agreements, either of which could have a material impact upon our business. Our existing contracts with Senior Housing and others may inhibit our ability to grow. In connection with our recent spin-off from Senior Housing, we entered agreements which prohibit us from acquiring or financing real estate in competition with Senior Housing, HRPT Properties, Hospitality Properties or other real estate entities managed by Reit Management, unless those investment opportunities are first offered to Senior Housing, HRPT Properties, Hospitality Properties or those real estate entities. Although we have obtained the necessary waivers to allow us to complete the pending acquisition of the five communities described in this prospectus, these agreements may make it difficult, more expensive or impossible for us to acquire additional facilities in the future. In addition, certain provisions of our leases with Senior Housing, such as the provisions limiting our ability to discontinue operations in any of the facilities or assign the leases, limit our operating flexibility. Also, because of our various relationships with Senior Housing and Reit Management, competitors of those companies may be unwilling to lease senior living facilities to us or conduct business with us. These circumstances may prevent us from realizing some growth opportunities. Senior Housing creditors may have the right to cancel our leases. Our leases with Senior Housing are subordinated to mortgages and other indebtedness of Senior Housing totaling $33.1 million at December 31, 2001, and may be subordinated to additional indebtedness that Senior Housing incurs. In the event Senior Housing defaults upon debts to which our leases are subordinated, we may lose our rights to operate the leased properties. Our management team has limited experience working together.

Our management team has been assembled for less than two years. We do not have employment agreements with any of our executive officers. Two of our executive officers have other business interests which may prevent them from working full time on our business. All of our directors have other business interests which will prevent them from working full time on our business. These conditions may make it difficult for us to carry out our business plans. Our owned and leased properties are subject to real estate risks. Our leases require that we pay for and indemnify Senior Housing from all liabilities associated with the ownership or operation of the facilities we lease from Senior Housing which arise prior to or

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during the terms of our leases. Also, we may own real estate in the future, including as a result of our pending acquisition. Accordingly, our business is subject to risks associated with real estate, including: –> costs associated with uninsured damages, including damages for which insurance may be unavailable or unavailable on commercially reasonable terms; –> costs and damages caused by eminent domain takings; –> costs that may be required for maintenance and repair; and –> the need to make expenditures due to changes in laws and other regulations, including the Americans with Disabilities Act. Our business exposes us to environmental risks. Under various laws in the United States, operators of real estate may be required to investigate and clean up hazardous substances present at their leased properties, including but not limited to medical waste, mishandled petroleum products and asbestos containing materials, and may be held liable for property damage or personal injuries that result from such contamination. These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination. As the owner of real estate leased to us, Senior Housing may be also subject to similar liabilities, and we have agreed to indemnify Senior Housing from costs it incurs at our leased properties related to environmental hazards which arise prior to or during the terms of our leases. We can give you no assurance that environmental liabilities are not present in our operated facilities or that costs we incur to remediate contamination or the presence of asbestos will not have a material adverse effect on our business and financial condition.

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Forward-looking statements
We have made statements that are not historical facts in this prospectus that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern: –> our ability to successfully close the pending acquisition on negotiated terms or at all; –> our ability to manage effectively the 56 facilities we lease from Senior Housing and the communities we intend to acquire; –> Marriott's ability to manage effectively the 31 retirement communities we lease from Senior Housing; –>

our ability to generate revenues in excess of our operating expenses and the sufficiency of these and other resources to provide capital for our growth or to pay our liabilities, including rent, as they come due; –> our ability to close our pending $20 million line of credit; –> our ability to access additional capital to fund our operations and growth; –> our ability to acquire and operate successfully additional senior living businesses; and –> our ability to operate successfully as a separate public company. Also, whenever we use words such as "believe", "expect", "anticipate", "estimate" or similar expressions, we are making forward-looking statements. Forward-looking statements are not guaranteed to occur and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including risks outlined under "Risk factors". Investors should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations which may or may not occur.

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Use of proceeds
The net proceeds to us from this offering, assuming a public offering price of $8.29 and after deduction of the underwriting discount and estimated offering expenses payable by us, are estimated to be $23.4 million ($26.9 million if the underwriters' over-allotment option is exercised in full). We intend to use these net proceeds to fund a portion of our pending acquisition of five communities for $45.5 million. Until we complete our pending acquisition, we may deposit all or a portion of the net proceeds in interest bearing accounts or invest them in short term securities, including securities that may not be investment grade rated. In the event this acquisition is not completed we intend to use the net proceeds for general business purposes, including possibly other acquisitions which have not been identified.

Market price of common shares
Our common shares are traded on the American Stock Exchange under the symbol "FVE." The following table presents the high and low closing price for our common shares as reported on the American Stock Exchange for each calendar quarter since they began to trade: Period December 13 to 31, 2001 January 1 to February 28, 2002
Low High

$6.12 6.97

$7.50 8.75

On February 28, 2002 the last reported sale price of our common shares on the American Stock Exchange was $8.29 per share. As of February 28, 2002, there were approximately 5,000 shareholders of record of our common shares.

Dividend policy
We do not expect to pay dividends in the foreseeable future.

12

Capitalization

The following table describes our capitalization as of December 31, 2001, on a historical basis, and on a pro forma basis after giving effect to the transactions described in the footnotes to our pro forma financial statements appearing elsewhere in this prospectus:
At December 31, 2001 As adjusted for this Offering and after giving pro forma effect to the FSQ merger, the lease of 31 Marriott communities and the pending acquisition

Historical

After giving pro forma effect to the FSQ merger and the lease of 31 Marriott communities

As adjusted for this Offering and after giving pro forma effect to the FSQ merger and the lease of 31 Marriott communities

($ in thousands)

Cash Debt Shareholders' equity: Common Stock, par value $0.01, shares outstanding: 4,374,333 historical; 4,624,333 pro forma; and 7,624,333 pro forma as adjusted Total shareholders' equity: Total capitalization

$24,943 —

$30,608 —

$53,986 —

$7,986 —

50,233 $50,233

49,279 $49,279

72,657 $72,657

72,657 $72,657

Dilution
The recent trading price of our common shares is less than their book value per share determined according to generally accepted accounting principles, or GAAP. Accordingly, assuming that you purchase our shares at the price set forth on the cover of this prospectus, you will not suffer dilution in book value. Book value per share at December 31, 2001, was $11.48; as adjusted for this offering, assuming a public offering price of $8.29 per share, book value per share will be $9.53.

13

Selected financial data
The following table presents selected financial data which has been derived from our historical financial statements for the period from April 27, 2000 (the date we commenced operations) through December 31, 2001. The following data should be read in conjunction with our financial statements and the notes thereto included elsewhere in this prospectus, and "Management's discussion and analysis of financial condition and results of operations". As discussed under "Risk factors" and "Management's discussion and analysis of financial condition and results of operations", we are a relatively new company and our historical financial information is not reflective of our current operations. Accordingly, you should not place undue reliance on our historical financial information.
Period from April 27, 2000 through December 31, 2000

Year ended December 31, 2001

($ in thousands)

Five Star Quality Care, Inc. Operating data Total revenues Net income (loss) Earnings (loss) per share Balance sheet data

$

$229,235 527 0.12

$

$2,520 (1,316 ) (0.30 )

Total assets

$68,043

$54,788

The following table presents selected financial data of our two predecessors and has been derived from historical financial statements of those predecessors included elsewhere in this prospectus. The following data should be read in conjunction with the financial statements and notes thereto entitled Combined Financial Statements of Forty-Two Facilities acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. and Combined Financial Statements of Certain Mariner Post-Acute Network Facilities (Operated by Subsidiaries of Mariner Post-Acute Network) included elsewhere in this prospectus, and "Management's discussion and analysis of financial condition and results of operations—Historical results of operations—Mariner Predecessor" and "Historical results of operations—Integrated Predecessor". The following table presents the information from 1997 to 2000.
Year ended December 31, 2000 1999 1998 1997

(in thousands)

Integrated Predecessor Operating data Operating revenues Net loss Balance sheet data Total assets Long term liabilities Mariner Predecessor Operating data Operating revenues Net loss Balance sheet data Total assets Long term liabilities
14

$135,378 (25,252 ) $34,942 —

$130,333 (126,939 ) $61,274 17,500

$140,116 (17,183 ) $190,553 17,751

$104,727 (10,432 ) $174,954 18,006

$85,325 (7,421 ) $23,052 32,091

$86,945 (43,804 ) $17,433 28,603

$105,486 (7,710 ) $62,502 33,195

$107,829 (9,453 ) $84,119 15,498

Management's discussion and analysis of financial condition and results of operations
You should read the following discussion in conjunction with our historical and pro forma financial statements and the financial statements of our predecessors and others included elsewhere in this prospectus. OVERVIEW We were incorporated in April 2000 as a Delaware corporation and reincorporated in Maryland in September 2001. We were formed as a 100% owned subsidiary of Senior Housing. Effective July 1, 2000, we assumed the operations of healthcare facilities from two bankrupt former tenants of Senior Housing. At the time we assumed operations of these facilities, we had not received substantially all of the required licenses for these facilities. As a result, for the period from July 1, 2000, through December 31, 2000, we accounted for the operations of these facilities using the equity method of accounting and we only recorded the net income from these operations. Since that time, we have obtained all necessary licenses to operate these facilities, and on January 1, 2001, we began to consolidate the results of operations of these facilities. On December 31, 2001, Senior Housing distributed substantially all of our shares to its shareholders in a spin-off transaction and we became an independent public company. Since we succeeded to substantially all of the business formerly conducted by subsidiaries or units of two former tenants of Senior Housing, these subsidiaries and units are considered to be our predecessors. We have included the financial statements of these predecessors in this prospectus and discuss their results of operations. Our predecessors' financial statements are entitled: Certain Mariner Post-Acute Network Facilities (referred to herein as Mariner Predecessor); and Forty-Two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (referred to herein as Integrated Predecessor). Our revenues consist primarily of payments for services provided to residents at our facilities. The payments are either paid for by the residents, their families or insurers, or by the Medicare and Medicaid programs. The substantial majority of our historical revenues have been paid by the Medicare and Medicaid programs. The substantial majority of the revenues associated with the 31 Marriott facilities are paid by the patients, or private pay. On a pro forma basis, after giving effect to the new lease which we entered for the 31 Marriott facilities in January 2002 and the pending acquisition of five facilities, for the year ended December 31, 2001, private pay revenues would have represented 60% of our total

revenues, or 59% if our pending acquisition does not close. Our expenses consist primarily of wages and benefits of personnel, food, supplies and other patient care costs, as well as taxes, insurance and other property related costs. We were a subsidiary of Senior Housing until December 31, 2001. The 2001 results presented in this prospectus are for a period during which we were a subsidiary of Senior Housing and they are not necessarily indicative of what our results would have been as a separate public company. Similarly these results are not indicative of future financial performance. Our future results of operations are expected to differ materially from the historical results presented in this prospectus. Material differences are expected because our future operations will include, among other factors, rent expense on leases to Senior Housing, general and administrative costs incurred by us as a separate company, revenues and expenses related to our lease entered in January 2002 for 31 retirement communities operated by Marriott and from the pending acquisition, if it closes.

15

We accounted for our merger with FSQ as the termination of a management contract rather than as a business combination. As a result, at the closing of the merger, because the FSQ liabilities assumed plus the value of our common shares issued in connection with the FSQ acquisition exceeded the fair value of FSQ's assets acquired, we recognized an expense of $2.8 million. For this purpose, the fair value of our common shares was based on the average of the high and low price of our shares on the day of the merger, or $7.50 per share. OUR HISTORICAL RESULTS OF OPERATIONS As described above, we operated, until completion of the spin-off, as a subsidiary of Senior Housing. Our past operations as Senior Housing's subsidiary differ from our current operations as an independent public company as follows: –> our historical operating business included certain facilities, assets and activities which we do not own or conduct and did not include such other factors discussed above; and –> the principal source of financing for these operating businesses was intercompany advances from Senior Housing, an entity with financial resources substantially in excess of ours. We believe that because of these differences, the historical results of operations described below are not comparable to our current operations or our expected future operations. Specifically, in the historical periods discussed we operated only 56 properties for Senior Housing, which owned the real estate as well as the operations. Effective December 31, 2001, we leased these 56 facilities from Senior Housing which continued to own the real estate. On January 11, 2002, we began to lease an additional 31 facilities from Senior Housing. Moreover, we now conduct our own affairs and incur costs as a separate public company some of which are more and some of which are less than the costs incurred by Senior Housing and allocated to us in the historical periods. Years ended December 31, 2001 and 2000 We did not begin to operate the senior living facilities of our predecessors or generate revenue until July 1, 2000. Therefore, our results for the year ended December 31, 2001, are not comparable to the year ended December 31, 2000. Revenues for the year ended December 31, 2001, were $229.2 million. On a combined basis, the two predecessor entities had revenues of $220.7 million for the year ended December 31, 2000. This increase was due mainly to an increase in the average daily rate received during these periods. Expenses for the year ended December 31, 2001, were $228.8 million. On a combined basis, the predecessor entities had expenses of $253.4 million for the year ended December 31, 2000. The decrease is due primarily to rent and interest expenses which were included in the 2000 expenses of our predecessors but were zero in 2001 because, after Senior Housing's repossessions and foreclosures, rent and interest payments on the leases and mortgages ceased. Period from April 27, 2000 (date operations commenced) through December 31, 2000 This period was our first period of operations and, therefore, there is no comparable period. During 2000 we accounted for our investment in these operating businesses using the equity method of accounting. As a result, the reported revenues included our equity in earnings of these investees. Revenues for 2000 were $2.5 million and represent the net amount of net patient revenues in excess of expenses of these operations for the 2000 period. Net patient revenues at the operating businesses for the six months ended December 31, 2000, were $114.5 million and expenses incurred for the period were $112.0 million.

16

LIQUIDITY AND CAPITAL RESOURCES On a historical basis our expenditures, including capital expenditures and for working capital, were provided by Senior Housing. We maintained no financing sources apart from Senior Housing. At the time of our spin off from Senior Housing on December 31, 2001, we had cash of $24.9 million, operating accounts receivable of $36.4 million and accrued operating expenses and other liabilities totaling $17.8 million. We lease all of our current facilities from Senior Housing. Our leases with Senior Housing require us to pay a total of $70 million of base rent annually. Percentage rent on our current leases does not begin until 2003 and 2004. We expect these increases to be modest relative to our overall liquidity. Payments required of us under our lease for 31 Marriott facilities also include a percentage of revenues for a capital expenditure reserve. If events of default under the leases occur, Senior Housing has the ability to accelerate our rent payments. Our leases with Senior Housing are cross-defaulted with one another, and events of default include: our failure to pay rent when due; our default under any indebtedness which gives the holder the right to accelerate; our default under the Marriott management agreements; and our being declared ineligible to receive reimbursement under Medicare and Medicaid programs for any of the leased facilities. On January 10, 2002, we accepted a non-binding letter of intent from a lender for a $20 million line of credit to be secured by our accounts receivable. This financing is subject to lender diligence, final documentation and other customary conditions. We expect this financing to close on or before March 31, 2002, but it may not close before that date or at all. On January 23, 2002, we agreed to acquire five communities for $45.5 million. We expect to fund this acquisition with our cash, the proceeds of this offering and possibly also with proceeds of our proposed secured line of credit. We have also had preliminary discussions with Senior Housing concerning its providing interim or long term financing for this acquisition in the event that the funds available to us are not sufficient to close this acquisition; however, we have not reached any agreement with Senior Housing concerning such interim or long term financing. Other than our leases with Senior Housing and our agreement to acquire five communities, we have no individually material contractual or commercial obligations or commitments. Our primary source of cash to fund operating expenses, including rent and routine capital expenditures, is the resident revenues we generate at our facilities. Changes in laws and regulations which impact Medicare or Medicaid rates, on which many of our properties rely for substantial amounts of revenues, or changes in insurance costs caused by recent, material litigation awards in some states may materially affect our future results. We believe that our revenues will be sufficient to allow us to meet our ongoing operating expenses, working capital needs and rent payments to Senior Housing in the short term, or next 12 months, and long term, whether or not we arrange for a line of credit secured by our receivables, as described above. Despite this belief, our operating cash flow as a percentage of our revenues is small; a small percentage decline in revenue or increase in our operating expenses could eliminate or reduce our operating cash flow. If our other resources, such as our cash on hand, or our pending $20 million line of credit, are not available or insufficient, the decline in operating cash flow may cause lease defaults or other material consequences. Our shared services agreement with Reit Management allows us to defer payments to Reit Management under the shared services agreement if necessary to make rent payments to Senior Housing. On a pro forma basis, assuming completion of our January 2002 lease for 31 Marriott facilities and our pending acquisition, payments to Reit Management for shared services would have totaled $3.1 million during the year ended December 31, 2001.

17

SEASONALITY Our business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods nursing home and assisted living residents are sometimes discharged to join family celebrations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally. INFLATION AND DEFLATION

Inflation in the past several years in the United States has been modest. Future inflation might have both positive or negative impacts on our business. Rising price levels may allow us to increase occupancy charges to residents, but may also cause our operating costs, including our percentage rent, to increase. Deflation would likely have a negative impact upon us. A large component of our expenses consist of minimum rental obligations to Senior Housing. Accordingly we believe that a general decline in price levels which could cause our charges to residents to decline would likely not be fully offset by a decline in our expenses. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have no obligations for funded debt and as such are not directly affected by changes in market interest rates. However, as discussed above, we expect to enter a $20 million revolving credit facility secured by our accounts receivable. We expect that this loan facility will require interest on drawn amounts at floating rates based upon a spread above LIBOR. Accordingly, whenever borrowing are outstanding under such a credit facility we may be exposed to market changes in interest rates, especially market changes in short term LIBOR rates. For example, if the full amount of a $20 million line of credit were drawn and interest rates rose by 1% per annum, our interest expense would increase by $200,000 per year, or $0.04 per share. We may from time to time consider our exposure to interest rate risks if we have or expect to have material amounts of floating rate obligations. As a result of these considerations we may decide to purchase interest rate caps or other hedging instruments. CRITICAL ACCOUNTING POLICIES Our most critical accounting policies regard revenue recognition and our assessment of the net realizable value of our accounts receivable. These policies involve significant judgments based upon our experience, including judgments about changes in payment methodology, contract modifications and economic conditions that may affect the collectibility of our accounts receivable. In the future we may need to revise our assessment to incorporate information which is not yet known and such revisions could increase or decrease our net revenues or cause us to adjust the net carrying value of our accounts receivable.

18

HISTORICAL RESULTS OF OPERATIONS—MARINER PREDECESSOR The Mariner Predecessor conducted operations of 17 facilities leased from Senior Housing. The operations of the Mariner Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows: –> The business of the Mariner Predecessor was conducted by its then parent, Mariner Post-Acute Network, an entity with a capital structure, corporate overhead costs, and operating systems substantially different than ours. –> During the period of Mariner's operation of this business, significant write offs of goodwill and other long lived assets of the Mariner Predecessor occurred and Mariner filed for bankruptcy. We believe that because of these differences, the historical results of operations described below are not comparable to our operations. Specifically, the historical operations described below include: revenues and operating expenses for only 17 facilities, one of which has since been closed, while currently we generate revenues and incur operating expenses at present at 87 facilities; revenues prior to 1999 which were based in part upon Medicare rates established prior to the completion of the phase-in of the new Medicare prospective payment system; depreciation expenses which relate to real estate and amortization expenses which relate to goodwill, while we do not have substantial depreciable assets; expenses related to allocation of corporate overhead by the parent of these operations, while we incur different corporate expenses; rent expense under a lease which has been cancelled; charges for impairments of long lived assets of substantial amounts, while we do not have substantial long lived assets and have not incurred similar changes; and interest expense incurred on debt, while we have no debt as of the date of this prospectus. Years ended December 31, 2000 and 1999—Mariner Predecessor Revenues for the year ended December 31, 2000, were $85.3 million. These revenues represent a decrease of $1.6 million from the revenues in the 1999 period. This decrease is attributable primarily to a slight decrease in occupancy at the facilities in operation during both periods and to the closing of one facility.

Expenses for the year ended December 31, 2000, were $92.6 million, a decrease of $1.6 million over the 1999 period, excluding non-recurring or unusual charges and write offs incurred in 1999. This decrease is attributable primarily to decreases in general and administrative costs and provision for bad debts and rent, offset by an increase in salary, wages and benefits. Net loss for the year ended December 31, 2000, was $7.4 million, a decrease in loss of $36.4 million over the 1999 period. This decrease in loss is principally attributable to the impact of unusual charges related to the impairment of long lived assets in 1999. HISTORICAL RESULTS OF OPERATIONS—INTEGRATED PREDECESSOR The Integrated Predecessor conducted operations of 42 facilities leased from or mortgaged to Senior Housing. The operations of the Integrated Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows: –> The business of the Integrated Predecessor was conducted by its then parent, Integrated Health Services, Inc., an entity with a capital structure, corporate overhead costs, and operating systems substantially different than ours.

19

–> During the period of Integrated Health Services' operation of this business, significant write offs of goodwill and other long lived assets of the Integrated Predecessor occurred and Integrated Health Services filed for bankruptcy. We believe that because of these differences, the historical results of operations described below are not comparable to our operations. Specifically, the historical operations described below include: revenues and operating expenses for only 42 facilities, one of which has since been closed, while we currently generate revenues and incur operating expenses at 87 facilities; revenues prior to 1999 which were based in part upon Medicare rates established prior to the completion of the phase in of the new Medicare prospective payment system; depreciation expenses which relate to real estate and amortization expenses which relate to intangible assets, while we do not have substantial depreciable assets; expenses related to corporate overhead and management fees charged by the parent of the Integrated Predecessor, while we incur different corporate expenses; rent expense under a lease which has been cancelled; charges for impairments of long lived assets of substantial amounts, while we do not have substantial long lived assets and have not incurred similar charges; and interest expense incurred on debt, while we have no debt as of the date of this prospectus. Years ended December 31, 2000 and 1999—Integrated Predecessor Revenues for the year ended December 31, 2000, were $135.4 million. These revenues represent an increase of $5.0 million over the revenues in the 1999 period. This increase resulted primarily from an increase in Medicaid rates and an increase in occupancy at the Integrated Predecessor facilities. Expenses for the year ended December 31, 2000, excluding non-recurring or unusual charges and write offs of $16.7 million as discussed in the next paragraph, were $144.0 million, a decrease of $2.1 million from the 1999 period. This decrease is attributable primarily to a decrease in rent, depreciation and amortization at the Integrated Predecessor facilities offset by increased operating expenses. During the 2000 period, the Integrated Predecessor incurred unusual charges related to a loss on settlement of lease and mortgage obligations of $16.7 million. These charges were a result of the bankruptcy settlement between Integrated and Senior Housing and represent the carrying value of the tangible and intangible assets of the facilities conveyed to Senior Housing, less the debts due Senior Housing which were not paid. During the 1999 period, the Integrated Predecessor incurred write-offs and unusual charges related to a loss on impairment of long lived assets of $120.0 million. Net loss for the year ended December 31, 2000, was $25.3 million, a decrease of $101.7 million from the net loss of $126.9 million in 1999. This decrease in loss is attributable to the decreases in rent, depreciation and amortization and the impact of unusual charges discussed above.

20

Business
GENERAL We are in the business of operating senior living facilities, including independent living and congregate care communities, assisted living facilities and nursing homes. We lease and operate 56 senior living facilities. We lease 31 communities that Marriott manages. Combined, these 87 facilities, which we lease from Senior Housing, include 4,060 independent living apartments, 1,766 assisted living suites, 294 special care

beds and 6,578 nursing beds; 59% of their revenues in 2001 was paid from residents' private resources and 41% was paid by Medicare and Medicaid. We have recently agreed to purchase five senior living communities which we will own and operate. In combination with our existing facilities, these 92 facilities include 4,591 independent living apartments, 1,939 assisted living suites, 294 special care beds and 6,578 nursing beds. Sixty percent of our pro forma revenues from these 92 facilities in 2001 was paid from residents' private resources and 40% was paid by Medicare and Medicaid: FIVE STAR UNITS AFTER COMPLETION OF PENDING ACQUISITION FIVE STAR REVENUES AFTER COMPLETION OF PENDING ACQUISITION

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OUR BUSINESS AND GROWTH STRATEGY Our growth strategy is to acquire facilities that provide high quality services to residents who pay with private resources. In January 2002, we leased 31 senior living communities from Senior Housing. Approximately 88% of the revenues from these communities is paid by residents from their private resources. At the five communities we have agreed to acquire, all of the revenues are paid by residents from private resources. Our nursing homes derive a majority of their revenue from Medicare and Medicaid. In the future we may decide to expand our nursing home operations; however, if we do so, we expect to price such acquisitions at levels which take account of the increased risks associated with Medicare and Medicaid revenues. Our senior management team has significant experience in the senior living industry. Although we have substantial lease obligations, we currently have zero debt. We believe our relationship with our former parent company, Senior Housing, may provide us with capital to finance some acquisitions. We believe that this combination of our experienced management, our financial position and our relationship with Senior Housing will enable us to expand our operations and compete successfully in the senior living industry. OUR HISTORY In July 2000, Senior Housing repossessed or acquired senior living facilities from two former tenants. We were created by Senior Housing in 2000 as a 100% subsidiary to conduct the businesses of operating these facilities. Under the amended Internal Revenue Code, or IRC, Senior Housing was required to engage an independent operating company to manage the healthcare businesses which we owned. Messrs. Portnoy and Martin formed FSQ, Inc. to manage these facilities. During the past year, we believe the combined operations at these 56 facilities have stabilized and improved. In August 2001, Senior Housing agreed to acquire 31 Marriott senior living facilities. The operations at these 31 communities are managed by Marriott under long term management contracts. The operating income generated by these facilities is not REIT qualified income under applicable IRC rules. To complete this acquisition and remain a REIT, Senior Housing was required to identify a taxable entity to lease these facilities. On December 31, 2001, Senior Housing distributed substantially all of our outstanding shares to its shareholders and we became a separate publicly owned company listed on the American Stock Exchange. Pursuant to the transaction agreement governing this spin-off: –>

Senior Housing capitalized us with $50 million of equity, consisting of cash and working capital, primarily operating receivables net of operating payables; –> we leased 56 facilities from Senior Housing; –> we agreed to merge with FSQ, Inc. in order to acquire the personnel, systems and assets necessary to operate these 56 facilities; and –> we agreed to lease the 31 Marriott communities from Senior Housing when they were acquired by Senior Housing. Effective January 2, 2002, we completed our merger with FSQ, Inc. As consideration for this merger Messrs. Portnoy and Martin each received 125,000 of our common shares. On January 10, 2002, we entered a non-binding letter of intent for a new, three year, $20 million credit line which will be secured by our accounts receivable. Although the closing of this transaction is subject to customary contingencies, we expect it to occur on or before March 31, 2002.

22

On January 11, 2002, Senior Housing completed its acquisition of the 31 Marriott communities, and we leased these facilities from Senior Housing. On January 23, 2002, we agreed to acquire five senior living communities for $45.5 million. The closing of this acquisition is subject to completion of various state licensing matters and other customary closing conditions, and although we expect it to be completed during April 2002, we can give no assurances that it will close. We intend to use the proceeds of this offering to partially fund this acquisition. TYPES OF FACILITIES Our present business plan contemplates the leasing and management of senior apartments, independent living apartments, assisted living facilities, congregate care communities and nursing homes. Some facilities combine more than one type of service in a single building or campus. Senior apartments Senior apartments are marketed to residents who are generally capable of caring for themselves. Residence is usually restricted on the basis of age. Purpose built facilities may have special function rooms, concierge services, high levels of security and assistance call systems for emergency use. Tenants at these facilities who need healthcare or assistance with the activities of daily living are expected to contract independently for these services with home healthcare companies. Independent living apartments Independent living apartments, or congregate care communities as they are sometimes called, also provide high levels of privacy to residents and require residents to be capable of relatively high degrees of independence. Unlike a senior apartment facility, an independent living apartment usually bundles several services as part of a regular monthly charge—for example, one or two meals per day in a central dining room, weekly maid service and a social director. Additional services are generally available from staff employees on a fee-for-service basis. In some congregate care communities, separate parts of the facility are dedicated to assisted living or nursing services. Assisted living facilities Assisted living facilities are typically comprised of one bedroom suites which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing. Professional nursing and healthcare services are usually available at the facility on call or at regularly scheduled times. Nursing homes Nursing homes generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two-bed

units with a separate bathroom in each unit and shared dining and bathing facilities. Some private rooms are often available for those residents who can afford to pay higher rates or for patients whose medical conditions require segregation. Nursing homes are generally staffed by licensed nursing professionals 24 hours per day. During the past few years, nursing home operators have faced two significant business challenges. First, the rapid expansion of the assisted living industry which started in the early 1990s has attracted a number of residents away from nursing homes. This was especially significant because the residents who chose assisted living facilities often previously had been the most profitable residents in the

23

nursing homes. These residents required a lesser amount of care and were able to pay higher private rates rather than government rates. The second major challenge arose as a result of Medicare and Medicaid cost containment laws, particularly 1997 federal legislation that required the Medicare program to implement a prospective payment program for various subacute services provided in nursing homes. Implementation of this Medicare prospective payment program began on July 1, 1998. Prior to the prospective payment program, Medicare generally paid nursing home operators based upon audited costs for services provided. The new prospective payment system sets Medicare rates based upon government estimated costs of treating specified medical conditions. Although it is possible that a nursing home may increase its profit if it is able to provide services at below average costs, we believe that the effect of the Medicare prospective payment system has been and will be to reduce the profitability of Medicare services in nursing homes. This belief is based upon our observation of the impact of similar Medicare changes that were implemented for hospitals during the 1980s and the large number of bankruptcies which have occurred in the nursing home industry since the implementation of the Medicare prospective payment system began. OUR SENIOR LIVING FACILITIES Assuming we close our pending acquisition of five communities, we will lease or operate 92 senior living facilities: five facilities which we expect to own and operate directly; 56 facilities included in one lease which we operate directly; and 31 communities included in a second lease which are managed by Marriott:
No. of Units Independent Living Apartments Assisted Living Suites Specialty Care Beds Year ended December 31, 2001

Ownership

Nursing Beds

Total

Rent

Revenues ($ in thousands)

Pending acquisition (5 facilities owned and operated by us) Senior Housing Lease No. 1 (56 facilities operated by us) Senior Housing Lease No. 2 (31 facilities managed by Marriott) Total units:

531 79 3,981 4,591

173 153 1,613 1,939

— — 294 294

— 4,979 1,599 6,578

704 5,211 7,487 13,402

N/A $7,000 63,000(1)

$14,194(2) 227,044 277,413

(1) In addition to the $63 million of rent, we are required to pay a percentage of our gross revenue as an escrowed reserve for recurring capital expenditures. In 2001 this pro forma amount was $7.3 million. (2) For the twelve months ended November 30, 2001.

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PENDING ACQUISITION In January 2002, we agreed to purchase five senior living communities. Our acquisition of these five communities is subject to completion of various state licensing matters and other customary closing conditions. At this time we expect to own and operate these communities directly. In the future we may decide to finance these properties with Senior Housing or another third party. These five communities contain 704 living units and are located in five states. The following table provides additional information about these five communities and their current operations:

Location

No. of units

Type of units

Occupancy(1)

Revenues(2)

Percent of revenues from private pay sources

($ in thousands)

1. Stockton, CA

84 80 164

ind. liv. apts. asst. liv. suites total units ind. liv. apts. asst. liv. suites total units ind. liv. apts. ind. liv. apts. asst. liv. suites ind. liv. apts. asst. liv. suites units 88 % $14,194 100 % 90 % 91 % 81 % 82 % $ 4,107 $ 2,887 $ 1,974 $ 1,820 100 % 100 % 100 % 100 % 94 % $ 3,406 100 %

2. Ft. Myers, FL

186 20 206

3. Overland Park, KS 4. Florissant, MO 5. Omaha, NE Totals: 5 communities in 5 states

141 120 73 531 173 704

(1) As of November 30, 2001. (2) For the twelve months ended November 30, 2001.

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SENIOR HOUSING LEASE NO. 1 FACILITIES We lease and operate 56 senior living facilities which are owned by Senior Housing. These 56 facilities include 54 nursing homes and two assisted living facilities; four of the nursing homes also contain some assisted living units. These 56 facilities have 5,211 beds or living units and they are located in 12 states. The following table provides additional information about these facilities and their current operations as of and for the year ended December 31, 2001:
Percent of revenues from Medicare/ Medicaid

Location/Units

Occpy.

Revenues ($ in 000s)

1. Phoenix, AZ 119 nursing beds 2. Yuma, AZ 125 nursing beds 3. Yuma, AZ 52 asst. liv. suites 4. Arleta, CA 85 asst. liv. suites 5. Lancaster, CA 99 nursing beds

80 % 92 % 84 % 87 % 94 %

$4,367 6,080 576 1,473 4,860

80 % 80 % 0% 0% 67 %

6. Stockton, CA 116 nursing beds 7. Thousand Oaks, CA 124 nursing beds 8. Van Nuys, CA 58 nursing beds 9. Canon City, CO 85 nursing beds 48 ind. liv. apts. 10. Cherrelyn, CO 198 nursing beds 11. Colorado Springs, CO 75 nursing beds 12. Delta, CO 76 nursing beds 16 asst. liv. suites 13. Grand Junction, CO 95 nursing beds 14. Grand Junction, CO 82 nursing beds 15. Lakewood, CO 125 nursing beds 16. New Haven, CT 150 nursing beds 17. Waterbury, CT 150 nursing beds 18. College Park, GA 99 nursing beds 19. Dublin, GA 130 nursing beds 20. Glenwood, GA 61 nursing beds 21. Marietta, GA 109 nursing beds 22. Clarinda, IA 96 nursing beds 23. Council Bluffs, IA 62 nursing beds 24. Des Moines, IA 85 nursing beds 25. Glenwood, IA 116 nursing beds 26. Mediapolis, IA 62 nursing beds 27. Pacific Junction, IA 12 nursing beds 28. Winterset, IA 98 nursing beds 19 ind. liv. apts. 29. Ellinwood, KS 55 nursing beds 4 ind. liv. apts. 30. Farmington, MI 149 nursing beds 31. Howell, MI 149 nursing beds 32. Tarkio, MO 75 nursing beds 33. Ainsworth, NE 48 nursing beds 34. Ashland, NE 101 nursing beds 35. Blue Hill, NE

97 % 94 % 97 % 91 %

6,620 7,142 2,835 3,576

72 % 72 % 83 % 62 %

90 % 100 % 78 %

9,272 3,833 3,572

83 % 75 % 83 %

87 % 93 % 86 % 98 % 95 % 91 % 85 % 81 % 87 % 60 % 95 % 88 % 100 % 89 % 100 % 70 %

4,152 4,221 5,677 10,101 10,109 3,163 3,798 1,694 3,745 2,366 2,428 3,862 6,754 2,299 733 2,637

62 % 71 % 82 % 95 % 93 % 98 % 97 % 95 % 88 % 70 % 87 % 80 % 99 % 66 % 96 % 50 %

93 %

1,821

56 %

76 % 88 % 69 % 87 % 94 % 85 %

9,985 9,999 1,936 1,652 4,423 2,136

78 % 86 % 70 % 71 % 69 % 69 %

63 nursing beds 36. Campbell, NE 45 nursing beds 37. Central City, NE 65 nursing beds 38. Columbus, NE 48 nursing beds
26

85 % 95 % 98 %

1,538 2,310 2,087

76 % 73 % 63 %

39. Edgar, NE 52 nursing beds 40. Exeter, NE 48 nursing beds 41. Grand Island, NE 76 nursing beds 42. Gretna, NE 61 nursing beds 43. Lyons, NE 63 nursing beds 44. Milford, NE 54 nursing beds 45. Sutherland, NE 62 nursing beds 46. Utica, NE 40 nursing beds 47. Waverly, NE 50 nursing beds 48. Brookfield, WI 224 nursing beds 49. Clintonville, WI 103 nursing beds 50. Clintonville, WI 61 nursing beds 51. Madison, WI 63 nursing beds 52. Milwaukee, WI 154 nursing beds 53. Pewaukee, WI 175 nursing beds 54. Waukesha, WI 105 nursing beds 55. Laramie, WY 98 nursing beds 56. Worland, WY 85 nursing beds 8 ind. liv. apts. Totals: 56 facilities in 12 states, 5,211 units

86 % 87 % 98 % 93 % 81 % 90 % 92 % 96 % 86 % 95 % 87 % 94 % 74 % 80 % 84 % 96 % 92 % 84 %

1,680 1,489 3,091 2,459 1,822 1,950 2,354 1,715 2,003 11,612 3,634 3,264 2,891 6,816 7,275 5,327 4,416 3,414

66 % 58 % 66 % 67 % 57 % 69 % 80 % 75 % 49 % 73 % 74 % 67 % 59 % 76 % 71 % 56 % 70 % 71 %

88 %

$227,044

76 %

After it repossessed or acquired the foregoing facilities from former tenants, Senior Housing undertook to correct deferred maintenance which had been allowed to occur by former operators. Between July 2000 and December 2001, $8.3 million was spent by Senior Housing under this program. At the time of our spin off from Senior Housing, Senior Housing provided us cash of $1.6 million to fund the estimated costs of these projects which remained unfinished. During the course of these projects, parts of these facilities are sometimes closed and these closings can adversely impact occupancy; however, we believe these projects are necessary for continuing operations at these facilities and may make the facilities more attractive to residents. We expect this correction of deferred maintenance projects to be completed in 2002. OUR LEASE FOR THE 56 FACILITIES One of our subsidiaries leases the 56 facilities described above; and we have guaranteed our subsidiary's obligations under the lease. The lease has been filed as an exhibit to the registration statement of which this prospectus is a part. If you want more information about the lease terms, you should read the entire lease. The following is a summary of material terms of this lease:

Operating costs The lease is a so-called "triple-net" lease which requires us to pay all costs incurred in the operation of the facilities, including the costs of personnel, service to residents, insurance and real estate and personal property taxes. Minimum rent Our minimum rent is $7 million per year.

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Percentage rent Starting in 2004, we are required to pay additional rent with respect to each lease year in an amount equal to three percent (3%) of net patient revenues at each leased facility in excess of net patient revenues at the facility during 2003. Term The initial term expires on December 31, 2018. Renewal option We have the option to renew the lease for all but not less than all the 56 facilities for one renewal term ending on December 31, 2033, by notice on or before December 31, 2015. We may not exercise this renewal option unless we also exercise our renewal option under our lease for the Marriott facilities. Rent during renewal term Rent during the renewal term is a continuation of minimum rent and percentage rent payable during the initial term. Maintenance and alterations We are required to operate continuously and maintain, at our expense, the leased facilities in good order and repair, including structural and nonstructural components. We may request Senior Housing to fund amounts needed for repairs and renovations in return for rent adjustments to provide Senior Housing a return on its investment according to a formula set forth in the lease. At the end of the lease term, we are required to surrender the leased facilities in substantially the same condition as existed on the commencement date of the lease, subject to any permitted alterations and subject to ordinary wear and tear. Assignment and subletting Senior Housing's consent is generally required for any direct or indirect assignment or sublease of any of the facilities. In the event of any assignment or subletting, we will remain liable under the lease. Environmental matters We are required, at our expense, to remove and dispose of any hazardous substance at the leased facilities in compliance with all applicable environmental laws and regulations. We have indemnified Senior Housing for any liability which may arise as a result of the presence of hazardous substances at any leased facilities and from any violation or alleged violation of any applicable environmental law or regulation. Indemnification and insurance With limited exceptions, we are required to indemnify Senior Housing from all liabilities which may arise from the ownership or operation of the facilities. We generally are required to maintain commercially reasonable insurance, including: –> "all-risk" property insurance, in an amount equal to 100% of the full replacement cost of the facilities; –> business interruption insurance; –> comprehensive general liability insurance, including bodily injury and property damage, in amounts as are generally maintained by companies providing senior living services;

28

–> flood insurance if any facility is located in whole or in part in a flood plain; –> worker's compensation insurance if required by law; and –> such additional insurance as may be generally maintained by companies providing senior living services. The lease requires that Senior Housing be named as an additional insured under these policies. Damage, destruction or condemnation If any of the leased facilities is damaged by fire or other casualty or taken for a public use, we are generally obligated to rebuild unless the facility cannot be restored. If the facility cannot be restored, Senior Housing will generally receive all insurance or taking proceeds and we are liable to Senior Housing for the amount of any deductible or deficiency between the replacement cost and the insurance proceeds. Events of default Events of default under the lease include the following: –> our failure to pay rent or any other sum when due; –> our failure to maintain the insurance required under the lease; –> the occurrence of certain events with respect to our insolvency; –> the institution of a proceeding for our dissolution; –> any person or group of affiliated persons acquiring ownership of more than 9.8% of us without Senior Housing's consent; –> any change in our control or sale of a material portion of our assets without Senior Housing's consent; –> our default under the lease for the Marriott facilities; –> our default under any indebtedness which gives the holder the right to accelerate; –> our being declared ineligible to receive reimbursement under Medicare or Medicaid programs for any of the leased facilities; and –> our failure to perform any terms, covenants or agreements of the lease and the continuance thereof for a specified period of time after written notice. Remedies Upon the occurrence of any event of default, the lease provides that, among other things, Senior Housing may, to the extent legally permitted: –>

accelerate the rent; –> terminate the lease; –> terminate the other lease which we have with Senior Housing; –> enter the property and take possession of any and all our personal property and retain or sell the same at a public or private sale; and –> make any payment or perform any act required to be performed by us under the lease.

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We are obligated to reimburse Senior Housing for all costs and expenses incurred in connection with any exercise of the foregoing remedies. Management We may not enter into, amend or modify any management agreement affecting any leased property without the prior written consent of Senior Housing. Lease subordination Our lease may be subordinated to any mortgages of the leased properties by Senior Housing. Financing limitations; security We may not incur debt secured by our investments in our subsidiary tenant. Further, our tenant subsidiary is prohibited from incurring liabilities other than operating liabilities incurred in the ordinary course of business, those liabilities secured by accounts receivables or purchase money debt. We are required to pledge 100% of the equity interests of our tenant subsidiary to Senior Housing or its lenders.

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SENIOR HOUSING LEASE NO. 2 FACILITIES We lease 31 senior living facilities from Senior Housing which are managed by Marriott. These facilities contain 7,487 living units and are located in 13 states. The following table provides additional information about these facilities and their current operations as of and for the year ended December 28, 2001:
Year ended December 28, 2001 Percent of revenues from private pay resources

Location

Ind. liv. apts.

Asst. liv. suites

Spec. care beds

Nursing beds

Totals

Occupancy

Revenues ($ in 000s)

1 2 3 4,5 6 7 8 9 10 11 12 13 14 15 16 17 18

Peoria, AZ Scottsdale, AZ Tucson, AZ San Diego, CA Newark, DE Wilmington, DE Wilmington, DE Wilmington, DE Wilmington, DE Coral Springs, FL Deerfield Beach, FL Ft. Lauderdale, FL Ft. Myers, FL Palm Harbor, FL West Palm Beach, FL Indianapolis, IN Overland Park, KS

155 167 202 246 62 140 71 62 — 184 198 — — 230 276 117 117

79 33 30 100 26 37 44 15 51 62 33 109 85 87 64 — 30

— — 27 — — —

26

30

57 96 67 59 110 66 46 82 31 35 60 — — — — 74 60

291 296 326 405 198 243 161 159 108 281 291 109 85 317 340 221 207

90 % 91 % 96 % 93 % 97 % 97 % 94 % 93 % 72 % 91 % 88 % 90 % 90 % 82 % 84 % 93 % 94 %

$9,087 10,942 11,828 18,380 9,865 11,495 6,064 7,664 3,258 9,311 10,335 2,096 2,232 7,182 7,132 10,619 8,087

93 % 91 % 92 % 98 % 66 % 82 % 93 % 66 % 100 % 84 % 69 % 100 % 100 % 100 % 100 % 82 % 90 %

19 20 21 22 23 24 25 26 27 28 29 30 31

Lexington, KY Lexington, KY Louisville, KY Winchester, MA Lakewood, NJ Albuquerque, NM Columbus, OH Myrtle Beach, SC Dallas, TX El Paso, TX Houston, TX San Antonio, TX Woodlands, TX Totals: 31 facilities in 13 states

140 — 240 — 217 114 143 — 190 123 197 151 239 3,981

9 22 44 125 108 34 87 60 38 — 71 30 100 1,613

31 25 36 15 60 28 16 294

— 111 40 — 60 60 60 68 90 120 87 60 — 1,599

149 133 324 125 416 208 315 164 318 258 415 269 355 7,487

94 % 95 % 97 % 99 % 80 % 99 % 93 % 84 % 92 % 86 % 96 % 96 % 93 % 91 %

4,128 6,951 10,465 5,566 15,039 9,235 13,374 5,740 13,062 9,499 17,491 10,788 10,498 $277,413

100 % 66 % 82 % 100 % 88 % 95 % 93 % 66 % 83 % 71 % 93 % 95 % 100 % 88 %

OUR LEASE FOR THE MARRIOTT FACILITIES The lease for the Marriott facilities has been filed as an exhibit to the registration statement of which this prospectus is a part. If you want more information about lease terms, you should read the entire lease. The material terms of our lease for the Marriott facilities are substantially the same as those of our lease for the 56 facilities, except as follows: Minimum rent Our minimum rent is $63 million per year.

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Percentage rent Starting in 2003, we are required to pay additional rent with respect to each lease year in an amount equal to five percent (5%) of net patient revenues at each leased facility in excess of net patient revenues at the facility during 2002. FF&E reserves We are required to maintain accounts for replacements and improvements as described below in "—Marriott management—FF&E reserves and capital improvements". Term The initial term expires on December 31, 2017. Renewal options We have two options to renew the lease for all but not less than all the facilities: the first for 10 years ending on December 31, 2027, and the second for five years ending on December 31, 2032. We may not exercise these renewal options unless we have exercised our renewal option under the lease for the 56 facilities. The first renewal option must be exercised by notice two years prior to the expiration of the initial term. The second renewal option must be exercised by notice at least 11 months before the then current term expires. Events of default In addition to the events of default described under our lease for the 56 facilities, the lease for the Marriott facilities include the following events of default: –> our default under any Marriott management agreement; and –> our default under the lease for the 56 facilities owned by Senior Housing. MARRIOTT MANAGEMENT The 31 Marriott facilities are each subject to a management agreement with Marriott. The following is a description of the material terms of the management agreements. If you want more information about these agreements, you should read the representative form of management agreement which has been filed as an exhibit to the registration statement of which this prospectus is a part.

Term Generally each of the management agreements has an initial term expiring in 2027, with one five-year renewal term at Marriott's option. Facility services Marriott has responsibility and authority for all day-to-day operations of the managed facilities, including obtaining and maintaining all licenses necessary for operations, insurance, establishing resident care policies and procedures, carrying out and supervising all necessary repairs and maintenance, procuring food, supplies, equipment, furniture and fixtures, and establishing prices, rates and charges for services provided. Marriott also recruits, employs and directs all facility based employees, including managerial employees. Central services Marriott also furnishes certain central administrative services, which are provided on a central or regional basis to all senior living facilities managed by Marriott. Such services include: (i) marketing

32

and public relations; (ii) human resources program development; (iii) information systems development and support; and (iv) centralized computer payroll and accounting. Working capital We are required to maintain working capital at each of the managed facilities at levels consistent with the Marriott senior living system standard. FF&E reserves and capital improvements Marriott has established a reserve account under each management agreement, referred to as an FF&E Reserve, to cover the expected recurring cost of replacements and renewals to the furniture, furnishings, fixtures, soft goods, case goods, vehicles and equipment, and for building repairs and maintenance which are normally capitalized. The FF&E Reserve accounts are funded from the operating revenues of the managed facilities. The amount of this funding varies somewhat among the managed facilities; however, for most facilities it is currently set at 2.65% of gross revenues and is expected to gradually increase to 3.5%. In the event major capital improvements are required, or if the amounts set aside in the FF&E Reserve accounts are inadequate for required repairs, we may be required to fund such repairs and improvements. Any such funding which we provide increases the amount of our owner's priority, described below. Also, under our lease we have the option to request Senior Housing to provide such required funding in return for rent adjustments to provide Senior Housing a return on its investment according to a formula set forth in the lease. Fees For its facility services, Marriott receives a base fee generally equal to 5% of the managed facilities' gross revenues, plus an incentive fee generally equal to 20% of operating profits in excess of owner's priority amounts, as defined in the agreements. For its central services, Marriott receives a fee generally equal to 2% of gross revenues. Generally, through the earlier of (i) the end of June 2004 or (ii) the date on which certain performance criteria have been met, payment of up to one half of this central services fee (i.e., 1% of gross revenues) is conditional, and is waived if specified annual profit targets are not achieved. During 2001 management fees paid to Marriott totaled $18.1 million. Owner's priority We receive the profits of the Marriott managed facilities on a priority basis before Marriott receives any incentive fees for facility services or any conditional central services fees. The amount of the owner's priority for each managed facility is established based upon a specified rate of return on historical capital investments in these facilities, including capital investments funded in addition to the FF&E Reserve. For fiscal year 2001, the aggregate amount of owner's priority for all 31 properties was $69.4 million. Pooling Twenty-nine of the facilities are subject to pooling arrangements whereby the calculation and payment of FF&E Reserves, fees payable to Marriott and owner's priority for several groups of these 29 facilities are combined. Events of default Events of default under the management agreements include, among others, certain events relating to the insolvency or bankruptcy of either party.

33

Termination The Marriott management agreements may be terminated as follows: –> Upon material default, by the non-defaulting party after applicable cure periods lapse. –> Starting in 2006 by us, if a specific facility, or a pooled combination of facilities, fails to achieve specified financial performance; provided, however, Marriott has the option to avoid financial performance terminations by making specified payments to us or by temporarily reducing certain of its fees. –> By us, upon 120 days notice, provided we make a termination payment to Marriott calculated according to a formula set forth in the agreements. Our right to exercise termination options under the Marriott management agreements is subject to approval by Senior Housing under the terms of the lease for these 31 Marriott facilities. GOVERNMENT REGULATION AND RATE SETTING Senior apartments Generally, government programs do not pay for housing in senior apartments. Rents are paid from the residents' private resources. Accordingly, the government regulations that apply to these types of properties are generally limited to zoning, building and fire codes, Americans with Disabilities Act requirements and other life safety type regulations applicable to residential real estate. Government rent subsidies and government assisted development financing for low income senior housing are exceptions to these general statements. The development and operation of subsidized senior housing properties are subject to numerous governmental regulations. While it is possible that we may lease some subsidized senior apartment facilities, we do not expect these facilities to be a major part of our future business, and we do not own senior apartments where rent subsidies are applicable. Independent living apartments Government benefits generally are not available for services at independent living apartments and the resident charges in these facilities are paid from private resources. However, a number of Federal Supplemental Security Income program benefits pay housing costs for elderly or disabled residents to live in these types of residential facilities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a significant number of supplemental security income residents reside or are likely to reside. Categories of living arrangements which may be subject to these state standards include independent living apartments and assisted living facilities. Because independent living apartments usually offer common dining facilities, in many locations they are required to obtain licenses applicable to food service establishments in addition to complying with land use and life safety requirements. In many states, independent living apartments are licensed by state health departments, social service agencies, or offices on aging with jurisdiction over group residential facilities for seniors. To the extent that independent living apartments include units in which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations, and if the facilities receive Medicaid or Medicare funds, to certification standards. In some states, insurance or consumer protection agencies regulate independent living apartments in which residents pay entrance fees or prepay other costs. Assisted living According to the National Academy for State Health Policy, 39 states provide or are approved to provide Medicaid payments for residents in some assisted living facilities under waivers granted by the Federal Centers for Medicare and Medicaid Services or under Medicaid state plans, and eight other

34

states are planning some Medicaid funding by requesting waivers implementing assisted living pilot programs or demonstration projects. Because rates paid to assisted living facility operators are lower than rates paid to nursing home operators, some states use Medicaid funding of assisted living as a means of lowering the cost of services for residents who may not need the higher intensity of health-related services provided in nursing homes. States that administer Medicaid programs for assisted living facilities are responsible for monitoring the services at,

and physical conditions of, the participating facilities. Different states apply different standards in these matters, but generally we believe these monitoring processes are similar to the concerned states' inspection processes for nursing homes. In light of the large number of states using Medicaid to purchase services at assisted living facilities and the growth of assisted living in the 1990s, a majority of states have adopted licensing standards applicable to assisted living facilities. According to the National Academy for State Health Policy, 29 states have licensing statutes or standards specifically using the term "assisted living". The majority of states have revised their licensing regulations recently or are reviewing their policies or drafting or revising their regulations. State regulatory models vary; there is no national consensus on a definition of assisted living, and no uniform approach by the states to regulating assisted living facilities. Most state licensing standards apply to assisted living facilities whether or not they accept Medicaid funding. Also, according to the National Academy for State Health Policy, seven states require certificates of need from state health planning authorities before new assisted living facilities may be developed and two states have exempted assisted living facilities from certificate of need laws. Based on our analysis of current economic and regulatory trends, we believe that assisted living facilities that become dependent upon Medicaid payments for a majority of their revenues may decline in value because Medicaid rates may fail to keep up with increasing costs. We also believe that assisted living facilities located in states that adopt certificate of need requirements or otherwise restrict the development of new assisted living facilities may increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates. Two federal government studies provide background information and make recommendations regarding the regulation of, and the possibility of increased governmental funding for, the assisted living industry. The first study, an April 1999 report by the General Accounting Office to the Senate Special Committee on Aging on assisted living facilities in four states, found a variety of residential settings serving a wide range of resident health and care needs. The General Accounting Office found that consumers often receive insufficient information to determine whether a particular facility can meet their needs and that state licensing and oversight approaches vary widely. The General Accounting Office anticipates that as the states increase the use of Medicaid to pay for assisted living, federal financing will likewise grow, and these trends will focus more public attention on the place of assisted living in the continuum of long-term care and upon state standards and compliance approaches. The second study, a National Study of Assisted Living for the Frail Elderly, was funded by the U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation and is expected to result in a report on the effects of different service and privacy arrangements on resident satisfaction, aging in place and affordability. In 2001, the Senate Special Committee on Aging held hearings on assisted living and its role in the continuum of care and on community-based alternatives to nursing homes. We cannot predict whether these studies will result in governmental policy changes or new legislation, or what impact any changes may have. Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also undertakes expanded funding obligations, and we do not believe a materially increased financial commitment from the federal government is presently likely. However, we do

35

anticipate that assisted living facilities will increasingly be licensed and regulated by the various states, and that in absence of federal standards, the states' policies will continue to vary widely. Nursing homes Reimbursement About 58% of all nursing home revenues in the U.S. in 2000 came from government Medicare and Medicaid programs, including about 48% from Medicaid programs. Nursing homes are among the most highly regulated businesses in the country. The federal and state governments regularly monitor the quality of care provided at nursing homes. State health departments conduct surveys of resident care and inspect the physical condition of nursing home properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require nursing home operators to make significant capital improvements. These mandated capital improvements have in the past usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over expected useful lives of the improvements. A new Medicare prospective payment system, often referred to as PPS, began being phased in over three years beginning with cost reporting years starting on or after July 1, 1998. Under this new Medicare payment system, capital costs are part of the prospective rate and are not facility specific. This new Medicare payment system and other recent legislative and regulatory actions with respect to state Medicaid rates are limiting the reimbursement levels for some nursing home and other eldercare services. At the same time federal and state enforcement and oversight of nursing homes are increasing, making licensing and certification of these facilities more rigorous. These actions have adversely affected the revenues and increased the expenses of many nursing home operators, including us. The new Medicare payment system was established by the Balanced Budget Act of 1997, and was intended to reduce the rate of growth in Medicare payments for skilled nursing facilities. Before the new Medicare payment system, Medicare rates were facility-specific and cost-based. Under the new Medicare payment system, facilities receive a fixed payment for each day of care provided to Medicare patients. Each patient is assigned to one of 44 care groups depending on that patient's medical characteristics and service needs. Per diem payment rates are based on these care groups. Medicare payments cover substantially all services provided to Medicare patients in skilled nursing facilities, including ancillary services such as rehabilitation therapies. The new Medicare payment system is intended to provide incentives to providers to furnish only necessary services and to deliver those services efficiently. During the three year phase in period, Medicare rates for skilled nursing facilities were based on a

blend of facility specific costs and rates established by the new Medicare payment system. According to the General Accounting Office, between fiscal year 1998 and fiscal year 1999, the first full year of the new Medicare payment system phase-in, the average Medicare payment per day declined by about nine percent. As of September 30, 2001, all of the facilities that we currently lease from Senior Housing and that participate in the Medicare program have derived their Medicare revenues under the new payment system rates for at least six months. The new Medicare payment system rates have been applied to 34 of our 87 leased facilities since January 1, 2001. Since November 1999, Congress has provided some relief from the impact of the Balanced Budget Act of 1997. Effective April 1, 2000, the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 temporarily boosted payments for certain skilled nursing cases by 20 percent and allowed nursing facilities to transition more rapidly to the federal payment system. This Act also increased the new Medicare payment rates by four percent for fiscal years 2001 and 2002 and imposed a two-year moratorium on some therapy limitations for skilled nursing patients covered under Medicare Part B. In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 was approved. Effective April 1, 2001 to October 1, 2002, this Act increases the nursing component of the payment rate for each care group by 16.6%. This Act also increased annual

36

inflation adjustments for fiscal year 2001, increased rehabilitation care group rates by 6.7%, and maintained the previously temporary 20% increase in the other care group rates established in 1999. Effective October 1, 2002, the 4% across-the-board increase in Medicare payment rates, the 16.66% increase in the nursing component of the rates, and the 6.7% increase in rehabilitation care group rates, are scheduled to expire. The 20% increase for the skilled nursing care groups will expire when the current resource utilization groups are refined. The Bush administration's fiscal year 2003 budget proposal assumes that the add-ons to the Medicare rates will expire as scheduled and does not provide for additional Medicaid funding for nursing homes. The Medicare Payment Advisory Commission has recommended that Congress incorporate the 20% increases into the base rate for fiscal year 2003 and that the other add-ons expire as scheduled. Survey and enforcement The Federal Centers have begun to implement an initiative to increase the effectiveness of Medicare and Medicaid nursing facility survey and enforcement activities. The Federal Centers' initiative follows a July 1998 General Accounting Office investigation which found inadequate care in a significant proportion of California nursing homes and the Federal Centers' July 1998 report to Congress on the effectiveness of the survey and enforcement system. In 1999, the U.S. Department of Health and Human Services Office of Inspector General issued several reports concerning quality of care in nursing homes, and the General Accounting Office issued reports in 1999 and 2000 which recommended that the Federal Centers and the states strengthen their compliance and enforcement practices to better ensure that nursing homes provide adequate care. In 1998, 1999 and 2000, the Senate Special Committee on Aging held hearings on these issues. The Federal Centers are taking steps to focus more survey and enforcement efforts on nursing homes with findings of substandard care or repeat violations of Medicare and Medicaid standards and to identify chain operated facilities with patterns of noncompliance. The Federal Centers are increasing their oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. In addition, the Federal Centers have adopted regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. Medicare survey results for each nursing home are posted on the internet at http://www.medicare.gov. In 2000, the Federal Centers issued a report on their study linking nursing staffing levels with quality of care, and the Federal Centers are assessing the impact that minimum staffing requirements would have on facility costs and operations. In a report to be presented to Congress in March 2002, the Department of Health and Human Services has found that 90% of nursing homes lack the nurse and nurse aide staffing necessary to provide adequate care to residents. The Bush administration has indicated that it does not intend to impose minimum staffing levels or to increase Medicare or Medicaid rates to cover the costs of increased staff at this time, but is considering publishing the staffing level at each nursing home to increase market demand. Federal efforts to target fraud and abuse and violations of anti-kickback laws and physician referral laws by Medicare and Medicaid providers have also increased. In March 2000, the U.S. Department of Health and Human Services Office of Inspector General issued compliance guidelines for nursing facilities, to assist them in developing voluntary compliance programs to prevent fraud and abuse. Also, new rules governing the privacy, use and disclosure of individually identified health information became final in 2001 and will require compliance by 2003, with civil and criminal sanctions for noncompliance. An adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or compliance with applicable federal or state regulations could negatively affect our financial condition and results of operations.

37

Certificates of need Most states also limit the number of nursing homes by requiring developers to obtain certificates of need before new facilities may be built. Even states such as California and Texas that have eliminated certificate of need laws often have retained other means of limiting new nursing home development, such as the use of moratoria, licensing laws or limitations upon participation in the state Medicaid program. We believe that these governmental limitations generally make nursing homes more valuable by limiting competition. A number of legislative proposals that would affect major reforms of the healthcare system have been introduced in Congress, such as additional Medicare and Medicaid reforms and cost containment measures. We cannot predict whether any of these legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our business. LIABILITY INSURANCE Litigation against senior living operators has been increasing during the past few years. Several cases by nursing home patients or their families who have won large monetary awards for mistreatment have been widely publicized. The amount of such litigation in Florida and Texas has been particularly significant. As a result, liability insurance costs are rising and, in some cases, such insurance is not available to senior living operators. We have liability insurance for the 56 properties which we now operate. None of these facilities are located in Florida or Texas. One of the five facilities we intend to purchase and operate is located in Florida; this Florida property has 186 independent living apartments and 20 assisted living suites, but it has no nursing beds. Based upon preliminary inquires which we have made, we believe that our planned operations at the five facilities we intend to acquire may be included within our existing insurance. Our current liability insurance expires in June 2002; we expect our insurance costs to increase, and we do not know the amount of any such increase. If such increased cost is not acceptable to us, we intend to explore alternatives, including possibly higher deductible or retention amounts and self insurance. Marriott is responsible for obtaining insurance for the 31 senior living communities which we lease and Marriott manages. These 31 communities include six in Florida (888 independent living apartments, 440 assisted living suites and 95 nursing beds), and five in Texas (900 independent living apartments, 239 assisted living suites, 119 special care beds and 357 nursing beds). Liability insurance for these facilities' operations is currently provided in part by an insurance company subsidiary of Marriott. The cost of this insurance increased on October 1, 2001, and we are currently exploring with Marriott whether it may be possible to reduce this cost, but we can provide no assurance that these insurance costs can be reduced or that they will not increase further in the future. COMPETITION The senior living services business is highly competitive. We compete with service providers offering different types of services, such as home healthcare services, as well as other companies providing real estate facility based services. We believe we can compete successfully for the following reasons: –> Our acquisition of FSQ, Inc. and our shared services agreement with Reit Management provide us a depth and quality of management which is equal to or stronger than most other senior living facility operators.

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–> Our historical and continuing relationship with Senior Housing may provide us opportunities to expand our business by acquiring new leaseholds from Senior Housing. –> The senior living services industry has experienced severe financial distress during the past few years. Many operators of nursing homes and assisted living facilities have been forced into bankruptcy. As a new company without any material debt, we are not burdened with financial difficulties of the types which currently burden some of our competitors. Our management team has been recently assembled within the past two years, and, although we believe it is experienced and highly talented, it does not have extensive experience working together. We expect we may expand our business with Senior Housing; however, Senior Housing is not obligated to provide us with opportunities to lease additional properties. We have no debt, but we do have large lease obligations and limited financeable assets; and many of our competitors have greater financial resources than us. For all of these reasons and others, we cannot provide you any assurance that we will be able to compete successfully for business in the senior living industry. TECHNOLOGY SYSTEMS

When we began operating senior living facilities for Senior Housing in July 2000 we created new internet based data processing and management information systems for our clinical, operational and financial information. These systems currently support over 1,000 widely distributed computers in a secure and stable working environment. Because they were built in 2000 and 2001 and are internet based, we believe our technology systems are among the most up-to-date and efficient systems currently in use in the senior living industry. Moreover, these systems were designed to be readily scalable to support our growth strategy. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, owners as well as tenants and operators of real estate may be required to investigate and clean up hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. Under our leases, we have also agreed to indemnify Senior Housing for any such liabilities related to the leased facilities. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination, which lien may be senior in priority to our leases. We have reviewed some preliminary environmental surveys of the facilities we lease and the properties we expect to acquire in the pending acquisition. Based upon that review we do not believe that any of these properties are subject to any material environmental contamination. However, no assurances can be given that: –> a prior owner, operator or occupant of our leased facilities or the properties we intend to acquire did not create a material environmental condition not known to us which might have been revealed by more in-depth study of the properties; and –> future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in the imposition of environmental liability upon us. EMPLOYEES As of January 31, 2002, we had approximately 6,000 employees, including 5,500 full time equivalents. Approximately 650 employees, including 570 full time equivalents, are represented under seven

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collective bargaining agreements, all of which have remaining terms of two to three years. We have no other employment agreements. We believe relations with our union and non-union employees to be good. The five facilities which we expect to acquire in the pending acquisition are staffed by approximately 250 employees, some of whom are represented by a union; we expect to offer to employ these people when this acquisition closes. LEGAL PROCEEDINGS We have a limited operating history and are not currently a party to any legal proceedings, and we are not aware of any material legal proceeding affecting our facilities for which we may become liable. We may become subject to legal actions and regulatory investigations arising in the normal course of our business. We cannot assure you that such actions or investigations would not have a material adverse effect on our business or financial results.

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Management
The following sets forth the names, ages and positions of our executive officers and directors as of February 1, 2002:
Name Age Position

Evrett W. Benton Rosemary Esposito, RN

53 58

President, Chief Executive Officer and Secretary Senior Vice President, Chief Operating Officer

Gretchen A. Holtz, RN Maryann Hughes Bruce J. Mackey Jr. Barry M. Portnoy Gerard M. Martin Bruce M. Gans, M.D. John L. Harrington Arthur G. Koumantzelis EXECUTIVE OFFICERS

59 54 31 56 67 55 65 71

Vice President, Chief Clinical Officer Vice President, Director of Human Resources Treasurer, Chief Financial Officer and Assistant Secretary Managing Director (term will expire in 2002) Managing Director (term will expire in 2003) Director (term will expire in 2004) Director (term will expire in 2002) Director (term will expire in 2003)

Evrett W. Benton has been our President, Chief Executive Officer and Secretary since our formation. Mr. Benton served as President and Chief Executive Officer of FSQ, Inc. since it began operations in January 2000 until our acquisition of FSQ, Inc. in January 2002. From November 1999 until FSQ, Inc. began operations, Mr. Benton served as a business and legal consultant to Reit Management and Senior Housing in connection with their negotiations with former tenants of Senior Housing who filed for bankruptcy. From November 1997 to November 1999, Mr. Benton was an independent consultant working in the healthcare and real estate industries. From December 1991 to November 1997, Mr. Benton was Executive Vice President, Chief Administrative Officer, General Counsel and Secretary of GranCare, Inc., a publicly owned healthcare services company and a predecessor to Mariner Post-Acute Network, Inc. Prior to December 1991, Mr. Benton was the Managing Partner of the Los Angeles office of the law firm of Andrews & Kurth LLP. Mr. Benton has been a Vice President of Reit Management since September 2000. Rosemary Esposito, RN , has been our Senior Vice President and Chief Operating Officer since our spin-off from Senior Housing on December 31, 2001. Ms. Esposito served as Senior Vice President and Chief Operating Officer of FSQ, Inc. from February 2001 until our acquisition of FSQ, Inc. in January 2002. Between June 1999 and February 2001, Ms. Esposito was Vice President and Chief Operating Officer of Lenox Healthcare, Inc., a privately owned nursing home chain headquartered in Pittsfield, Massachusetts, that filed for Chapter 11 bankruptcy in November 2000. From December 1996 to June 1999, Ms. Esposito was Vice President of Clinical Services of Lenox Healthcare, Inc. Prior to 1996, Ms. Esposito held senior management positions with Berkshire Health Systems, Inc., an acute care medical center and multi-facility, long-term care company headquartered in Pittsfield, Massachusetts.

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Gretchen A. Holtz, RN , has been our Vice President and Chief Clinical Officer since our spin-off from Senior Housing on December 31, 2001. Ms. Holtz served as Vice President and Chief Clinical Officer of FSQ, Inc. from May 2000 until our acquisition of FSQ, Inc. in January 2002. From 1999 until May 2000, Ms. Holtz was a private consultant for various healthcare insurance and referral businesses specializing in elder care services. From 1997 to 1999, Ms. Holtz was Vice President for Clinical Services at the Frontier Group, Inc., a Boston, Massachusetts based private company in the nursing home business. From 1994 to November 1997, Ms. Holtz was National Director of Subacute Services for Sun Healthcare Group, Inc., a publicly owned company which provided healthcare services that filed for Chapter 11 bankruptcy in October 1999. Maryann Hughes has been our Vice President and Director of Human Resources since our spin-off from Senior Housing on December 31, 2001. Ms. Hughes served as a Vice President and Director of Human Resources for FSQ, Inc. from May 2000 until our acquisition of FSQ, Inc. in January 2002. Between 1996 and May 2000, Ms. Hughes was Senior Vice President of Human Resources for Olympus Healthcare Group, Inc., a privately owned company headquartered in Waltham, Massachusetts in the business of operating nursing homes and rehabilitation hospitals. From 1994 to 1996, Ms. Hughes was Senior Vice President of Health Alliance, a partnership of two acute care hospitals, two nursing homes and other medical services businesses based in Leominster, Massachusetts. Bruce J. Mackey Jr. has been our Treasurer, Chief Financial Officer and Assistant Secretary since our spin-off from Senior Housing on December 31, 2001. Mr. Mackey served as Treasurer and Chief Financial Officer of FSQ, Inc. from October 2001 until our acquisition of FSQ, Inc. in January 2002. From December 1997 to July 2000, Mr. Mackey was a Controller of Reit Management and from July 2000 to October 2001 he was an Assistant Vice President of Reit Management. Mr. Mackey was elected a Vice President of Reit Management in October 2001. From 1992 to December 1997, Mr. Mackey was an accountant with the firm of Arthur Andersen LLP. Mr. Mackey is a certified public accountant. DIRECTORS Barry M. Portnoy has been one of our directors since our formation; he was designated a Managing Director in January 2002. Mr. Portnoy has been one of the Managing Trustees of Senior Housing, HRPT Properties and Hospitality Properties, since each began business in 1999, 1986 and 1995, respectively. Mr. Portnoy has been a director and 50% owner of Reit Management since it began business in 1986. Mr. Portnoy was a director and 50% owner of FSQ, Inc. since it began business in January 2000 until it was acquired by us in January 2002. From 1978 through

March 1997, Mr. Portnoy was a partner of the law firm of Sullivan & Worcester LLP, our counsel, and he was Chairman of that firm from 1994 through March 1997. Gerard M. Martin has been one of our directors since our formation; he was designated a Managing Director in January 2002. Mr. Martin has been one of the Managing Trustees of Senior Housing, HRPT Properties and Hospitality Properties since each began business in 1999, 1986 and 1995, respectively. Mr. Martin has been a director and 50% owner of Reit Management since it began business in 1986. Mr. Martin was a director and 50% owner of FSQ, Inc. since it began business in January 2000 until it was acquired by us in January 2002. Bruce M. Gans, M.D. has been one of our directors since our spin-off from Senior Housing on December 31, 2001. Dr. Gans has been Executive Vice President and Chief Medical Officer at Kessler Rehabilitation Corporation, a provider of healthcare services headquartered in West Orange, New Jersey, since June 1, 2001. From April 1999 to May 31, 2001, Dr. Gans was Senior Vice President for

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Continuing Care and Chairman of Physical Medicine and Rehabilitation at North Shore Long Island Jewish Health System, a provider of healthcare services headquartered in New Hyde Park, New York, and Professor of Physical Medicine and Rehabilitation at the Albert Einstein College of Medicine in New York City. From 1989 through March 1999, Dr. Gans was a Professor and Chairman of the Department of Physical Medicine and Rehabilitation at Wayne State University and a Senior Vice President of the Detroit Medical Center, both located in Detroit, Michigan. Dr. Gans was a trustee of HRPT Properties from October 1995 through October 11, 1999. Dr. Gans served as a trustee of Senior Housing from October 12, 1999 until December 31, 2001, when he resigned to join our Board. John L. Harrington has been one of our directors since our spin-off from Senior Housing on December 31, 2001. Mr. Harrington has been Executive Director and Trustee of the Yawkey Foundation and a Trustee of the JRY Trust for over five years, and during that period until February 27, 2002, was the Chief Executive Officer of the Boston Red Sox Baseball Club. The Yawkey Foundation and JRY Trust are not-for-profit charitable foundations headquartered in Dedham, Massachusetts. Mr. Harrington was a trustee of HRPT Properties from 1991 through August 1995 and has been a trustee of Hospitality Properties and Senior Housing since those companies became publicly owned in 1995 and 1999, respectively, through the present. Arthur G. Koumantzelis has been one of our directors since our spin-off from Senior Housing on December 31, 2001. Mr. Koumantzelis has been the President and Chief Executive Officer of Gainesborough Investments LLC, a private investment company, located in Lexington, Massachusetts since June 1998. Since April 2000, he has served as the President, Chief Executive Officer and a member of the Board of Directors of Peponi Investments, LLC, a private company, also located in Lexington, Massachusetts. In addition, Mr. Koumantzelis has served as Treasurer and has been a 33% stockholder of Mosaic Communications Group, LLC, a media company, since December 2000. He is also a Trustee of Milo Trust, Milo Franklin Trust and Lemoni Trust and a member of the Board of Directors of Wang Healthcare Information Systems, Inc.; all of these private companies are headquartered in Massachusetts. From 1990 until February 1998, Mr. Koumantzelis was Senior Vice President and Chief Financial Officer of Cumberland Farms, Inc., a private company headquartered in Canton, Massachusetts, engaged in the convenience store business and the distribution and retail sale of gasoline. Mr. Koumantzelis was a trustee of HRPT Properties from 1992 to 1995, and he has been a trustee of Hospitality Properties and Senior Housing since they became publicly owned in 1995 and 1999, respectively, through the present. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has three committees. Audit Committee The audit committee evaluates the performance of, and make recommendations to the Board of Directors as to the selection of, our independent auditors; and it reviews our published financial statements and the adequacy of our internal accounting controls. The members of the audit committee are Messrs. Gans, Harrington and Koumantzelis, each of whom are independent directors as defined by the American Stock Exchange. The audit committee operates under a written charter. Mr. Koumantzelis is the current Chairman of our audit committee. Compensation Committee Our entire Board of Directors serves as our compensation committee to review the performance and establish the compensation of our executive officers. The compensation committee also serves as the administrator of our stock option and stock incentive plan described below.

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Quality of Care Committee

Our quality of care committee consists of Dr. Gans and Mr. Martin. The quality of care committee periodically meets with our officers and other employees to evaluate the quality of services provided to residents at our facilities. Dr. Gans is the current Chairman of our quality of care committee. COMPENSATION OF DIRECTORS We pay each director other than Messrs. Martin and Portnoy an annual fee of $15,000, plus a fee of $500 for each Board meeting attended. In addition, commencing in 2002, each director will automatically receive an annual grant of 1,000 of our common shares at the first meeting of the Board of Directors following each annual meeting of shareholders. Board members are not separately compensated for serving on Board committees; however, we pay the Board member serving as Chairman of our audit committee an additional annual fee of $5,000, and the Board member serving as Chairman of our quality of care committee an additional annual fee of $10,000. We reimburse directors for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or Board committees on which they serve. Messrs. Portnoy and Martin do not receive any cash compensation as directors or as members of Board committees, but they do receive the annual share grants and they are reimbursed for their expenses. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our entire Board of Directors serves as our compensation committee. None of our Board members are employees of ours or an employee of any of our subsidiaries. Our Managing Directors, Messrs. Portnoy and Martin, are owners, directors and employees of Reit Management. Messrs. Benton and Mackey, our President and Treasurer, respectively, are also officers and part-time employees of Reit Management. Messrs. Portnoy and Martin, our two Managing Directors, are Managing Trustees of Senior Housing, our landlord. All of our directors also serve as trustees of Senior Housing, except for Dr. Gans, who resigned as a trustee of Senior Housing upon completion of our spin-off. Messrs. Portnoy, Martin, Harrington and Koumantzelis are also trustees of Hospitality Properties; Messrs. Portnoy and Martin are also Managing Trustees of HRPT Properties; and Messrs. Harrington and Koumantzelis and Dr. Gans formerly served as trustees of HRPT Properties. Reit Management is the investment manager for Senior Housing, Hospitality Properties and HRPT Properties, and is a party to a shared services agreement with us. Messrs. Portnoy and Martin also own the building where we rent space for our headquarters. For more information about possible relationships which might impact compensation decisions see below at "Certain relationships".

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EXECUTIVE COMPENSATION Our five highest paid executive officers and the amount of their annual cash compensation are as follows:
Position Annual Cash Compensation

Evrett W. Benton Rosemary Esposito, RN Gretchen A. Holtz, RN Maryann Hughes Bruce J. Mackey Jr.

President, Chief Executive Officer and Secretary Senior Vice President, Chief Operating Officer Vice President, Chief Clinical Officer Vice President, Director of Human Resources Treasurer, Chief Financial Officer and Assistant Secretary

$ $ $ $ $

420,000 255,000 157,500 157,500 120,000

We have no employment agreements with any of our executive officers. Messrs. Benton and Mackey each devote a substantial majority of their business time to providing services to us as officers and employees; however, Messrs. Benton and Mackey also devote some of their business time to providing services to Reit Management unrelated to us. Therefore, in addition to receiving compensation paid by us, Reit Management pays each of Messrs. Benton and Mackey compensation for their services to Reit Management. Neither of Messrs. Benton or Mackey have employment agreements with us or Reit Management. Except with respect to incentive share awards under Senior Housing's 1999 Incentive Share Award Plan, neither we nor Senior Housing paid during 2000 and 2001, compensation to our executive officers. Their compensation for services to us and Senior Housing was paid by FSQ, Inc. and Reit Management. In each of 2000 and 2001, Mr. Benton, our President and Chief Executive Officer, received a grant of 2,000 restricted shares of Senior Housing, having a value of $17,250 and $26,040, respectively, based upon the share closing prices for Senior

Housing's common shares on the New York Stock Exchange on the grant dates. At December 31, 2001, the 4,000 incentive shares granted to Mr. Benton had a value of $55,640, based upon a $13.91 per share closing price for Senior Housing's common shares on the New York Stock Exchange on that date. Each share award provided that one-third of the award vested immediately upon grant and one-third vests on the first and second anniversaries of the grant. Under Senior Housing's plan, if Mr. Benton ceases to be an officer or employee of Reit Management during the vesting period, the Senior Housing common shares which have not yet vested may be repurchased by Senior Housing for nominal consideration. Vested and unvested common shares under Senior Housing's plan are entitled to distributions paid by Senior Housing. OUR STOCK OPTION AND STOCK INCENTIVE PLAN We have adopted the Five Star Quality Care, Inc. 2001 Stock Option and Stock Incentive Plan, or the Plan. Under the Plan, we are authorized to grant our employees, officers, directors and other individuals rendering services to us and our subsidiaries equity based awards, including incentive stock options, nonqualified stock options, common shares, restricted common shares and stock appreciation rights. The Plan is administered by our Board compensation committee. The Plan provides that the compensation committee has the authority to select the participants and determine the terms of the stock options and other awards granted under the Plan. An incentive stock option is not transferable by the recipient except by will or by the laws of descent and distribution. Nonqualified stock options and other awards are transferable only to the extent

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provided in the agreement relating to such option or award. In the event that termination of employment is due to death or disability, the stock option is exercisable for a maximum of 12 months after such termination. The aggregate number of shares which may be issued under the Plan is 650,000. No awards have been made to date under the Plan and none are expected to be made before the first meeting of the Board of Directors following the annual meeting of our shareholders in 2002. If you want more information about this plan you should review the copy of the Plan which has been filed as an exhibit to the registration statement of which this prospectus is a part. OUR SHARED SERVICES AGREEMENT WITH REIT MANAGEMENT In order that we may have the benefit of certain shared services from Reit Management, including certain services that Reit Management historically provided to FSQ, Inc., we entered a shared services agreement with Reit Management. The following is a summary of the material provisions of the shared services agreement between us and Reit Management. If you want more information, you should read the entire shared services agreement, which has been filed as an exhibit to the registration statement of which this prospectus is part. General Under this agreement, Reit Management provides, or assists us with, certain services relating to human resources, management information systems, tax, accounting, property maintenance and repairs, investor relations, acquisitions, dispositions, capital markets advice, office support, cash management, SEC compliance and supervision of our relationship with Marriott. Compensation to Reit Management For Reit Management's services rendered to us pursuant to the shared services agreement, we pay Reit Management a fee equal to 0.6% of our total revenues. The fee is paid monthly in advance based upon the prior month's revenues. We also reimburse Reit Management for its reasonable out-of-pocket expenses. Subordination of Reit Management fees to Senior Housing rent No fee is paid to Reit Management if any rent we owe Senior Housing is past due or if the fee payment would leave us with insufficient cash, credit facilities or current accounts receivable to make our next scheduled rent payment under our leases with Senior Housing. Unpaid fees accrue, together with interest at the prime rate, and are payable when the condition preventing their payment is no longer in effect or upon termination of, or the occurrence of certain events of default by us under, the shared services agreement. The fees due Reit Management are not subordinated to any of our other obligations. Conflicts of interest with Senior Housing We have acknowledged that Reit Management may continue to serve as the investment manager for Senior Housing and we have agreed that, regarding issues and in circumstances where there is a conflict of interest between us and Senior Housing, Reit Management will serve as the investment manager for Senior Housing and will not be required to consider our interests.

Non-competition with Reit Management We have agreed to afford any public real estate entity Reit Management manages during the term of the shared services agreement the opportunity to acquire or finance any real estate investments of the types in which such entity invests before we do.

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Terminations The initial term of the agreement expires on December 31, 2002, and it renews automatically from year to year unless either we or Reit Management terminate due to default, or provide written notice of termination at least 90 days prior to the termination date. Indemnification, default and damages We have agreed to indemnify Reit Management, its owners, directors, officers and employees for any damages, liabilities, losses or out-of-pocket expenses incurred by them in the course of performing services other than any such damage, liability or loss resulting from Reit Management's gross negligence or bad faith. In the event of a termination because of our default we must pay the fees due Reit Management for the remainder of the current term. In the event of Reit Management's default, our remedy is limited to termination of the agreement and we cannot collect damages, except when Reit Management has taken action willfully and in bad faith.

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Principal shareholders
The following table sets forth certain information regarding beneficial ownership of our common shares as of February 28, 2002 and as adjusted for this offering (assuming the underwriters do not exercise their over allotment option) of: –> each named executive officer; –> each of our directors; –> all directors and executive officers as a group; and –> each person or group known to us to be the beneficial owner of more than 5% of our common shares based on information available to us on February 28, 2002. Unless otherwise noted, the address of each beneficial owner listed on the table is c/o Five Star Quality Care, Inc., 400 Centre Street, Newton, Massachusetts 02458, and each beneficial owner has sole voting and investing power over the shares shown as beneficially owned except to the extent authority is shared by spouses under applicable law and except as set forth in the footnotes to the table.
Percentage of Shares Outstanding Number of Shares Before Offering After Offering

Name

Barry M. Portnoy(1) Gerard M. Martin(1) Bruce M. Gans, MD John L. Harrington Arthur G. Koumantzelis Evrett W. Benton All directors and executive officers as a group *

172,371.9 172,371.9 190 150 225.6 405 310,732.6

3.7 % 3.7 % * * * * 6.7 %

2.3 % 2.3 % * * * * 4.1 %

Less than 1% (1) Mr. Martin is the sole stockholder of a corporation which owns 12,371.9 common shares. Mr. Portnoy is the sole stockholder of a separate corporation which owns 12,371.9 common shares. Messrs. Martin and Portnoy are each 50% owners and directors of Reit Management, the investment manager to Senior Housing. Senior Housing, of which Messrs. Martin and Portnoy are Managing Trustees, owns 35,000 common shares. Under some interpretations of applicable law, Messrs. Martin and Portnoy may be deemed to have beneficial ownership of our shares owned by Senior Housing; however, Messrs. Martin and Portnoy disclaim beneficial ownership of the common shares owned by Senior Housing. The numbers in this table includes these 35,000 shares.

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Certain relationships
Our creation was, and our continuing business operations are, subject to possible conflicts of interest. These conflicts may have caused, and in the future may cause, our business to be adversely affected. These conflicts and their possible adverse effects upon us include the following: –> All of the persons serving as our directors were trustees of Senior Housing at the time we were created, and four of our directors remain trustees of Senior Housing. We lease 87 facilities from Senior Housing. We believe that our lease terms with Senior Housing are commercially reasonable. Nonetheless, it is possible that, if these leases had been negotiated on an arm's length basis, the rent and other lease terms might be more favorable to us. We also believe that our historical and continuing relationships with Senior Housing will provide us with a competitive advantage in locating business expansion opportunities. Nonetheless, we must afford Senior Housing, HRPT Properties and Hospitality Properties the opportunity to acquire or finance any real estate investments of the type in which Senior Housing, HRPT Properties and Hospitality Properties, respectively, invests before we do. Also, future business dealings between Senior Housing and us could be on less favorable terms than would be possible if there were no historical or continuing management relationships between Senior Housing and us. –> As part of the spin off transaction, HRPT Properties purchased 7,163.7 of our shares for $7.26 per share. HRPT Properties purchased these shares so that it would make a distribution of our shares which it received as a shareholder of Senior Housing on a round lot basis of one of our shares for every 100 shares of HRPT Properties owned. The price paid to us by HPRT Properties was the average of the high and low trading prices of our shares on the day of the spin off, and we believe it represented fair value at that time. Nonetheless, were it not for the relationships among us, Senior Housing and HRPT Properties, it is possible that we may have been able to realize a higher price for this sale. –> Messrs. Portnoy and Martin are our two Managing Directors, and they are the Managing Trustees of Senior Housing. Messrs. Portnoy and Martin formed FSQ, Inc. to manage properties for Senior Housing. Messrs. Portnoy and Martin each received 125,000 of our shares as consideration in the FSQ, Inc. merger. The Board of Trustees of Senior Housing received an opinion dated December 5, 2001 from UBS Warburg LLC, an internationally recognized investment banking firm and one of the underwriters of this offering, to the effect that, as of the date of the opinion and based on and subject to various assumptions, matters considered and limitations described in the opinion, the consideration provided for in the merger was fair, from a financial point of view, to us. The terms of this merger were approved by Senior Housing's trustees other than Messrs. Portnoy and Martin. Nonetheless, it is possible that, if this merger had been negotiated on an arm's length basis, different terms more favorable to us might have been achieved. –> Our Chief Executive Officer and our Chief Financial Officer are currently also officers and employees of Reit Management. These officers devote a substantial majority of their business time to our affairs and the remainder of their business time to Reit Management's business which is separate from us. The current compensation which we pay to these officers reflects their division of business time. Periodically hereafter these individuals may devote a larger percentage of their time to our or Reit Management's affairs and the compensation they receive from us may become disproportionate to their efforts on our behalf. Also, because of this dual employment arrangement we may have to compete with Reit Management for the time and attention of these officers. –> Messrs. Portnoy and Martin own Reit Management. Reit Management is the investment manager for Senior Housing, HRPT Properties and Hospitality Properties, and has other business interests. We have entered a shared services agreement with Reit Management under which Reit Management

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provides certain administrative services to us similar to the services it provided to FSQ, Inc. before our acquisition of FSQ, Inc. as well as other services which we may require. Under this shared services agreement, we pay Reit Management a fee equal to 0.6% of our total revenues. On a pro forma basis, after giving effect to the spin-off, the new lease for 31 Marriott facilities and the pending acquisition of five facilities, this fee would be $3.1 million for the year ended December 31, 2001. We believe we do, and in the future will, receive fair value for the fee paid to Reit Management. The shared services agreement is terminable upon at least 90 days notice prior to the expiration

date of the then current term. However, despite our beliefs and this termination provision, equivalent services might be available from parties other than Reit Management on more favorable terms to us, including for a lesser fee. Also, the fact that Reit Management has responsibilities to other entities, including our landlord, Senior Housing, could create conflicts; and, in the event of such conflicts between Senior Housing and us, the shared services agreement allows Reit Management to prefer its responsibilities to Senior Housing. See "Management—Our Shared Services Agreement with Reit Management". –> Messrs. Portnoy and Martin own the building in which our headquarters is located. As a result of our acquisition of FSQ, Inc. we became obligated for a lease in this building. This lease expires in 2011 and requires rent of $531,069 per year, subject to annual increases of $16,093 per year. We believe that the terms of this lease are commercially reasonable. However, this lease was negotiated at a time when Messrs. Portnoy and Martin simultaneously owned the building and FSQ, Inc., and, accordingly, it was not done on an arm's length basis. If the lease were negotiated on an arm's length basis it is possible that the lease might have been more favorable to FSQ, Inc., and to us after the merger, including for a lesser rent. –> During 2001 FSQ, Inc. provided management services to Senior Housing. FSQ, Inc. received fees under the management agreements of $11.1 million. As a result of our acquisition of FSQ, Inc., we have terminated these management agreements. –> Until March 31, 1997, Mr. Portnoy was a partner in the law firm Sullivan & Worcester LLP, our counsel and counsel to Senior Housing, HRPT Properties, Hospitality Properties, FSQ, Inc., Reit Management and certain of their affiliates. Mr. Portnoy receives payments from Sullivan & Worcester LLP in respect of his retirement.

Federal income tax considerations for non-U.S. persons
The following summary of federal income tax considerations for non-U.S. persons is based on existing law, and is limited to investors who own our common shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under the federal income tax law, for example if you are: –> a bank, life insurance company, regulated investment company, or other financial institution, –> a broker or dealer in securities or foreign currency, –> a person who has a functional currency other than the U.S. dollar, –> a person who acquires our common shares in connection with employment or other performance of services, –> a person subject to alternative minimum tax, –> a controlled foreign corporation, a passive foreign investment company, or a foreign personal holding company,

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–> a person who owns our common shares as part of a straddle, hedging transaction, constructive sale transaction, or conversion transaction, or –> except as specifically described in the following summary, a tax-exempt entity or an expatriate. This summary is based on applicable of the Internal Revenue Code, or IRC, provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. We have not sought a ruling from the IRS with respect to this offering, and we can not assure you that the IRS or a court will agree with the statements made in this summary. In addition, the following summary is not exhaustive of all possible tax consequences, and does not discuss any state, local or foreign tax consequences. For all these reasons, we urge you to consult with a tax advisor about the federal, state, local and non-U.S. income tax and other tax consequences of your acquisition, ownership and disposition of our common shares. For purposes of this summary, a non-U.S. person for federal income tax purposes is a person other than: –>

a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws, –> a corporation, partnership or other entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations, –> an estate the income of which is subject to federal income taxation regardless of its source, or –> a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996 to the extent provided in Treasury regulations, whose status as a non-U.S. person is not overridden by an applicable tax treaty. DISTRIBUTIONS AND DISPOSITIONS Distributions on our common shares At the present time, we do not expect to pay any dividends on our common shares. However, if we do later decide to do so, your tax consequences would generally be as follows. Dividends paid to you will be subject to withholding of federal income tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may obtain a refund of any excess amounts previously withheld by filing an appropriate claim for refund with the IRS. To claim the benefits of an income tax treaty, you are required to satisfy the applicable certification requirements, generally by executing an applicable IRS Form W-8 or substantially similar form. If the dividends paid to you are effectively connected with the conduct of a trade or business within the United States or, if a treaty so provides, attributable to a permanent establishment of a non-U.S. person within the United States, you will be exempt from withholding tax, provided you provide us or our paying agent with an applicable IRS Form W-8 or a substantially similar form containing your taxpayer identification number. Effectively connected dividend income will be subject to U.S. federal income tax on a net basis at applicable graduated rates. If you are a corporation with effectively

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connected dividend income you may be subject to an additional branch profits tax at a rate of 30% or a lower rate specified by an applicable income tax treaty. Dispositions of our common shares You will generally not be subject to United States federal income tax in respect of gain you recognize on your disposition of our common shares unless: –> the gain is effectively connected with a trade or business carried on within the United States (in which case the branch profits tax discussed above may also apply if you are a corporation) or the gain is attributable to a permanent establishment maintained in the United States if that is required by an applicable income tax treaty as a condition to subjecting you to United States income tax on a net basis; –> you are an individual and are present in the United States for 183 days or more in the taxable year of disposition and certain other tests are met; –> you are subject to tax pursuant to the provisions of the Code regarding the taxation of U.S. expatriates; or –> we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding such disposition or your holding period (in which case the branch profits tax discussed above may also apply if you are a corporation). However, your gain on a disposition of our common shares will not be subject to tax under this rule, if that class of common shares is "regularly traded" as defined by applicable Treasury regulations on an established securities market like the American Stock Exchange, and if you have at all times during the preceding five years owned 5% or less by value of that class of common shares. At this time, we believe that upon completion of our pending acquisition, we will likely become a "United States real property holding corporation" for federal income tax purposes, but can provide no assurance in this regard.

INFORMATION REPORTING AND BACKUP WITHHOLDING Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders in the circumstances discussed below. Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against your federal income tax liability, provided that you furnish the required information to the IRS. The current backup withholding rate is 30% for the calendar years 2002 and 2003, and is scheduled to gradually decrease to 28% by calendar year 2006. Distributions on our common shares paid to you during each calendar year, and the amount of tax withheld if any, will generally be reported to you and to the IRS. This information reporting requirement applies regardless of whether you were subject to withholding, or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions and other payments to you on our common shares may be subject to backup withholding, unless you have properly certified your non-U.S. person status on an IRS Form W-8 or substantially similar form. Similarly, information reporting and backup withholding will not apply to proceeds you receive upon the sale, exchange, redemption, retirement or other disposition of our common shares if you have properly certified your non-U.S. person status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that you receive upon the sale, exchange, redemption, retirement or other disposition of our common shares if you receive those proceeds through a broker's foreign office.

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Shares eligible for future sale
Upon completion of this offering, we will have 7,624,333 outstanding shares, assuming the issuance of 3,000,000 shares in this offering. Our shares being sold in this offering and substantially all of our currently outstanding shares will be freely transferable, except for shares held by persons that are "affiliates" as defined in the Securities Act of 1933. The Securities Act of 1933 generally defines affiliates as individuals or entities that control, are controlled by, or are under common control with us and may include our officers, directors and principal shareholders. Shares held by affiliates may only be sold pursuant to an effective registration statement under the Securities Act of 1933 or Rule 144 of the Securities Act of 1933. We cannot predict whether substantial amounts of our shares will be sold in the open market following this offering. Under our charter and applicable provisions of Maryland law our Board of Directors may authorize the issuance of an unlimited number of our shares without a vote of shareholders. Sales of substantial amounts of our shares in the public market, or the perception that substantial sales may occur, could adversely affect the market price of our shares.

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Description of capital stock
The following description of our capital stock and certain provisions of our charter and bylaws are summaries and are qualified by reference to our charter and our bylaws. Copies of these documents have been filed as exhibits to the registration statement of which this prospectus is a part. Common shares Upon completion of the offering, we will have only one class of common shares, $.01 par value per share, of which ten million shares will be authorized and 7,624,333 shares will have been issued. Our charter provides that our Board of Directors, without any action by the shareholders, may amend the charter to increase or decrease the number of our authorized common shares. All of our shares issued in the offering will be duly authorized, fully paid and non-assessable. The holders of common shares are entitled to one vote for each share held of record on our books for the election of directors and on all matters submitted to a vote of shareholders. The holders of common shares are entitled to receive ratably dividends, if any, when, as and if authorized by our Board of Directors out of assets legally available therefor, subject to any preferential dividend rights of any outstanding preferred shares. Upon our dissolution, liquidation or winding up, the holders of common shares are entitled to receive ratably our net assets available after the payment of all debts and other liabilities, subject to the preferential rights of any outstanding preferred shares. Holders of common shares have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common shares are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred shares that we may designate and issue in the future. Our charter authorizes our Board of Directors to reclassify any unissued common shares into other classes or series of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series. Our charter

and our bylaws contain certain provisions that could have the effect of delaying, deferring or preventing a change in our control. See "—Material provisions of Maryland law, our charter and bylaws" below for a description of these provisions. Preferred shares We have one million preferred shares authorized. Our Board of Directors is authorized, without further vote or action by the shareholders, to issue from time to time preferred shares in one or more series and to classify or reclassify any unissued preferred shares and to reclassify any previously classified but unissued preferred shares of any series. Prior to issuance of shares of each series, our Board of Directors is required by Maryland law and our charter to set, subject to the provisions of our charter regarding the restrictions on transfer of shares, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Our charter provides that our Board of Directors, without any action by the shareholders, may amend the charter to increase or decrease the number of our authorized preferred shares. The issuance of preferred shares could adversely affect the voting power of holders of common shares and the likelihood that such holders will receive dividend payments or payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control. We believe that the ability of our Board of Directors to issue one or more series of preferred shares provides us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that may arise. Transfer agent and registrar Our transfer agent and registrar for our common shares is EquiServe Trust Company, N.A.

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Material provisions of Maryland law, our charter and bylaws
We are organized as a Maryland corporation. The following is a summary of our charter and bylaws and several provisions of Maryland law. Because it is a summary, it does not contain all the information that may be important to you. If you want more information, you should read our entire charter and bylaws, copies of which we have filed as exhibits to the registration statement of which this prospectus is a part, or refer to the provisions of applicable Maryland corporate law summarized below. Restrictions on share ownership and transfer Our charter restricts the amount of shares that shareholders may own. These restrictions are intended to assist Senior Housing with REIT compliance under the IRC, and otherwise to promote our orderly governance. All certificates representing our shares will bear a legend referring to these restrictions. Our charter provides that no person or group of persons acting in concert may own, or be deemed to own by virtue of the attribution provisions of the IRC, more than 9.8% of the number or value of any class or series of our outstanding shares of capital stock. Any person who acquires, or attempts or intends to acquire, actual or constructive ownership of shares of our capital stock that will or may violate this 9.8% ownership limitation must give notice to us and provide us with other information that we may request. The ownership limitations in our charter are effective against all of our shareholders. However, with the written consent of Senior Housing, our Board of Directors may grant an exemption from the ownership limitation if it is satisfied that: (i) the shareholder's ownership will not cause us or any of our subsidiaries that are tenants of Senior Housing to be deemed a "related party tenant" under the IRC rules applicable to REITs; (ii) the shareholder's ownership will not cause a default under any lease we have outstanding; and (iii) the shareholder's ownership is otherwise in our interest as determined by our Board of Directors in the exercise of its business judgment. If a person attempts a transfer of our shares in violation of the ownership limitations described above, then that number of shares which would cause the violation will be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries designated by us. The prohibited owner will not acquire any rights in the shares held in trust, will not benefit economically from ownership of the shares held in trust, will have no rights to distributions and will not possess any rights to vote the shares held in trust. This automatic transfer will be deemed to be effective as of the close of business on the business day prior to the date of the violative transfer. Within 20 days after receiving notice from us that shares have been transferred to the trust, the trustee will sell the shares held in the trust to a person selected by the trustee whose ownership of the shares will not violate the ownership limitations. Upon this sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the prohibited owner and to the charitable beneficiary as follows: –>

The prohibited owner will receive the lesser of: (1) the net price paid by the prohibited owner for the shares or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price of the shares on the day of the event causing the shares to be transferred to the trust; and

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(2) the net price received by the trustee from the sale of the shares held in the trust. –> Any net sale proceeds in excess of the amount payable to the prohibited owner shall be paid to the charitable beneficiary. If, prior to our discovery that shares of our capital stock have been transferred to the trust, a prohibited owner sells those shares, then: –> those shares will be deemed to have been sold on behalf of the trust; and –> to the extent that the prohibited owner received an amount for those shares that exceeds the amount that the prohibited owner was entitled to receive from a sale by the trustee, the prohibited owner must pay the excess to the trustee upon demand. Also, shares of capital stock held in the trust will be offered for sale to us, or our designee, at a price per share equal to the lesser of: –> the price per share in the transaction that resulted in the transfer to the trust or, in the case of a devise or gift, the market price at the time of the devise or gift; and –> the market price on the date we or our designee accepts the offer. We will have the right to accept the offer until the trustee has sold the shares held in the trust. The net proceeds of the sale to us will be distributed similar to any other sale by the trustee. Every owner of 5% or more of any class or series of our shares may be required to give written notice to us within 30 days after the end of each taxable year stating the name and address of the owner, the number of shares of each class and series of our shares which the owner beneficially owns, and a description of the manner in which those shares are held. In addition, each shareholder is required to provide us upon demand with any additional information that we may request in order to assist us and Senior Housing in its determination of its status as a REIT and to determine and ensure compliance with the foregoing share ownership limitations. The restrictions described above will not preclude the settlement of any transaction entered into through the facilities of the American Stock Exchange or any other national securities exchange or automated inter-dealer quotation system. Our charter provides, however, that the fact that the settlement of any transaction occurs will not negate the effect of any of the foregoing limitations and any transferee in this kind of transaction will be subject to all of the provisions and limitations described above. These ownership limitations could have the effect of delaying, deferring or preventing a takeover or other transaction in which holders of some, or a majority, of our common shares might receive a premium for their shares over the then prevailing market price or which such holders might believe to be otherwise in their best interest. Possible liability of shareholders for breach of restrictions on ownership Our facility leases and our shared services agreement are terminable by Senior Housing and Reit Management, respectively, in the event that any shareholder or group of shareholders acting in concert becomes the owner of more than 9.8% of our voting stock without Senior Housing's consent. If a breach of the ownership limitations results in a lease default, the shareholders causing the default may become liable to us or to our other shareholders for damages. These damages may be in addition to the loss of beneficial ownership and voting rights, the transfer to a trust and the forced sale of excess shares described above. These damages may be for material amounts.

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Directors Our charter and bylaws provide that our Board of Directors establishes the number of directors. However, there may not be less than the minimum number required by Maryland law nor more than seven directors. In the event of a vacancy, a majority of the remaining directors will fill the vacancy and the director elected to fill the vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred. Our charter divides our Board of Directors into three classes. The initial term of the first class will expire in 2002; the initial term of the second class will expire in 2003; and the initial term of the third class will expire in 2004. Beginning in 2002, shareholders will elect directors of each class for three-year terms upon the expiration of their current terms. Shareholders will elect only one class of directors each year. There is no cumulative voting in the election of directors. Consequently, at each annual meeting of shareholders, a majority of the votes entitled to be cast will be able to elect all of the successors of the class of directors whose term expires at that meeting. We believe that classification of our Board will help to assure the continuity of our business strategies and policies. However, our classified Board will also have the effect of making the replacement of our incumbent directors more time consuming and difficult. At least two annual meetings of shareholders are generally required to effect a change in a majority of our Board of Directors. Our charter provides that a director may be removed only for cause by the affirmative vote of at least 75% of the shares entitled to vote in the election of directors. This provision precludes shareholders from removing incumbent directors unless they can obtain a substantial affirmative vote of shares. Advance notice of director nominations and other business Our bylaws provide that nominations of persons for election to our Board of Directors and other business may only be considered at our shareholders meetings if the nominations or other business are included in the notice of the meeting, made or proposed by our Board of Directors or made or proposed by a shareholder who: –> is a shareholder of record at the time of giving notice of the nomination or the business to be considered; –> is a shareholder of record entitled to vote at the meeting at which the nomination or business is to be considered; –> is a shareholder of record at the time of the meeting and physically present in person or by proxy at the meeting to answer questions about the nomination or business; and –> has complied in all respects with the advance notice provisions for shareholder nominations and other business set forth in our bylaws. Under our bylaws, a shareholder's notice of nominations for director or business to be transacted at an annual meeting of shareholders must be delivered to our secretary at our principal office not later than the close of business on the 90th day and not earlier than the close of business on the 120th day prior to the first anniversary of the date of mailing of our notice for the preceding year's annual meeting. In the event that the date of mailing of our notice of the annual meeting is advanced or delayed by more than 30 days from the anniversary date of the mailing of our notice for the preceding year's annual meeting, a shareholder's notice must be delivered to us not earlier than the close of business on the 120th day prior to the mailing of notice of such annual meeting and not later than the close of business on the later of: (1) the 90th day prior to the date of mailing of the notice for an annual

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meeting, or (2) the 10th day following the day on which we first make a public announcement of the date of mailing of our notice for such meeting. The public announcement of a postponement of the mailing of the notice for an annual meeting or of an adjournment or postponement of an annual meeting to a later date or time will not commence a new time period for the giving of a shareholder's notice. If the number of directors to be elected to our Board of Directors at a shareholders meeting is increased and we make no public announcement of such action or do not specify the size of the increased Board of Directors at least 100 days prior to the first anniversary of the date of mailing of notice for our preceding year's annual meeting, a shareholder's notice also will be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is delivered to our secretary at our principal office not later than the close of business on the 10th day

following the day on which such public announcement is made. This provision does not apply to new directors who are elected by the Board of Directors to fill a vacancy, including a vacancy created by Board action which increases the number of directors. For special meetings of shareholders, our bylaws require a shareholder who is nominating a person for election to our Board of Directors at a special meeting at which directors are to be elected to give notice of such nomination to our secretary at our principal office not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of: (1) the 90th day prior to such special meeting or (2) the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting to a later date or time will not commence a new time period for the giving of a shareholder's notice as described above. Any notice from a shareholder of nominations for director or business to be transacted at a shareholders meeting must be in writing and include the following: –> as to each person nominated for election or reelection as a director, (1) the person's name, age, business and residence addresses, (2) the principal occupation or employment of the person for the past five years, (3) the class and number of shares beneficially owned or owned of record by the person and (4) all other information relating to the person that is required to be disclosed in solicitations of proxies for election of directors or otherwise required by Regulation 14A under the Securities Exchange Act of 1934, as amended, together with the nominee's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; –> as to other business that the shareholder proposes to bring before the meeting, a brief description of the business, the reasons for considering the business and any interest in the business of the shareholder giving the notice and of the beneficial owner, if any, on whose behalf the proposal is made; and –> as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, the name and address of the shareholder and beneficial owner and the class and number of each class of our shares of capital stock which (s) he or they own beneficially and of record. We may request that any shareholder proposing a nominee for election to our Board of Directors provide, within three business days of such request, written verification of the accuracy of the information submitted by the shareholder.

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Meetings of shareholders The Board of Directors determines the place and time of the annual meeting of shareholders. Special meetings of shareholders may only be called by the majority of the Board of Directors, the chairman of the Board of Directors, if any, the President, or, if permitted under Maryland law, upon the written request of shareholders entitled to cast not less than a majority of all the votes entitled to be cast at that meeting (or such greater proportion we are permitted to specify under Maryland law). Liability and indemnification of directors and officers Maryland corporate law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) acts committed in bad faith or active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. In accordance with Maryland corporate law, our charter authorizes us, to the maximum extent permitted by Maryland law, to obligate ourselves to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer or (ii) any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise, from and against any claim or liability to which he or she may become subject or which he or she may incur by reason of his or her status as a present or former director or officer of ours. Our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director, at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any employee or agent of ours or a predecessor of ours.

The Maryland corporation statutes require a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The Maryland corporation statutes permit a corporation to indemnify its directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceedings to which they may be made a party by reason of their service in those or other capacities unless it is established that: –> the act or omission of the director or officer was material to the matter giving rise to the proceedings and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty; –> the director or officer actually received an improper personal benefit in money, property or services; or –> in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

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However, under the corporation statutes of Maryland, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In accordance with Maryland corporate law, our bylaws require us, as a condition to advancing expenses, to obtain: –> a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by us as authorized by our bylaws; and –> a written statement by him or her or on his or her behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the standard of conduct was not met. Charter amendments and extraordinary transactions Under Maryland corporate law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless the transaction or amendment is declared advisable by the board of directors and then approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. Our charter provides for approval of such matters when they are first declared advisable by our Board of Directors and then approved by the affirmative vote of stockholders holding a majority of the shares entitled to vote on the matter (or such lesser proportion, as is permitted by Maryland law). Bylaw amendments As permitted under Maryland corporate law, our bylaws provide that our Board of Directors has the exclusive power to amend the bylaws. Business combinations The Maryland corporation statutes contain a provision which regulates business combinations with interested shareholders. Under Maryland corporate law, business combinations such as mergers, consolidations, share exchanges and the like between a Maryland corporation and an interested shareholder or an affiliate of the interested shareholder are prohibited for five years after the most recent date on which the shareholder becomes an interested shareholder. Under the statute, the following persons are deemed to be interested shareholders: –> any person who beneficially owns 10% or more of the voting power of the corporation's shares of capital stock; or –> an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting shares of the corporation. A person is not an interested shareholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. The board of directors may provide that its approval is subject to compliance with any terms and conditions determined by the board of directors.

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After the five-year prohibition period has ended, a business combination between a corporation and an interested shareholder or an affiliate of the interested shareholder must be recommended by the board of directors of the corporation and must receive the following shareholder approvals: –> the affirmative vote of at least 80% of the votes entitled to be cast; and –> the affirmative vote of at least two-thirds of the votes entitled to be cast by holders of shares other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or by an affiliate or associate of the interested shareholder. This shareholder approval is not required if the corporation's shareholders receive the minimum price set forth in the Maryland corporation statute for their shares of capital stock and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares of capital stock. The foregoing provisions of Maryland corporate law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the interested shareholder becomes an interested shareholder. Our Board of Directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Maryland corporation statutes described in the preceding paragraph, provided that the business combination is first approved by our Board of Directors, including the approval of a majority of the members of our Board of Directors who are not affiliates or associates of such person. This resolution, however, may be altered or repealed in whole or in part at any time. Control share acquisitions Maryland law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent that the acquisition is approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of capital stock owned by the acquiror, by employees who are also directors of the corporation or by officers of the corporation. Control shares are voting shares of capital stock which, if aggregated with all other shares of capital stock previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: –> one-tenth or more but less than one-third; –> one-third or more but less than a majority; or –> a majority or more of all voting power. An acquiror must obtain the necessary shareholder approval each time he acquires control shares in an amount sufficient to cross one of the thresholds noted above. Control shares do not include shares which the acquiring person is entitled to vote as a result of having previously obtained shareholder approval. A control share acquisition means the acquisition of control shares. There is a statutory list of exceptions from the definition of control share acquisition. A person who has made or proposes to make a control share acquisition, upon satisfaction of the conditions set forth in the statute, including an undertaking to pay expenses, may compel the board of directors of the corporation to call a special meeting of shareholders to be held within 50 days after demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the matter at a shareholders meeting.

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If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem any or all of the control shares for fair value determined as of the date of the last control share

acquisition by the acquiror or of any meeting of shareholders at which the voting rights of those shares are considered and not approved. The right of the corporation to redeem any or all of the control shares is subject to conditions and limitations listed in the statute. The corporation may not redeem shares for which voting rights have previously been approved. Fair value is determined without regard to the absence of voting rights for the control shares. If voting rights for control shares are approved at a shareholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. The fair value of the shares as determined for purposes of these appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply to the following: –> shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction; or –> acquisitions approved or exempted by a provision in the charter or bylaws of the corporation adopted before the acquisition of shares. Our bylaws contain a provision exempting any and all acquisitions by any person of our shares of capital stock from the control share acquisition statute. However, this provision may be amended or eliminated at any time in the future. Anti-takeover effect of Maryland law and of our charter and bylaws The following provisions in our charter and bylaws and in Maryland law could delay or prevent a change in our control: –> the limitation on ownership and acquisition of more than 9.8% of our shares of capital stock; –> the ability of our Board of Directors, without a shareholders' vote, to authorize and issue additional shares, including additional classes of shares with rights defined at the time of issuance; –> the classification of our Board of Directors into classes and the election of each class for three-year staggered terms; –> the requirement of cause and a 75% vote of shareholders for removal of our directors; –> the provision that the number of our directors may be fixed only by vote of our Board of Directors and that a vacancy on our Board of Directors may be filled by a majority of our remaining directors; –> the advance notice requirements for shareholder nominations for directors and other proposals; and –> the business combination provisions of Maryland law, if the applicable resolution of our Board of Directors is rescinded or if our Board of Directors' approval of a combination is not obtained.

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Underwriting
We and the underwriters for the offering named below have entered into an underwriting agreement concerning the shares being offered. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. UBS Warburg LLC, First Union Securities, Inc. and Jefferies & Company, Inc. are the representatives of the underwriters. Underwriters UBS Warburg LLC First Union Securities, Inc. (1) Jefferies & Company, Inc.
Number of Shares

Total (1) First Union Securities, Inc. is acting under the trade name Wachovia Securities.

3,000,000

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy from us up to an additional 450,000 shares at the public offering price less the underwriting discounts and commissions to cover these sales. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional 450,000 shares.
No Exercise Full Exercise

Per Share Total

$

$

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $500,000. Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the public offering price. If all the shares are not sold at the public offering price, the representatives may change the offering price and the other selling terms. We and each of our Managing Directors and Senior Housing have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable for shares of our common stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, without the prior written consent of UBS Warburg LLC, subject to limited exceptions. In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include stabilizing transactions, short sales and purchases to cover positions created by short sales. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while the

63

offering is in progress. These transactions may also include short sales and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Short sales may be either "covered short sales" or "naked short sales." "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the American Stock Exchange, in the over-the-counter market or otherwise. We have agreed to indemnify the several underwriters against liabilities, including liabilities under the Securities Act and to contribute to payments that the underwriters may be required to make in respect thereof.

Some of the underwriters engage in transactions with us and our subsidiaries in the ordinary course of business. UBS Warburg LLC delivered an opinion to the Board of Trustees of Senior Housing as to the fairness, from a financial point of view, to us of the consideration provided to Messrs. Martin and Portnoy in the FSQ, Inc. merger. UBS Warburg LLC also acted as Senior Housing's financial advisor in connection with the purchase of 31 Marriott facilities.

Legal matters
Sullivan & Worcester LLP, Boston, Massachusetts, is counsel to us in connection with this offering. Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, will issue an opinion about the legality of the shares we are offering. Dewey Ballantine LLP, New York, New York, is counsel to the underwriters in connection with this offering. Barry M. Portnoy was a partner of the firm of Sullivan & Worcester LLP until March 31, 1997, and is one of our Managing Directors, a Managing Trustee of Senior Housing and a director and 50% owner of Reit Management. Sullivan & Worcester LLP represents Senior Housing, Reit Management and their affiliates on various matters.

64

Experts
The consolidated financial statements of Five Star Quality Care, Inc. at December 31, 2001 and 2000, and for the year ended December 31, 2001 and the period April 27, 2000 (inception) through December 31, 2000, the combined financial statements and schedule of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network, Inc.) at December 31, 2000 and 1999 and for the years then ended, the consolidated financial statements of ILM II Senior Living, Inc. and subsidiary at August 31, 2000 and for each of the two years in the period ended August 31, 2000 and the financial statements of ILM II Lease Corporation at August 31, 2000, and for each of the two years in the period ended August 31, 2000, all appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The combined financial statements and schedule of the Forty-Two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. at December 31, 2000 and 1999, and for each of the years in the two year period ended December 31, 2000, appearing in this prospectus and registration statement have been audited by KPMG LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust at December 28, 2001, and December 29, 2000, and for the years ended December 28, 2001, December 29, 2000, and December 31, 1999, appearing in this prospectus and registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto appearing elsewhere herein, and are included in reliance upon the authority of said firm as experts in accounting and auditing. The financial statements and financial statement schedule of ILM II Senior Living Inc. as of August 31, 2001 and for the year ended August 31, 2001 and the financial statements of ILM II Lease Corporation as of August 31, 2001 and the year ended August 31, 2001 included in this Prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

Where you can find more information
We have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules and any amendments thereto) under the Securities Act of 1933 with respect to the shares being offered pursuant to this prospectus. This prospectus is part of this registration statement and does not contain all of the information set forth in the registration statement. Statements contained in this prospectus as to the content of any agreement or other document filed or incorporated by reference as an exhibit are not necessarily complete, and you should consult a copy of those contracts or other documents filed or incorporated by reference as exhibits to the registration statement. For further information regarding us, please read the registration statement and the exhibits and schedules thereto. We are subject to the information and reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, we file periodic reports, proxy statements and other information with the SEC. You may read and copy the registration statement and its exhibits and schedules or other information on file at the SEC's Public Reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of those documents upon payment of a duplicating fee to the SEC. Information filed by us with the SEC can be copied at the SEC's Public Reference Room. Please call the SEC at 1-800-SEC-0330 for

further information on the operation of the public reference room. You can review our SEC filings and the registration statement by accessing the SEC's Internet site at http://www.sec.gov.

65

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page

Five Star Quality Care, Inc. Unaudited Pro Forma Financial Statements Introduction to Unaudited Pro Forma Financial Statements Unaudited Pro Forma Consolidated Balance Sheet at December 31, 2001 Unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 2001 Notes to Unaudited Pro Forma Consolidated Financial Statements Five Star Quality Care, Inc. Historical Financial Statements Report of Independent Auditors Consolidated Balance Sheets at December 31, 2001 and 2000 Consolidated Statements of Operations for the year ended December 31, 2001 and the period from April 27, 2000 (Inception) through December 31, 2000 Consolidated Statement of Shareholders' Equity for the year ended December 31, 2001 and the period April 27, 2000 (Inception) through December 31, 2000 Consolidated Statements of Cash Flows for the year ended December 31, 2001 and the period from April 27, 2000 (Inception) through December 31, 2000 Notes to Consolidated Financial Statements Combined Financial Statements of the Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (Integrated Predecessor) Independent Auditors' Report Combined Balance Sheet at December 31, 2000 and 1999 Combined Statements of Operations for the years ended December 31, 2000 and 1999 Combined Statements of Changes in Net Equity (Deficit) of Parent Company for the years ended December 31, 2000 and 1999 Combined Statements of Cash Flows for the years ended December 31, 2000 and 1999 Notes to Combined Financial Statements Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2000 and 1999 Combined Financial Statements of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Mariner Predecessor) Report of Independent Auditors Combined Balance Sheets at December 31, 2000 and 1999 Combined Statements of Operations for each of the two years ended December 31, 2000 and 1999 Combined Statements of Divisional Equity (Deficit) for each of the two years ended December 31, 2000 and 1999 Combined Statements of Cash Flows for each of the two years ended December 31, 2000 and 1999 Notes to Combined Financial Statements Schedule II—Valuation and Qualifying Accounts for each of the years ended December 31, 2000 and 1999 Consolidated Financial Statements of CSL Group, Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL Properties Trust Report of Independent Public Accountants Consolidated Balance Sheets at December 28, 2001 and December 29, 2000 Consolidated Statements of Operations for the three fiscal years ended December 28, 2001 December 29, 2000 and December 31, 1999 Consolidated Statements of Equity for the three fiscal years ended December 28, 2001 and December 29, 2000 and December 31, 1999 Consolidated Statements of Cash Flows for the three fiscal years ended December 28, 2000, December 29, 2000 and December 31, 1999 F-3 F-4 F-5 F-6 F-10 F-11 F-12 F-13 F-14 F-15

F-22 F-23 F-24 F-25 F-26 F-27 F-37

F-38 F-39 F-40 F-41 F-42 F-43 F-52

F-53 F-54 F-55 F-56 F-57
F-1

Notes to Consolidated Financial Statements

F-58

Financial Statements of ILM II Senior Living, Inc. Reports of Independent Accountants Consolidated Statement of Net Assets in Liquidation as of August 31, 2001 Consolidated Balance Sheet as of August 31, 2000 Consolidated Statements of Income for the years ended August 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Shareholders' Equity for the years ended August 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Financial Statements of ILM II Lease Corporation Reports of Independent Accountants Statement of Net Assets in Liquidation as of August 31, 2001 Balance Sheet as of August 31, 2000 Statements of Operations for the years ended August 31, 2001, 2000 and 1999 Statements of Changes in Shareholders' Equity for the years ended August 31, 2001, 2000 and 1999 Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 Notes to Financial Statements Financial Statements of ILM II Senior Living, Inc. Consolidated Statements of Net Assets in Liquidation as of November 30, 2001 (unaudited) and August 31, 2001 Consolidated Statement of Changes in Net Assets in Liquidation for the three months ended November 30, 2001 (unaudited) Consolidated Statement of Income for the three months ended November 30, 2000 (unaudited) Consolidated Statement of Changes in Shareholders' Equity for the three months ended November 30, 2000 (unaudited) Consolidated Statement of Cash Flows for the three months ended November 30, 2000 (unaudited) Notes to Consolidated Financial Statements (unaudited) Financial Statements of ILM II Lease Corporation Statements of Net Assets in Liquidation as of November 30, 2001 (unaudited) and August 31, 2001 Statement of Changes in Net Assets in Liquidation for the three months ended November 30, 2001 (unaudited) Statement of Operations for the three months ended November 30, 2000 (unaudited) Statement of Changes in Shareholders' Equity for the three months ended November 30, 2000 (unaudited) Statement of Cash Flows for the three months ended November 30, 2000 (unaudited) Notes to Financial Statements (unaudited)
F-2

F-68 F-70 F-71 F-72 F-73 F-74 F-75 F-86 F-88 F-89 F-90 F-91 F-92 F-93

F-100 F-101 F-102 F-103 F-104 F-105 F-111 F-112 F-113 F-114 F-115 F-116

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS The unaudited pro forma balance sheet at December 31, 2001, presents the financial position of Five Star Quality Care, Inc. as if its merger with FSQ, Inc., the commencement of its lease of 31 Marriott facilities from Senior Housing, its offering of 3,000,000 shares of its common stock and its pending acquisition of five senior living communities had been completed as of December 31, 2001, as described in the notes thereto. The unaudited pro forma statement of operations for the year ended December 31, 2001, present the results of operations of Five Star Quality Care, Inc. as if these transactions and its spin-off from Senior Housing had been completed as of January 1, 2001, as described in the notes thereto. These unaudited pro forma financial statements do not represent our financial condition or results of operations for any future date or period. Actual future results may be materially different from pro forma results. Differences could arise from many factors, including, but not limited to, those related to our operations as a separate public company, competition in our business, the impact of changes to rates under Medicare and Medicaid reimbursement programs, our ability to successfully attract residents to our facilities, our ability to control operating expenses, our capital structure, the timing of our success or failure in closing the pending acquisition, this offering and other changes. These unaudited pro forma financial statements should be read in connection with our audited financial statements and the related Management's discussion and analysis of financial condition and results of operations included elsewhere in this prospectus. In connection with these unaudited pro forma financial statements, you should read the financial statements of the 31 Marriott facilities, as owned and operated by Crestline, which are also included in this prospectus and are entitled CSL Group, Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL Properties Trust and the financial statements of ILM II Senior Living, Inc. and ILM II Lease Corporation, the owner and operator, respectively, of the five communities we intend to acquire.

F-3

Five Star Quality Care, Inc.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET At December 31, 2001 (amounts in thousands, except per share amounts)
Adjustments Lease of 31 Marriott Facilities (B)

Historical

FSQ Merger (A)

This Offering (C)

Pro Forma

Pending Acquisition (D)

Pro Forma

Assets
Current assets Cash and cash equivalents Accounts receivable, net Prepaid expenses and other Total current assets Fixed assets, net Total assets $24,943 36,436 3,750 65,129 2,914 $68,043 $— — 97 97 955 $1,052 $5,665 6,537 — 12,202 — $12,202 $ $ 23,378 — — 23,378 — 23,378 $53,986 42,973 3,847 100,806 3,869 $104,675 $(46,000 ) — — (46,000 ) 46,000 $— $7,986 42,973 3,847 54,806 49,869 $104,675

Liabilities and Shareholders' Equity
Current liabilities Accounts payable and accrued expenses Accrued compensation Accrued real estate taxes Due to affilates, net Other liabilities Total current liabilities Long term liabilities Shareholders' equity Total liabilities and shareholders' equity $7,141 5,288 1,485 2,232 1,664 17,810 — 50,233 $414 549 — 1,043 — 2,006 — (954 ) $— — — — — — 12,202 — $ — — — — — — — 23,378 $7,555 5,837 1,485 3,275 1,664 19,816 12,202 72,657 $— — — — — — — — $7,555 5,837 1,485 3,275 1,664 19,816 12,202 72,657

$68,043

$1,052

$12,202

$

23,378

$104,675

$—

$104,675

See accompanying notes.

F-4

Five Star Quality Care, Inc.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the year ended December 31, 2001 (amounts in thousands, except per share amounts)
Lease of 31 Marriott Facilities Spin-Off and FSQ Merger Adjustments This Offering Pending Acquisition

Historical

Historical

Adjustments

Pro

Historical

Adjustments

Pro

Forma

Forma

(J) Revenues Expenses Property level operating costs and expenses Depreciation and amortization General and administrative Rent FF&E Rent Interest, net Total expenses Income (loss) before income taxes Provision for income taxes Net income (loss) Weighted average shares outstanding Earnings per share $229,235 $— $277,499 $—

(P) $— $506,734

(Q) $14,217 $— $520,951

211,850 1,274 15,627 — — (43 ) 228,708 527 —

— (868) (E) (3,298) (F) 7,000 (G) — 43 (H) 2,877 (2,877 ) (823) (U)

185,042 24,155 20,115 — — 19,335 248,647 28,852 10,098 (U)

— (24,155) (K) (307) (L) 63,000 (M) 7,354 (N) (19,335) (O) 26,557 (26,557 ) (9,295) (U)

— — — — — — — — —

396,892 406 32,137 70,000 7,354 — 506,789 (55 ) (20) (U)

8,505 313 1,462 4,579 — — 14,859 (642 ) (225) (U)

— 722 (R) (1,377) (S) (4,579) (T) — — (5,234 ) 5,234 1,832 (U)

405,397 1,441 32,222 70,000 7,354 — 516,414 4,537 1,587 (U)

$527 4,374 $0.12

$(2,054 ) 250 (I)

$18,754

$(17,262 )

$— 3,000

$(35 ) 7,624 $.00

$(417 )

$3,402

$2,950 7,624 $0.39

See accompanying notes.

F-5

Five Star Quality Care, Inc.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share and per share amounts) Pro Forma Balance Sheet Adjustments A. On January 2, 2002, we acquired FSQ, Inc. by merger. The consideration we paid for FSQ was 250,000 shares which are valued at $7.50 per share, or a total of $1,875, which price is based upon the average of the high and low price of our shares on the day of the merger. Because FSQ, Inc. had no revenue producing activity other than through its management arrangement with us, we view the merger for accounting purposes as a termination of a management contract rather than a business combination. Under this accounting, the consideration we paid, plus liabilities we assumed in excess of the fair value of the assets we acquired is recorded as an expense incurred to terminate a contract. For purposes of these pro forma statements, we have valued the assets acquired in the FSQ, Inc. merger based on their depreciated cost, which results in a charge of $2,829 calculated as follows: Number of shares issued in the FSQ, Inc. merger Multiplied by the average of the high and low price of our stock on the day of the merger Value of consideration paid Add: FSQ, Inc. liabilities Less: fair value of acquired assets of FSQ, Inc. Total charge 250,000 $7.50 $1,875 2,006 (1,052 ) $2,829

Pursuant to Rule 11-02 of Regulation S-X, this charge has not been reflected on the pro forma income statement because it is not expected to recur.

B. On January 11, 2002, our lease of 31 Marriott facilities from Senior Housing commenced. In connection with this lease, we acquired receivables due from Marriott as manager of these facilities and other current assets of $6,537, and we assumed long term operating liabilities of $12,202, consisting primarily of refundable resident deposits for future services. The net amount paid to us was:

Long term liabilities assumed Receivables acquired Net cash received from Senior Housing

$12,202 (6,537 ) $5,665

C. Represents our proposed issuance of 3 million common shares as follows:

Gross proceeds from proposed issuance of 3,000,000 common shares at an assumed public offering price of $8.29 per share Underwriters' discount and other offering costs, estimated Net proceeds D. Represents our cash purchase of fixed assets in the pending acquisition, calculated as follows:

$24,870 1,492 $23,378

Contract purchase price Estimated closing costs Total
F-6

$45,500 500 $46,000

Pro Forma Statement of Operations E. As part of the spin off from Senior Housing, we transferred substantially all of our real and personal property to Senior Housing, and then leased that property, and certain ancillary property was transferred by Senior Housing to us. This adjustment represents the elimination of historical depreciation expense from the real and personal property transferred by us to Senior Housing net of the depreciation expense from the real estate transferred to us, and the addition of depreciation expense related to fixed assets acquired by us in the FSQ, Inc. merger, calculated as follows:

Elimination of historical depreciation expense on assets transferred from us, net of depreciation expense on real estate transferred to us Addition of FSQ, Inc. depreciation Total adjustment

$(1,096 ) 228 $(868 )

F. In connection with our stabilization of facilities' operations which we assumed from former tenants of Senior Housing, we incurred certain costs which are not expected to recur. Also, as required by REIT tax rules applicable to Senior Housing and us during 2001, we engaged FSQ, Inc. to manage our facilities, and FSQ, Inc. purchased certain services from Reit Management. Since our acquisition of FSQ, Inc. we manage our facilities directly and have entered a shared services agreement with Reit Management to purchase the services previously provided by Reit Management to FSQ, Inc. The net adjustment to our general and administrative costs is intended to reflect these charges and is calculated as follows:

Elimination of costs related to Senior Housing's repossession of Mariner and Integrated facilities and our stabilization of operations which are not expected to recur(1) Elimination of management fees paid to FSQ, Inc. during 2001 Addition of FSQ, Inc. expenses

$(4,167 ) (11,460 ) 10,954

Shared service fee: Pro forma revenues Contract rate Total adjustment

$229,235 0.6 %

1,375 1,375 $(3,298 )

(1) These costs represent payments to third parties to convert financial and patient data previously maintained by Mariner and Integrated to our systems.

G. Our lease for 56 facilities requires minimum rent payments of $7 million per year to Senior Housing. In addition to minimum rent under this lease, beginning in 2004 we must pay percentage rent payments equal to three percent (3%) of net patient revenues at each leased facility in excess of net patient revenues at such facility during 2003. H. Represents elimination of interest, net on mortgage debts and related compensating cash balances on properties transferred to Senior Housing, which debts Senior Housing assumed as part of the spin-off. I. Represents shares issued as consideration in the FSQ, Inc. merger. J. Represents the 2001 historical operating revenue and facility operating expenses for the 31 Marriott facilities which we began to lease on January 11, 2002. The 31 Marriott facilities' results are accounted for on the basis of 13 four-week periods per fiscal year. Amounts presented as 2001 and related adjustments represent the period from December 30, 2000, through December 28,

F-7

2001. General and administrative expenses include management fees paid to Marriott under the terms of its management agreements. K. Represents the elimination of historical depreciation and amortization expense related to the 31 Marriott facilities. These facilities were acquired by Senior Housing and leased to us. Accordingly, depreciation and amortization expense will be incurred by Senior Housing. L. Represents the elimination of historical expenses incurred by the former owner of the 31 Marriott facilities, and the addition to our shared services agreement fee applicable to these operations:

Elimination of corporate expenses of seller Shared services fee: Pro forma revenues Contract rate Total adjustment

$(1,972 ) $277,499 0.6 % $(307 )

M. Our lease for the 31 Marriott facilities requires minimum rent payments of $63 million per annum. In addition to minimum rent under this lease, beginning in 2003 we must make percentage rent payments to Senior Housing in an amount equal to five percent (5%) of net patient revenues at each leased facility in excess of net patient revenues at such facility during 2002. N. Represents deposits made into reserves for capital improvements in accordance with the management agreements for the 31 Marriott facilities and which, under our lease with Senior Housing, will be paid to Senior Housing as additional rent. O.

Represents the elimination of historical interest expense. Incident to its acquisition of the 31 Marriott facilities, Senior Housing prepaid or assumed this debt and the obligation for this expense. P. Represents our issuance of 3,000,000 shares in this offering. Q. Represents historical operating revenues and facility operating expenses of the five facilities we expect to acquire. Amounts presented are for the seller's year ended November 30, 2001. R. Represents elimination of historical depreciation expense and the addition of our depreciation expense based upon the anticipated purchase price plus estimated closing costs totaling $46,000:

Elimination of historical depreciation expense on five communities to be acquired Addition of depreciation expense based on anticipated purchase price plus estimated closing costs Total adjustment

$(313 ) 1,035 $722

F-8

S. Represents the elimination of historically incurred general and administrative costs of the seller of the five communities to be acquired net of our additional costs under our shared services agreement calculated as follows:

Elimination of seller's general and administrative expenses Shared services fee: Pro forma revenues Contract rate Total adjustment

$(1,462 ) 14,217 0.6 %

85 $(1,377 )

T. Represents the elimination of historically incurred rental expense. These five communities will be owned by us without a lease obligation. U. The pro forma tax provision is based on a blended federal and state income tax rate of 35%.

F-9

REPORT OF INDEPENDENT AUDITORS To the Directors and Shareholders of Five Star Quality Care, Inc. We have audited the accompanying consolidated balance sheets of Five Star Quality Care, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 2001 and the period April 27, 2000 (inception) through December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 Five Star Quality Care, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for the year ended December 31, 2001 and the period April 27, 2000 (inception) through December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts February 22, 2002

F-10

Five Star Quality Care, Inc.

CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share amounts )
December 31,

2001

2000

Assets Current assets: Cash and cash equivalents Accounts receivable, net of allowance of $3,787 at December 31, 2001 Prepaid expenses and other current assets Total current assets Net investment in facilities' operations Property and equipment, net

$24,943 36,436 3,750 65,129 — 2,914 $68,043

$— — — — 29,046 25,742 $54,788

Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses Accrued compensation and benefits Due to affiliates, net Accrued real estate taxes Note payable Other current liabilities Total current liabilities Commitments and contingencies Shareholders' equity: Preferred stock, par value $0.01: 1,000,000 shares authorized, none issued Common stock, par value $0.01: 10,000,000 shares authorized, 4,374,334 shares issued and outstanding as of December 31, 2001 and 3,000 shares authorized, 1,000 shares issued and outstanding, as of December 31, 2000 Additional paid-in-capital Accumulated deficit Total shareholders' equity

$7,141 5,288 2,232 1,485 — 1,664 17,810

$— — — — 100 — 100

—

—

44 50,978 (789 ) 50,233 $68,043

— 56,004 (1,316 ) 54,688 $54,788

See accompanying notes.

F-11

Five Star Quality Care, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts)
Period April 27, 2000 (Inception) through December 31, 2000

Year Ended December 31, 2001

Revenues: Net patient revenues Income from facilities' operations Total revenues Expenses: Wages and benefits Other operating expenses General and administrative Depreciation Total expenses Operating income (loss) Interest income, net Net income (loss) before income taxes Provision for income taxes Net income (loss) Weighted average shares outstanding Earnings (loss) per share

$229,235 — 229,235 138,883 72,967 15,627 1,274 228,751 484 43 527 — $527 4,374 $0.12

$— 2,520 2,520 — — 3,519 317 3,836 (1,316 ) — (1,316 ) — $(1,316 ) 4,374 $(0.30 )

See accompanying notes.

F-12

Five Star Quality Care, Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended December 31, 2001 and the period April 27, 2000 (Inception) through December 31, 2000 (amounts in thousands, except share amounts)
Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit

Total

Balance at April 27, 2000 Contribution from Senior Housing, net

1,000 —

$— —

$1 56,003

$— —

$1 56,003

Net loss Balance at December 31, 2000 Issuance of shares, pursuant to spin-off Distribution to Senior Housing, net Net income Balance at December 31, 2001

— 1,000 4,373,334 — — 4,374,334

— — 44 — — $44

— 56,004 189 (5,215 ) — $50,978

(1,316 ) (1,316 ) — — 527 $(789 )

(1,316 ) 54,688 233 (5,215 ) 527 $50,233

See accompanying notes.

F-13

Five Star Quality Care, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
Period April 27, 2000 (inception) through December 31, 2000

Year Ended December 31, 2001

Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation Amortization Provision for bad debt Income from facilities' operations Changes in assets and liabilities: Accounts receivable Prepaid expenses and other current assets Accounts payable and accrued expenses Accrued compensation and benefits Due to affiliates, net Other current liabilities Cash used in operating activities Cash flows from investing activities: Real estate acquisitions Investment in facilities' operations Equipment purchases Cash used in investing activities Cash flows from financing activities: Payment of deferred financing costs Proceeds from note payable Proceeds from mortgage payable Proceeds from issuance of common stock Owners contribution, net Cash provided by financing activities

$527

$(1,316 )

1,274 47 1,587 — 9,571 (2,685 ) (4,905 ) (492 ) 2,232 (8,316 ) (1,160 )

317 — — (2,520 ) — — — — — — (3,519 )

— — (2,176 ) (2,176 )

(2,300 ) (38,530 ) — (40,830 )

(1,016 ) — 9,100 233 12,783 21,100

— 100 — 1 44,248 44,349

Increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at facilities' operations, beginning of period Cash and cash equivalents at end of period Non-cash investing and financing activities: Contribution of real estate and related property from Senior Housing Distribution of real estate and other assets to Senior Housing Liabilities assumed by facilities' operations Assumption of mortgage payable by Senior Housing See accompanying notes.

17,764 — 7,179 $24,943

— — — $—

$(2,232 ) 29,330 — (9,100 )

$(23,759 ) — 12,004 —

F-14

Five Star Quality Care, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (amounts in thousands, except per share amounts) 1. Organization

Five Star Quality Care, Inc. (the "Company") was organized on April 27, 2000, as a wholly owned subsidiary of Senior Housing Properties Trust ("Senior Housing"). The Company was formed under Delaware law in 2000 and reincorporated under Maryland law on September 20, 2001. Effective July 1, 2000, the Company assumed the operations of healthcare facilities from two former tenants of Senior Housing. On December 31, 2001, Senior Housing distributed 4,342 of the Company's common shares to its shareholders (the "Spin-Off"). Additionally, the Company sold 32 common shares to Senior Housing and HRPT Properties Trust ("HRPT"). Concurrent with the Spin-Off, the Company entered into a lease agreement with Senior Housing for 56 healthcare facilities. The Company also entered into a transaction agreement to govern the initial capitalization and other events related to the Spin-Off. Pursuant to the transaction agreement, the Company's initial capitalization of $50,000 was provided by Senior Housing. In connection with the Spin-Off, the Company (i) transferred title to seven properties and other assets with a net book value at December 31, 2001 of $29,330 to Senior Housing, (ii) conveyed a mortgage of $9,100 at December 31, 2001 to Senior Housing and (iii) obtained title to two properties with a net book value of $2,232 at December 31, 2001 from Senior Housing. 2. Summary of Significant Accounting Policies

Basis of presentation. The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions have been eliminated. The Company was owned by Senior Housing until December 31, 2001 and transactions are presented on Senior Housing's historical basis. Prior to December 31, 2001, substantially all of the income from the facilities' operations received by the Company was deposited in and commingled with Senior Housing's general funds, and Senior Housing provided funds for working capital and other cash required by the Company. General and administrative expenses are comprised of costs incurred by Senior Housing and charged to the Company primarily based on a specific identification basis, which in the opinion of management is reasonable. It is not practicable to estimate additional costs that would have been incurred by the Company as a separate entity. The facilities operations commenced by the Company on July 1, 2000 were initially subject to completion of state and Federal regulatory processes, which were substantially completed on December 31, 2000. As a result, for the period July 1, 2000 through December 31, 2000, the facilities were accounted for using the equity method. Net income from these operations for the period prior to December 31, 2000, is reported as income from facilities' operations in the Consolidated Statements of Operations and the capital invested in these operations as of December 31, 2000, is included in net investment in facilities' operations on the Consolidated Balance Sheets. Cash and cash equivalents. to be cash equivalents. Highly liquid investments with original maturities of three months or less at the date of purchase are considered

Property and equipment. Fixed assets are stated at cost. Depreciation of property and equipment is expensed on a straight-line basis over the estimated useful lives of up to 40 years for buildings and improvements and up to 12 years for personal property.

F-15

Impairment of long lived assets. Impairment losses are recognized when indicators of impairment are present and the undiscounted cash flow estimated to be generated by the Company's investments is less than the carrying amount of such investments. The amount of impairment loss, if any, is determined by comparing the carrying amount of the Company's investment to its estimated fair value. Income taxes. Prior to December 31, 2001, substantially all of the Company's taxable income was included in the taxable income of Senior Housing for federal income tax purposes. Senior Housing qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended ("IRC"), and, prior to December 31, 2001, the Company was a subsidiary of Senior Housing. A portion of the Company's income generated by subsidiaries is subject to federal income taxes. These subsidiaries generated tax losses in both 2001 and 2000. Use of estimates. Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that may affect the amounts reported in these financial statements. Actual results could differ from these estimates. Per common share amounts. Earnings per share has been presented as if the shares outstanding at December 31, 2001 were outstanding as of April 27, 2000. The Company has no common share equivalents, instruments convertible into common shares or other dilutive instruments. Revenues. The Company's revenues are derived primarily from providing healthcare services to residents. Approximately 76% of 2001 revenues was derived from payments under Federal and state medical assistance programs. The Company accrues for revenues when services are provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements. Revenues are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. As of December 31, 2001 the Company had an allowance for doubtful accounts which totaled $3,787. During 2001, the Company increased its allowance for doubtful accounts by $3,283 and wrote off $1,696 of accounts receivable as uncollectable. Amounts due from the Federal government Medicare program were $14,020 at December 31, 2001. Amounts due from various state Medicaid programs were $17,979 at December 31, 2001. Of these balances approximately $1,800 is expected to be paid to Integrated Health Services Inc. ("IHS") for the Company's account. The Company believes IHS will pay these funds pursuant to its contractual obligation approved by the Bankruptcy Court. However, IHS remains in bankruptcy proceedings and its record keeping and payment processing has not been timely. New accounting pronouncements. In 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company will adopt these pronouncements as of January 1, 2002. The Company expects the adoption of these standards will not have a material effect on the Company's financial position or results of operations. 3. Net Investment in Facilities' Operations

The Company assumed operating responsibility for the healthcare facilities effective July 1, 2000, pending final regulatory approvals required in the healthcare industry. Former tenants of Senior

F-16

Housing performed these licensed services until January 1, 2001. Because all approvals had not been received by December 31, 2000, net income from these facilities is reflected as income from facilities' operations in the Consolidated Statements of Operations for the period April 27, 2000 (Inception) through December 31, 2000. The capital invested in these operations as of December 31, 2000, is included in net investment in facilities' operations in the Consolidated Balance Sheets. Summary financial data for these facilities' operations is as follows:
December 31, 2000 July 1 through December 31, 2000

Current assets Property and equipment, net

$55,938 2,399 $58,337

Revenues Expenses Income from facilities' operations

$114,483 111,963 $2,520

Current liabilities Net investment in facilities'

$29,291 29,046

operations $58,337

4.

Property and Equipment

Property and equipment, at cost, consists of the following as of December 31, 2001 and 2000:
2001 2000

Land Building and improvements Furniture, fixtures and equipment

$237 1,999 885 3,121 (207 ) $2,194

$2,949 20,584 2,526 26,059 (317 ) $25,742

Accumulated depreciation

5.

Income Taxes

Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001, and 2000 are:
2001 2000

Deferred tax assets (liabilities) Allowance for doubtful accounts Net operating loss carryforward Property and equipment Net deferred tax assets before valuation allowance Valuation allowance Net deferred tax assets

$1,325 168 1,977 3,470 (3,470 ) $—

$65 66 (37 ) 94 (94 ) $—

During 2001 and 2000, some of the Company's subsidiaries were taxable entities separate from Senior Housing and generated net operating loss carryforwards for tax purposes. These subsidiary net

F-17

operating loss carryforwards totaled $479 and $189 at December 31, 2001 and 2000 respectively, and may be used under certain conditions to reduce future taxable income of the Company. These net operating loss carryforwards will expire beginning in 2015, if unused. During 2001 and 2000, the Company and certain of its subsidiaries were part of Senior Housing for federal tax purposes. These subsidiaries contributed expenses in excess of revenues for tax purposes to Senior Housing during 2001 and 2000. Some of the temporary differences between such excess and the Company's book income in 2001 and 2000 are expected to reverse in future periods when the Company is a separate consolidated group (i.e., after the Spin-Off). Such temporary differences totaled approximately $1,400 as of December 31, 2001, and relate primarily to the allowance for doubtful accounts. In connection with the Spin-Off, Senior Housing contributed assets to the Company with tax basis in excess of book basis; the tax effect of this temporary difference was approximately $1,900 as of December 31, 2001. A full valuation allowance has been recorded in the accompanying financial statements to offset the net deferred tax asset because its future realizability is uncertain.

The blended statutory federal and state income tax rates applicable to the Company of 35% in 2001 and 2000 was fully offset by the change in valuation allowances for those periods. 6. Transactions with Affiliates

On October 1, 2000, the Company entered into third party management agreements with FSQ, Inc. to manage the operations of its facilities. Messrs. Martin and Portnoy, the Company's Managing Directors, own FSQ, Inc. During 2001 and 2000, management fees paid to FSQ, Inc. by the Company totaled approximately $11,500 and $5,100, respectively. As of December 31, 2001, the Company was owed approximately $1,000 from FSQ, Inc. for amounts advanced by the Company on its behalf. This amount was satisfied as part of the merger of FSQ, Inc. into the Company which occurred on January 2, 2002. During 2000, HRPT, an affiliate of Senior Housing, foreclosed on a mortgage with a principal balance outstanding of $2,400 that had been in default. The collateral security for this mortgage was an assisted living facility in the vicinity of a nursing home operated by the Company. In November 2000, a subsidiary of the Company purchased the former collateral from HRPT for $2,300, its appraised value. Pursuant to the Spin-Off transaction agreement, Senior Housing agreed to contribute $50,000 of net working capital to the Company on December 31, 2001. Amounts were estimated on December 31, 2001 and the transaction agreement provided that a true up of amounts contributed would be completed subsequent to the year end. The amount owed to Senior Housing by the Company is approximately $3,300 as of December 31, 2001. Pursuant to the Spin-Off transaction agreement, the Company entered into a shared service agreement with Reit Management and Research, LLC ("RMR"). Messrs. Martin and Portnoy, the Company's Managing Directors, own RMR. This agreement provides that RMR will perform services for the Company that RMR has historically performed for FSQ, Inc. and that the Company will pay RMR a fee equal to 0.6% of the Company's revenues starting in 2002.

F-18

As part of the Spin-Off transaction, and in order that HRPT could make a round lot distribution to its shareholders of one for 100 of Company shares which HRPT received as a shareholder of Senior Housing, HRPT acquired 7 shares of the Company from the Company for $7.26 per share. This purchase price per share was determined as the average trading price of the Company's shares on the date of the Spin-Off as reported by the American Stock Exchange. The Company leases its headquarters from an entity owned by Messrs. Martin and Portnoy. The lease expires in 2011 and requires rent of $531 per year, subject to annual increases of $16 per year. 7. Leases

The Company has entered into a noncancelable lease with Senior Housing for 56 facilities. The lease is a "triple-net" lease and requires that the Company pay for all costs incurred in the operation of the facilities, including the cost of personnel, service to residents, insurance, and real estate and personal property taxes. The lease also requires the Company to maintain the facilities during the lease term and to indemnify Senior Housing for any liability which may arise during the lease term. The lease requires minimum rent payments of $7,000 per year and percentage rent starting in 2004. The percentage rent is an amount equal to three percent (3%) of net patient revenues at each facility in excess of net patient revenues at such facility during 2003. The lease expires on December 31, 2018, and the Company has one renewal option for an additional 15 years. The future minimum rent required by this lease as of December 31, 2001, is as follows: 2002 2003 2004 2005 2006 Thereafter $7,000 7,000 7,000 7,000 7,000 84,000 $119,000 8. Employee Benefit Plan

During 2001, the Company established an employee savings plan under the provisions of the Internal Revenue Code section 401(k). All employees are eligible to participate in the plan and are entitled, upon termination, or retirement, to receive their portion of the plan assets. The

Company does not contribute to this plan, but does pay certain expenses of the plan. The Company's plan expenses were $30 for the year ended December 31, 2001. 9. Fair Value of Financial Instruments

The Company's financial instruments are limited to cash and cash equivalents, accounts receivables and payables. The fair value of these financial instruments was not materially different from their carrying values at December 31, 2001 and 2000. 10. Commitments and Contingencies

In conjunction with certain Medicaid rate adjustments that the Company obtained from the State of Connecticut, the Company is obligated to fund certain tenant improvements at the Company's Connecticut facilities. The Company expects these improvements will be completed in 2002.

F-19

Applicable provisions of Federal and some state laws allow paying agents for the Medicare and Medicaid programs to recoup amounts owed by Mariner Post Acute Network, Inc. ("Mariner") and IHS to these programs for historical overpayments from current payments to facilities now operated by the Company, despite the bankruptcy filings by Mariner and IHS. Also, some state nursing home licensing agencies have in the past required that a successor nursing home licensee, such as the Company, agree to assume financial responsibility for a predecessor licensee's obligations due to those state Medicaid programs. The Company has negotiated agreements with the U.S. Department of Justice and understandings with several state Medicaid agencies to limit the Company's liabilities for obligations of Mariner and IHS to the Federal Medicare and state Medicaid programs. 11. Subsequent Events

On January 2, 2002, the Company acquired FSQ, Inc. in order to acquire the personnel, systems and assets necessary to manage the facilities the Company leases from Senior Housing. The acquisition was a stock for stock transaction, and Messrs. Martin and Portnoy, the owners of FSQ, Inc., each received 125 of the Company's common shares valued at $7.50 per share. On January 11, 2002, the Company entered into a lease with Senior Housing for 31 retirement communities. These communities are managed by Marriott Senior Living Services, Inc. ("Marriott"). The 31 retirement communities are leased from Senior Housing through 2017, with renewal options for an additional 15 years. The minimum rent payable by the Company for these facilities is $63,000 per year, plus a varying percentage of gross revenue each year which is paid as additional rent to Senior Housing but will be escrowed for future capital expenditures at the leased facilities. In addition, percentage rent will be payable, starting in 2003, in amounts equal to five percent (5%) of net patient revenues at each facility in excess of net patient revenues at such facility in 2002. 12. Pro Forma Information (Unaudited)

If the Company had obtained all required healthcare licenses and began operating the facilities as of January 1, 2000, its pro forma 2000 revenues, expense and net loss would have been $220,703, $223,015 and $2,312, respectively. This unaudited pro forma information is not indicative of the operating results that would have occurred had the Company obtained all required healthcare licenses and began operating the facilities as of January 1, 2000, nor is it indicative of future results of operations.

F-20

13.

Selected Quarterly Financial Data (Unaudited)

Summary unaudited quarterly results of operations of the Company for the year ended December 31, 2001 and the period April 27, 2000 (Inception) through December 31, 2000:
2001

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Revenues Net (loss) income (Loss) earnings per common share:

$57,354 (839 ) $(0.19 )

$55,906 (1,063 ) $(0.24 )
2000

$57,421 1,238 $0.28

$58,554 1,191 $0.27

Second Quarter

Third Quarter

Fourth Quarter

Revenues Net income (loss) Earnings (loss) per common share:

$— (870 ) $(0.20 )

$1,228 1,070 $0.24

$1,292 (1,516 ) $(0.34 )
F-21

INDEPENDENT AUDITORS' REPORT The Board of Directors Five Star Quality Care, Inc.: We have audited the accompanying combined balance sheets of the Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (Acquired Facilities) as described in note 1 as of December 31, 2000 and 1999 and the related combined statements of operations, changes in net equity (deficit) of parent company and cash flows for each of the years in the two-year period ended December 31, 2000. In connection with our audits of the combined financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. These financial statements and the financial statement schedule are the responsibility of the Acquired Facilities' management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Acquired Facilities as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Baltimore, Maryland September 13, 2001

F-22

Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

COMBINED BALANCE SHEETS (Note 1) December 31, 2000 and 1999 (Dollars in thousands)
2000 1999

Assets Current assets: Cash and cash equivalents Patient accounts and third-party payor settlements receivable (note 3) Other current assets Total current assets Property, plant and equipment (note 4) Intangible assets, net (note 5)

$4,514 29,266 576 34,356 586 —

1,684 22,624 2,657 26,965 16,199 18,110

$34,942 Liabilities and Net Equity (Deficit) of Parent Company Current liabilities: Accounts payable and accrued expenses (note 6) Current maturities of long-term debt (note 7) Due to Senior Housing Properties Trust (note 8) Total current liabilities Long-term debt, less current maturities (note 7) Commitments and contingencies (notes 11 and 13) Net equity (deficit) of Parent Company

61,274

$9,499 — 27,323 36,822 — (1,880 ) $34,942

12,891 273 — 13,164 17,500 30,610 61,274

See accompanying notes to financial statements.

F-23

Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

COMBINED STATEMENTS OF OPERATIONS (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands)
2000 1999

Total patient service revenues Costs and expenses: Operating expenses Depreciation and amortization Rent (note 9) Interest, net Loss on impairment of long-lived assets (note 12) Loss on settlement of lease and mortgage obligations (note 1) Total costs and expenses Loss before income taxes Federal and state income taxes (benefit) (note 10) Net loss

$135,378

130,333

131,916 889 9,102 2,053 — 16,670 160,630 (25,252 ) — $(25,252 )

124,732 4,265 13,191 3,899 120,007 — 266,094 (135,761 ) (8,822 ) (126,939 )

See accompanying notes to financial statements.

F-24

Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

COMBINED STATEMENTS OF CHANGES IN NET EQUITY (DEFICIT) OF PARENT COMPANY (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands) Balance at December 31, 1998 $147,025

Net contributions from Parent Net loss Balance at December 31, 1999 Net contributions from (distributions to) Parent Net loss Balance at December 31, 2000

10,524 (126,939 ) 30,610 (7,238 ) (25,252 ) $(1,880 )

See accompanying notes to financial statements.

F-25

Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

COMBINED STATEMENTS OF CASH FLOWS (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands)
2000 1999

Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used by operating activities: Loss on impairment of long-lived assets Loss on settlement Deferred income taxes Depreciation and amortization Decrease (increase) in patient accounts and third-party payor settlements receivable Increase (decrease) in other current assets Increase (decrease) in accounts payable Net cash used by operating activities Cash flows from investing activities: Purchases of property, plant and equipment Net cash used by investing activities Cash flows from financing activities: Repayments of long-term debt Net contributions from (distributions to) parent company Advances from Senior Housing Properties Trust Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

$(25,252 ) — 16,670 — 889 (6,642 ) 2,081 (3,392 ) (15,646 )

(126,939 ) 120,007 — (8,822 ) 4,265 7,540 (60 ) (3,822 ) (7,831 )

(1,472 ) (1,472 )

(3,108 ) (3,108 )

(137 ) (7,238 ) 27,323 19,948 2,830 1,684 $4,514

(220 ) 10,524 — 10,304 (635 ) 2,319 1,684

See accompanying notes to financial statements.

F-26

Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

NOTES TO COMBINED FINANCIAL STATEMENTS December 31, 2000 and 1999 (Dollars in thousands) 1. Background and Basis of Presentation

Prior to July 7, 2000, Integrated Health Services, Inc. (IHS or the Parent Company), through its wholly owned subsidiaries, operated various skilled nursing facilities with respect to which Senior Housing Properties Trust (SNH) was owner/lessor or first mortgage lender. In January 2000, IHS ceased making rent and interest payments on these obligations and subsequently filed for bankruptcy in February 2000. On July 7, 2000, effective as of July 1, 2000, the Bankruptcy Court approved a settlement agreement whereby IHS' lease and mortgage obligations to a subsidiary of SNH were cancelled and IHS conveyed nine nursing homes and one parcel of non-operating real property to SNH. As a result, SNH has obtained the operations of 42 facilities previously operated by IHS (the Acquired Facilities). IHS managed the Acquired Facilities under a management agreement with SNH for the period from July 1, 2000 to September 30, 2000. An affiliate of SNH has managed the Acquired Facilities subsequent to September 30, 2000. The Acquired Facilities' financial statements are presented for the purposes of complying with the Securities and Exchange Commission's rules and regulations regarding acquired businesses. The combined financial statements of the Acquired Facilities reflect the historical accounts of the skilled nursing facilities, including allocations of general and administrative expenses from the IHS corporate office to the individual facilities. Such corporate office allocations, calculated as a percentage of revenue, are based on determinations that management believes to be reasonable. However, IHS has operated certain other businesses and has provided certain services to the Acquired Facilities, including financial, legal, accounting, human resources and information systems services. Accordingly, expense allocations to the Company may not be representative of costs of such services to be incurred in the future (see note 11). The financial statements for periods prior to July 1, 2000 represent the financial position and results of operations of the Acquired Facilities as reflected in the accounts of IHS' subsidiaries. Such subsidiaries leased 19 facilities from SNH, owned 11 facilities with respect to which SNH was mortgagee, and owned, leased or managed 12 other facilities not previously affiliated with SNH. The financial statements for the period subsequent to July 1, 2000 represent the financial position and results of operations of the Acquired Facilities as described above and give effect to the terms of the aforementioned settlement agreement. Accordingly, as of July 1, 2000, the accounts of the Acquired Facilities no longer include the property, plant and equipment and intangible assets of the facilities conveyed to SNH, related mortgage debt, mortgage interest, and depreciation and amortization of such facilities. The loss on settlement represents the carrying value of the tangible and intangible assets of the facilities conveyed to SNH, less the related mortgage debt.

F-27

The operating results of the Acquired Facilities for the six-month period ended June 30, 2000 (prior to the settlement agreement) and the six-month period ended December 31, 2000 are summarized below:
Six months ended June 30, 2000 Six months ended December 31, 2000 Year ended December 31, 2000

Total patient service revenues Costs and expenses: Operating expenses Depreciation and amortization Rent (note 9) Interest, net Loss on settlement Total costs and expenses

$65,195

70,183

135,378

63,865 876 6,323 2,053 — 73,117

68,051 13 2,779 — 16,670 87,513

131,916 889 9,102 2,053 16,670 160,630

Loss before income taxes

$(7,922 )

(17,330 )

(25,252 )

2. (a)

Summary of Significant Accounting Policies Revenues

Revenues, primarily patient services revenues related to room and board charges, ancillary charges and revenues of pharmacy, rehabilitation and similar service operations, are recorded at established rates and adjusted for differences between such rates and estimated amounts reimbursable by third-party payors. As of January 1, 1999, Medicare revenue is recognized pursuant to the Prospective Payment System (PPS). Under PPS, per diem federal rates were established for urban and rural areas. Rates are case-mix adjusted using Resource Utilization Groups. PPS is implemented over a three-year transition period that blends a facility-specific payment rate with the federal case-mix adjusted rate. Estimated settlements under third-party payor retrospective rate setting programs (primarily Medicare for periods prior to January 1, 1999 and Medicaid) are accrued in the period that related services are rendered. Settlements receivable and related revenues under such programs are based on annual cost reports prepared in accordance with federal and state regulations, which reports are subject to audit and retroactive adjustment. In the opinion of management, adequate provision has been made therefore, and such adjustments in determining final settlements will not have a material effect on financial position or results of operations. (b) Cash and cash equivalents

Cash equivalents consist of highly liquid debt instruments with original maturities of three months or less. (c) Depreciation and amortization

Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, generally 25 years for land improvements, 10 years for equipment, 40 years for buildings and the term of the lease for costs of leasehold interests and improvements.

F-28

(d)

Intangible assets

Prior to the fourth quarter of 1999, intangible assets of businesses acquired (primarily goodwill) were amortized by the straight-line method primarily over 40 years, the period over which such costs were estimated to be recoverable through operating cash flows. As discussed in note 12, management of IHS continued to evaluate the impact of the 1997 Balanced Budget Act (BBA), particularly the impact of the prospective payment system (PPS), upon future operating results of the facilities. Utilizing IHS' experience with PPS since January 1, 1999, management performed a preliminary analysis of such impact in the third quarter of 1999 and a more comprehensive analysis at December 31, 1999. PPS has had a dramatic negative impact on the operating results and financial condition of the Acquired Facilities. The PPS system has significantly reduced the revenues, cash flow and liquidity of the Acquired Facilities and the long-term care industry in 1999. As a result of the negative impact of the provisions of PPS, management changed the estimated life of its goodwill to 20 years. This change has been treated as a change in accounting estimate and is being recognized prospectively beginning October 1, 1999. (e) Impairment of long-lived assets

Management regularly evaluates whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, management estimates the projected undiscounted cash flows of the related individual facilities (the lowest level for which there are identifiable cash flows independent of other groups of assets) to determine if an impairment loss should be recognized. The amount of impairment loss is determined by comparing the historical carrying value of the asset to its estimated fair value. Estimated fair value is determined through an evaluation of recent financial performance and projected discounted cash flows of facilities using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining lives of its long-lived assets. If estimates are changed, the carrying value of affected assets is allocated over the remaining lives. Management performed such an analysis at December 31, 1999 (see notes 1 (d) and 12). (f) Income Taxes

The Acquired Facilities are included in the Parent Company's consolidated federal income tax return. The income taxes reported in the Acquired Facilities financial statements are an allocation of income taxes calculated as if the Acquired Facilities were a separate taxpayer, in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes . Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the related tax bases of assets and liabilities as required by SFAS No. 109. Such tax effects are measured by applying enacted statutory tax rates

applicable to future years in which the differences are expected to reverse, and any change in tax rates will be recognized in the period that includes the date of enactment. (g) Net equity (deficit) of parent company

The Parent Company transfers excess cash from and makes working capital advances and corporate allocations to the Acquired Facilities. These advances include amounts to fund cash shortfalls, capital expenditures, advances for accounts payable and amounts paid for employee benefits and other

F-29

programs administered by the Parent Company. The resulting net balance of the aforementioned transactions, the Parent Company's initial investment in the Acquired Facilities and the cumulative deficit of the Acquired Facilities is classified as Net Equity (Deficit) of Parent Company in the accompanying balance sheet. (h) Business and credit concentrations

The Acquired Facilities' patient services are provided through 42 facilities located in 10 states throughout the United States. The Acquired Facilities generally do not require collateral or other security in extending credit to patients; however, the Acquired Facilities routinely obtain assignments of (or are otherwise entitled to receive) benefits receivable under the health insurance programs, plans or policies of patients (e.g., Medicare, Medicaid, commercial insurance and managed care organizations) (see note 3). (i) Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (j) Reclassification

Certain amounts presented in 1999 have been reclassified to conform with the presentation for 2000. 3. Patient Accounts and Third-Party Payor Settlements Receivable

Patient accounts and third-party payor settlements receivable consist of the following at December 31:
2000 1999

Patient accounts Third-party payor settlements

$28,996 13,147 42,143 (12,877 ) $29,266

19,396 12,194 31,590 (8,966 ) 22,624

Allowance for doubtful accounts and contractual adjustments

Patient accounts receivable and third party payor settlements receivable from the Federal government (Medicare) were approximately $14,246 and $10,757 at December 31, 2000 and 1999, respectively. Amounts receivable from various states (Medicaid) were approximately $17,161 and $16,189 at December 31, 2000 and 1999, respectively.

F-30

4.

Property, Plant and Equipment

Property, plant and equipment are summarized as follows at December 31:
2000 1999

Land and improvements

$

—

6,306

Buildings and improvements Leasehold interests and improvements Equipment

— — 598 598 12 $ 586

3,104 2,637 7,134 19,181 2,982 16,199

Less accumulated depreciation and amortization Net property, plant and equipment 5. Intangible Assets

Intangible assets are summarized as follows at December 31, 1999: Intangible assets of businesses acquired, primarily goodwill Less accumulated amortization Net intangible assets $23,287 (5,177 ) $18,110

Management regularly evaluates whether events or circumstances have occurred that would indicate an impairment in the carrying value or the life of goodwill. In accordance with SFAS No. 121, if there is an indication that the carrying value of an asset, including goodwill, is not recoverable, Management estimates the projected undiscounted cash flows, excluding interest, of the related business unit to determine if an impairment loss should be recognized. Such impairment loss is determined by comparing the carrying amount of the asset, including goodwill, to its estimated fair value. Management performs the impairment analysis at the individual facility level. See note 12 for information regarding impairment of assets in the year ended December 31, 1999. 6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are summarized as follows at December 31:
2000 1999

Accounts payable Accrued salaries and wages Other accrued expenses

$5,105 3,015 1,379 $9,499

8,294 3,468 1,129 12,891
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7.

Long-Term Debt

Long-term debt is summarized as follows at December 31, 1999: Mortgages payable in monthly installments of $87, including interest at rates ranging from 10.3% to 10.86%, due December 2016 Mortgages payable in monthly installments of $95, including interest at 11.5%, due January 2006

$8,687 9,086 17,773 273 $17,500

Less current maturities Total long-term debt, less current portion

At December 31, 1999 the aggregate maturities of long-term debt for the five years ending December 31, 2004 are as follows: 2000 2001 2002 2003 2004 Thereafter $273 304 339 378 421 16,058 $17,773

8.

Due to Senior Housing Properties Trust (SNH)

Subsequent to July 1, 2000, SNH advanced funds for operating expenses and working capital of the Acquired Facilities and allocated facility rents. Such advances bear no interest (see notes 9 and 11). 9. Leases

The Acquired Facilities leased equipment under short-term operating leases having rental costs of approximately $1,146 in 2000 and $1,800 in 1999. Leases of facilities were terminated in 2000 as discussed in note 1; however, in accordance with Staff Accounting Bulletin No. 55, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity , $2,159 is included in rent expense for the period subsequent to July 1, 2000, representing an allocation of the total estimated fair market rental value of facilities. The annual fair market rental value has been estimated for a combined group of facilities, including the Acquired Facilities, and has been allocated based on the respective total revenues of the facilities.

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10.

Income Taxes

The Acquired Facilities have been included in the Parent Company's consolidated federal income tax return. The allocated provision (benefit) for income taxes on loss before income taxes is summarized as follows at December 31:
2000 1999

Current Deferred

$— — $—

— (8,822 ) (8,822 )

The amount computed by applying the Federal corporate tax rate of 35% in 2000 and 1999 to loss before income taxes is summarized as follows at December 31:
2000 1999

Income tax computed at statutory rates State income taxes, net of Federal tax benefit and nondeductible items Jobs tax credit Valuation allowance adjustment

$(7,648 ) (1,044 ) (70 ) 8,762 $—

(47,516 ) (6,724 ) (94 ) 45,512 (8,822 )

Deferred income tax liabilities (assets) at December 31, 2000 and 1999, are summarized as follows:
2000 1999

Difference in book and tax bases of intangible assets Difference in book and tax bases of fixed assets Allowance for doubtful accounts Net operating loss carryforwards Job tax credit carryovers Total before valuation allowance Valuation allowance Net deferred tax liabilities

$— — (5,018 ) (57,627 ) (254 ) (62,899 ) 62,899 $—

(28,002 ) (9,327 ) (3,586 ) (13,038 ) (184 ) (54,137 ) 54,137 —

11.

Other Related Party Transactions

Corporate administrative and general expenses (included in operating expenses) represent management fees for certain services, including financial, legal, accounting, human resources and information systems services provided by the Parent Company. Management fees have been provided at approximately 6% of total revenues of each facility. Management fees charged by the Parent Company were $4,311 for the nine months ended September 30, 2000 and $6,254 in 1999, and have been determined based on an allocation of the Parent Company's corporate general and administrative expenses. Such allocation has been made because specific identification of expenses is not practicable. Management believes that this allocation method is reasonable. However, management believes that the Acquired Facilities' corporate

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administrative and general expenses on a stand-alone basis may have been different had the Acquired Facilities operated as an unaffiliated entity. Management fees charged by an SNH affiliate were $1,773 for the three months ended December 31, 2000. 12. Loss on Impairment of Long-Lived Assets

During the year ended December 31, 1999, the Parent Company continued to evaluate the impact of the 1997 Balanced Budget Act (BBA), particularly the impact of the Prospective Payment System (PPS), upon the future operating results on its facilities. Utilizing the Parent Company's (including the Acquired Facilities) experience with PPS since January 1, 1999, the Parent Company performed a preliminary analysis of such impact as of September 30, 1999 and a more comprehensive analysis at December 31, 1999. PPS has had a dramatic impact on the operating results and financial condition of the Acquired Facilities. PPS has significantly reduced the revenues, cash flow and liquidity of the Acquired Facilities and others in the industry in 1999. As a result of the negative impact of the provisions of PPS, the Acquired Facilities assessed the impairment of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 in 1999. In accordance with SFAS No. 121, the Acquired Facilities estimated the future cash flows expected to result from those assets to be held and used. In estimating the future cash flows for determining whether an asset is impaired, and if expected future cash flows used in measuring assets are impaired, the Acquired Facilities grouped the assets at the lowest level for which there are identifiable cash flows independent of other groups of assets, which is at the facility level. After determining the facilities eligible for an impairment charge, Management determined the estimated fair value of such facilities and compared such fair value to the carrying values of the related assets. The carrying value of buildings and improvements, leasehold improvements, equipment and goodwill exceeded the fair value by $120,007; accordingly, the Acquired Facilities recognized such amount as a loss on impairment of long-lived assets during the year ended December 31, 1999. 13. Certain Significant Risks and Uncertainties

The following information is provided in accordance with the AICPA Statement of Position No. 94-6, Disclosure of Certain Significant Risks and Uncertainties . The Acquired Facilities and others in the healthcare business are subject to certain inherent risks, including the following: –> Substantial dependence on revenues derived from reimbursement by the Federal Medicare and state Medicaid programs which have been drastically cut in recent years and which entail exposure to various healthcare fraud statutes; –> Government regulations, government budgetary constraints and proposed legislative and regulatory changes; and –> Lawsuits alleging malpractice and related claims. Such inherent risks require the use of certain management estimates in the preparation of the Acquired Facilities financial statements and it is reasonably possible that a change in such estimates may occur.

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The Acquired Facilities receives payment for a significant portion of services rendered to patients from the Federal government under Medicare and from the states in which its facilities and/or services are located under Medicaid. The Acquired Facilities operations are subject to a variety of Federal, state and local legal and regulatory risks, including without limitation the federal Anti-Kickback statute and the federal Ethics in Patient Referral Act (so-called "Stark Law"), many of which apply to virtually all companies engaged in the health care services industry. The Anti-Kickback statute prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. The Stark Law prohibits, with limited exceptions, financial relationships between ancillary service providers and referring physicians. Other regulatory risks assumed by the Acquired Facilities and other companies engaged in the health care industry are as follows: –> False Claims—"Operation Restore Trust" is a major anti-fraud demonstration project of the Office of the Inspector General. The primary purpose for the project is to scrutinize the activities of healthcare providers which are reimbursed under the Medicare and Medicaid programs. False claims are prohibited pursuant to criminal and civil statutes and are punishable by imprisonment and monetary penalties. –> Regulatory Requirement Deficiencies—In the ordinary course of business health care facilities receive notices of deficiencies for failure to comply with various regulatory requirements. In some cases, the reviewing agency may take adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from participation in the Medicare and Medicaid programs and, in extreme cases, revocation of a facility's license. –> Changes in laws and regulations—Changes in laws and regulations could have a material adverse effect on licensure, eligibility for participation in government programs, permissable activities, operating costs and the levels of reimbursement from governmental and other sources. In response to the aforementioned regulatory risks, the Parent Company formed a Corporate Compliance Department in 1996 to help identify, prevent and deter instances of Medicare and Medicaid noncompliance. Although the Parent Company and the Acquired Facilities strive to manage these regulatory risks, there can be no assurance that federal and/or state regulatory agencies that currently have jurisdiction over matters including, without limitation, Medicare, Medicaid and other government reimbursement programs, will take the position that the Acquired Facilities business and operations are in compliance with applicable law or with the standards of such regulatory agencies. In some cases, violation of such applicable law or regulatory standards by the Acquired Facilities can carry significant civil and criminal penalties and can give rise to qui tam litigation. In this connection, the Acquired Facilities are a defendant in certain actions or the subject of investigations concerning alleged violations of the False Claims Act or of Medicare regulations. As a result of the Parent Company's and the Acquired Facilities' financial position, various agencies of the federal government accelerated efforts to reach a resolution of all outstanding claims and issues related to the Parent Company's and the Acquired Facilities' alleged violations of healthcare statutes and related causes of action. The Parent Company has commenced global settlement negotiations with the government; however, the Parent Company is unable to assess fully the merits of the government's monetary claims

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at this time. In addition, the Parent Company is unable to determine the amount, if any, that might relate to the Acquired Facilities. The BBA, enacted in August 1997, made numerous changes to the Medicare and Medicaid programs that are significantly affecting the Acquired Facilities. With respect to Medicare, the BBA provides, among other things, for a prospective payment system for skilled nursing facilities. As a result, in 1999 the Acquired Facilities bore the cost risk of providing care inasmuch as they receive specified reimbursement for each treatment regardless of actual cost. With respect to Medicaid, the BBA repeals the so-called Boren Amendment, which required state Medicaid programs to reimburse nursing facilities for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. As a result, states now have considerable flexibility in establishing payment rates and the Management believes many states are moving toward a prospective payment type system for skilled nursing facilities. The BBA mandates the establishment of a PPS for Medicare skilled nursing facility services, under which facilities are paid a fixed fee for virtually all covered services. PPS is being phased in over a four-year period, effective January 1, 1999 for the Acquired Facilities. During the first three years, payments will be based on a blend of the facility's historical costs and a pre-determined federal rate. Thereafter, the per diem rates will be based 100% on the federal cost rate. Under PPS, each patient's clinical status is evaluated and placed into a payment category. The patient's payment category dictates the amount that the provider will receive to care for the patient on a daily basis. The per diem rate covers (i) all routine inpatient costs currently paid under Medicare Part A, (ii) certain ancillary and other items and services currently covered separately under Medicare Part B on a "pass-through" basis, and (iii) certain capital costs. The Acquired Facilities ability to offer the ancillary services required by higher acuity patients, such as those in its subacute care programs to Medicare beneficiaries, in a cost-effective manner

will continue to be critical to the Acquired Facilities services and will affect the profitability. To date the per diem reimbursement rates have generally been significantly less than the amount the Acquired Facilities received on a daily basis under cost based reimbursement, particularly in the case of higher acuity patients. As a result, PPS has had a material adverse impact on the Acquired Facilities' results of operations and financial condition (see note 12). The Acquired Facilities are also subject to malpractice and related claims, which arise in the normal course of business and which could have a significant effect on the Acquired Facilities. As a result, the Acquired Facilities maintain occurrence basis professional and general liability insurance with coverage and deductibles which management believes to be appropriate.

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Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 2000 and 1999 (dollars in thousands)
Column A Description Column B Balance at beginning of year Column C Additions charged to operating accounts Column D Deductions (1) Column E Balance at end of year

Allowance for doubtful accounts: Year ended December 31, 2000 Year ended December 31, 1999 (1)
Amounts represent bad debt write-offs

$8,966 $7,016

5,001 2,598

(1,090 ) (648 )

12,877 8,966

F-37

REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Five Star Quality Care, Inc.: We have audited the accompanying combined balance sheets of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network, Inc.) (the "Facilities"), as defined in Note 1, as of December 31, 2000 and 1999, and the related combined statements of operations, divisional equity (deficit), and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index on page F-1. These financial statements and schedule are the responsibility of the Facilities' 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network, Inc.), as defined in Note 1, at December 31, 2000 and 1999, and the combined results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. 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. /s/ ERNST & YOUNG LLP September 19, 2001 Boston, Massachusetts

F-38

Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

COMBINED BALANCE SHEETS (Dollars in thousands)
December 31, 2000 1999

Assets Current assets: Cash and cash equivalents Patient receivables, less allowance for doubtful accounts of $1,834 in 2000 and $1,534 in 1999 Other receivables Other current assets Total current assets Property and equipment: Building improvements Furniture, fixtures and equipment

$2,508 7,501 3,489 477 13,975 4,128 635 4,763 (3,725 ) 1,038 8,012 27 $23,052

$— 6,888 321 226 7,435 3,563 371 3,934 (2,425 ) 1,509 8,471 18 $17,433

Less accumulated depreciation

Goodwill, net Other assets Total assets Liabilities and divisional deficit Current liabilities: Accounts payable and accrued expenses Accrued wages and related liabilities Due to Senior Housing Properties Trust Current portion of long-term debt Current portion of unfavorable lease obligations and other non-current liabilities Total current liabilities Liabilities subject to compromise Unfavorable lease obligations and other non-current liabilities Total liabilities Commitments and contingencies Divisional deficit Total liabilities and divisional deficit

$12,645 3,570 5,760 — 3,673 25,648 7,111 24,980 57,739 (34,687 ) $23,052

$9,638 3,584 — 919 3,719 17,860 — 28,603 46,463 (29,030 ) $17,433

See accompanying notes.

F-39

Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands)
Year ended December 31, 2000 1999

Revenues: Net patient revenues Other Total revenues Expenses: Salaries, wages and benefits Nursing, dietary and other supplies Ancillary services Facility general and administrative costs Allocation of corporate overhead Insurance Rent Depreciation and amortization Impairment of long-lived assets Provision for bad debts Total expenses Loss from operations Interest expense Interest income Loss before income taxes Provision for income taxes Net loss

$85,128 197 85,325 55,033 5,445 4,077 7,205 4,101 4,496 8,748 1,766 — 1,758 92,629 (7,304 ) (121 ) 4 (7,421 ) — $(7,421 )

$86,643 302 86,945 50,619 5,592 3,848 9,394 4,347 4,876 9,315 2,027 36,322 4,233 130,573 (43,628 ) (181 ) 5 (43,804 ) — $(43,804 )

See accompanying notes.

F-40

Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

COMBINED STATEMENTS OF DIVISIONAL EQUITY (DEFICIT) (Dollars in thousands) Years ended December 31, 2000 and 1999 Balance at January 1, 1999 Contributions from Parent, net Net loss Balance at December 31, 1999 Contributions from Parent, net Net loss Balance at December 31, 2000 $14,464 310 (43,804 ) (29,030 ) 1,764 (7,421 ) $(34,687 )

See accompanying notes.

F-41

Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

COMBINED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year ended December 31, 2000 1999

Operating activities Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization Amortization of unfavorable lease obligations and other non-current liabilities Provision for bad debts Impairment of long-lived assets Increase (decrease) in cash arising from changes in operating assets and liabilities: Patient receivables Other receivables Other assets Accounts payable and accrued expenses Accrued wages and related liabilities Due to Senior Housing Properties Trust Net cash provided by operating activities Investing activities Purchases of property and equipment Disposals of property, equipment and other assets Net cash used in investing activities Financing activities Capital contributions, net Repayment of debt Repayment of capital lease Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

$(7,421 )

$(43,804 )

1,766 (3,673 ) 1,758 —

2,027 (3,691 ) 4,233 36,322

3,567 (3,168 ) (9 ) 3,007 (14 ) 5,760 1,573

2,915 987 (35 ) 1,527 621 — 1,102

(829 ) — (829 )

(1,362 ) — (1,362 )

1,764 — — 1,764 2,508 — $2,508

310 — (50 ) 260 — — $—

See accompanying notes.

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Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

NOTES TO COMBINED FINANCIAL STATEMENTS 1. Organization

The combined financial statements of Certain Mariner Post-Acute Network Facilities (the "Facilities") include the accounts of 17 nursing home facilities and certain related assets and liabilities owned and controlled by Mariner Post-Acute Network, Inc. ("Mariner" or the "Parent"). The Facilities are owned by wholly owned subsidiaries of GranCare, Inc. ("GranCare"), a wholly owned subsidiary of Mariner. The Facilities constitute a division of Mariner and are not separate legal entities. Mariner, formerly known as Paragon Health Network, Inc., was formed in November 1997 through the recapitalization by merger of Living Centers of America, Inc. ("LCA") with a newly-formed entity owned by certain affiliates of Apollo Management, L.P. and the subsequent merger of GranCare (the "GranCare Merger"). Mariner and certain of its respective subsidiaries, including those subsidiaries operating the Facilities, filed separate voluntary petitions (collectively, the "Chapter 11 Filings") for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on January 18, 2000 (the "Petition Date"). Mariner is presently operating its business as a debtor-in-possession and is subject to the jurisdiction of the Bankruptcy Court while a plan of reorganization is formulated. Mariner's and its subsidiaries' need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the implementation of the Balanced Budget Act of 1997. Mariner, through its GranCare subsidiaries, leased the Facilities from a wholly owned subsidiary of Senior Housing Properties Trust ("SNH"), which succeeded to the interests of Health and Retirement Properties Trust ("HRPT Properties"). On May 10, 2000, the Bankruptcy Court approved a settlement agreement (the "Settlement Agreement") between Mariner, certain of its GranCare subsidiaries, and subsidiaries of SNH. The Settlement Agreement is effective at the close of business on June 30, 2000 and is subject to obtaining regulatory approvals in the states where the Facilities are located. Based upon the terms of the Settlement Agreement: (a) the Facilities leased by the GranCare subsidiaries and the related personal property were assigned to subsidiaries of SNH and (b) Mariner agreed to manage the Facilities transferred to the SNH during a transition period that was expected to last less than six months. As of December 31, 2000, the transition period has ended and management of the Facilities is being performed by SNH. As specified in the Settlement Agreement, certain assets and liabilities reflected on the accompanying combined balance sheet as of December 31, 2000 will remain with Mariner including liabilities subject to compromise, unfavorable lease obligations and goodwill. In connection with the Settlement Agreement, outstanding indebtedness of the Facilities was terminated (see Note 8) and Mariner paid SNH at closing approximately $2,335,000 to settle its obligations for property taxes payable and certain employee accrued liabilities. The aforementioned transaction has not been reflected in the accompanying combined financial statements. The Settlement Agreement is contingent upon SNH obtaining licenses and other governmental approvals necessary to operate the Facilities. SNH has applied for all of the required licenses and, as of January 31, 2001, the required licenses for substantially all of these facilities have been received.

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2.

Summary of Significant Accounting Policies

Basis of presentation The accompanying combined financial statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. The accompanying combined financial statements have also been presented in conformity with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting of Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires the segregation of liabilities subject to compromise by the Bankruptcy Court as of the Petition Date and identification of all transactions and events that are directly associated with the reorganization of the Facilities. Pursuant to SOP 90-7, prepetition liabilities are reported on the basis of the expected amounts of such allowed claims, as opposed to the amounts for which those claims may be settled. Under a confirmed plan of reorganization, those claims may be settled at amounts substantially less than their allowed amounts.

Substantially all of the patient revenues and other income received by the Facilities is deposited in and commingled with the Parent's general corporate funds. Certain cash requirements of the Facilities were paid by the Parent and were charged directly to the Facilities. General and administrative costs of the Parent were allocated to the Facilities based upon management's estimate of the actual costs based upon the Facilities' level of operations. The Parent maintains insurance policies for the Facilities for workers' compensation, general and professional liability and employee health and dental insurance (see Note 9). In the opinion of management, the method for allocating Mariner's corporate general and administrative and insurance expenses is reasonable. It is not practicable to estimate additional costs, if any, that would have been incurred if the Facilities were not controlled by Mariner. Property and equipment Property and equipment is presented at cost. Maintenance and repairs are charged to operations as incurred and replacements and significant improvements, which would extend the useful life are capitalized. Depreciation and amortization are expensed over the estimated useful lives of the assets on a straight-line basis as follows: Building improvements Furniture, fixtures and equipment 10 - 15 years 3 - 15 years

Depreciation expense related to property and equipment for the years ended December 31, 2000 and 1999 was approximately $1,307,000 and $880,000, respectively. Goodwill Goodwill represents the excess of acquisition cost over the fair market value of net assets acquired in the GranCare Merger. Goodwill of approximately $53,177,000 was recorded at the Facilities and is being amortized on a straight-line basis over 30 years. Management periodically re-evaluates goodwill and makes any adjustments, if necessary, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the estimated useful life has changed. Accumulated amortization at December 31, 2000 and 1999 was approximately $1,159,000 and $700,000,

F-44

respectively. Amortization of goodwill charged to expense was approximately $459,000 and $1,147,000 for the years ended December 31, 2000 and 1999, respectively. Impairment of long-lived assets Statement of Financial Accounting Standards No. 121 , "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the long-lived assets are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of long-lived assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of the carrying value over the fair value written off. Fair market value is determined by various valuation techniques including discounted cash flow (see Note 7). Non-current liabilities Non-current liabilities principally include unfavorable lease obligations related to facilities acquired in the GranCare Merger. The unfavorable lease obligations are amortized as a reduction of rent expense over the remaining lease term. Revenue recognition Net patient revenue includes patient revenues payable by patients and amounts reimbursable by third party payors under contracts. Patient revenues payable by patients are recorded at established billing rates. Patient revenues to be reimbursed by contracts with third-party payors are recorded at the amount estimated to be realized under these contractual arrangements. Revenues from Medicare and Medicaid are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants or, for the Facilities' cost reporting periods beginning January 1, 1999, determined under the Prospective Payment System ("PPS"). Management separately estimates revenues due from each third party with which it has a contractual arrangement and records anticipated settlements with these parties in the contractual period during which services were rendered. The amounts actually reimbursable under Medicare and Medicaid cost reimbursement programs for periods prior to January 1, 1999 are determined by filing cost reports that are then subject to audit and retroactive adjustment by the payor.

Legislative changes to state or federal reimbursement systems may also retroactively affect recorded revenues. Changes in estimated revenues due in connection with Medicare and Medicaid may be recorded by management subsequent to the year of origination and prior to final settlement based on improved estimates. Such adjustments and final settlements with third party payors are reflected in operations at the time of the adjustment or settlement. Medicare revenues represented 21% and 23%, and Medicaid revenues represented 55% and 53% of net revenues for the years ended December 31, 2000 and 1999, respectively. On January 1, 1999, Mariner transitioned the Facilities to PPS for services to Medicare patients. Revenue recorded for 1999 consists of the aggregate payments expected from Medicare for individual claims at the appropriate payment rates, which include reimbursement for ancillary services.

F-45

In April 1995, the Health Care Finance Administration ("HCFA") issued a memorandum to its Medicare fiscal intermediaries as a guideline to assess costs incurred by inpatient providers relating to payment of occupational and speech language pathology services furnished under arrangements that include contracts between therapy providers and inpatient providers. While not binding on the fiscal intermediaries, the memorandum suggested certain rates to assist the fiscal intermediaries in making annual "prudent buyer" assessments of speech and occupational therapy rates paid by inpatient providers. In addition, HCFA has promulgated new salary equivalency guidelines effective April 1, 1998, which updated the then current physical therapy and respiratory therapy rates and established new guidelines for occupational therapy and speech therapy. These new payment guidelines were in effect until the Facilities transitioned to PPS, at which time payment for therapy services were included in the PPS rate. HCFA, through its intermediaries, is also subjecting physical therapy, occupational therapy and speech therapy to a heightened level of scrutiny resulting in increasing audit activity. A majority of the Facilities' provider and rehabilitation contracts provided for indemnification of the facilities for potential liabilities in connection with reimbursement for rehabilitation services. There can be no assurance that actions ultimately taken by HCFA with regard to reimbursement rates for such therapy services will not materially adversely affect the Facilities results of operations. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes that the Facilities are in compliance with all applicable laws and regulations, and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates. Income taxes The Parent files a consolidated federal income tax return. Throughout the years and periods presented herein, the Facilities' operations were included in the Parent's income tax returns. The income tax provision reported in the combined financial statements is an allocation of the Parent's total income tax provision. The Facilities' allocation was determined based on a calculation of income taxes as if the Facilities were a separate taxpayer, in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Income taxes paid was zero for all periods presented. Non-current deferred income taxes arise primarily from timing differences resulting from the recognition of rent expense for tax and financial reporting purposes and from the use of accelerated depreciation for tax purposes. Current deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes which are expected to reverse within one year.

F-46

3.

Proceedings Under Chapter 11 of the Bankruptcy Code

On January 18, 2000, Mariner and certain of its respective subsidiaries, including those subsidiaries operating the Facilities, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Proceedings"). Mariner is presently operating its business as a debtor-in-possession and is subject to the jurisdiction of the Bankruptcy Court while a plan of reorganization is formulated. As a debtor-in-possession, Mariner is authorized to operate its business but may not engage in transactions outside its ordinary course of business without the approval of the Bankruptcy Court.

While the Chapter 11 Proceedings constituted a default under Mariner's and such subsidiaries' various financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic stay that generally precludes any creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default outside of the Chapter 11 Proceedings with obtaining relief from the automatic stay from the Bankruptcy Court. On January 19, 2000, Mariner received approval from the Bankruptcy Court to pay prepetition and postpetition employee wages, salaries, benefits and other employee obligations. The Bankruptcy Court also approved orders granting authority to pay prepetition claims of certain critical vendors, utilities and patient obligations. All other prepetition liabilities at December 31, 2000 are disclosed in Note 5 as liabilities subject to compromise. The Facilities have been and intend to continue to pay postpetition claims to all vendors and providers in the ordinary course of business. 4. Going Concern and Issues Affecting Liquidity

The accompanying combined financial statements have been prepared assuming that the Facilities will continue to operate as a going concern. The Facilities have violated certain covenants of its loan agreement, have experienced significant losses and have a working capital deficiency of approximately $11,673,000 and a divisional deficit of approximately $34,687,000 as of December 31, 2000. Mariner and certain of its subsidiaries, including those subsidiaries operating the Facilities, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. These matters, among others, raise substantial doubt about the Facilities ability to continue as a going concern. As described in Note 1, on May 10, 2000 the Bankruptcy Court approved a settlement agreement between Mariner and SNH whereby the Facilities leased by Mariner and related personal property were assigned to affiliates of SNH. SNH agreed to provide working capital to the facilities. The agreement is effective at the close of business on June 30, 2000 and is subject to obtaining regulatory approvals in the states where the Facilities are located. At December 31, 2000, $5,760,000 had been advanced to the facilities by SNH. On December 31, 2000, SNH has approximately $173,000,000 available for borrowing under a $270,000,000 bank credit facility. Management of SNH believes that the available borrowings under the bank credit facility are sufficient to provide the necessary working capital to the Facilities for operations subsequent to the closing of the June 30, 2000 transaction. 5. Liabilities Subject to Compromise

"Liabilities subject to compromise" represents liabilities incurred prior to the commencement of the Chapter 11 Proceedings. These liabilities, consisting primarily of long-term debt and certain accounts payable, represent the Facilities' estimate of known or potential prepetition claims to be resolved in connection with the Chapter 11 Proceedings. Such claims remain subject to future adjustments based on negotiations, actions of the Bankruptcy Court, further developments with respect to disputed

F-47

claims, future rejection of executory contracts or unexpired leases, determination as to the value of any collateral securing claims, treatment under the plan of reorganization and other events. Payment for these amounts will be established in connection with the plan of reorganization. A summary of the principal categories of claims classified as liabilities subject to compromise at December 31, 2000 is as follows (in thousands): Accounts payable and accrued expenses Long-term debt $6,223 888 $7,111 6. Impairment of Long-Lived Assets

The revenues recorded by the Facilities under PPS are substantially less than the cost-based reimbursement it received previously. The implementation of PPS resulted in a greater than expected decline in reimbursement for inpatient services. Management determined that these revenue declines are other than temporary and are expected to have a materially adverse effect on future revenues and cash flow. As a result of such indicators of impairment, in the third quarter of 1999, a detailed analysis of the Facilities' long-lived assets and their estimated future cash flows was completed. The analysis resulted in the identification and measurement of an impairment loss of approximately $36,322,000. Each analysis included management's estimate of the undiscounted cash flows to be generated by these assets with a comparison to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on the present value of future cash flows. The following is a summary of the impairment losses recognized during 1999 by asset category (in thousands):

1999

Goodwill Property and equipment

$30,378 5,944 $36,322

7.

Debt

On December 28, 1990, a mortgage loan agreement was entered into for $15,000,000 with HRPT Properties, secured by two nursing home facilities' (Northwest Health Care Center and River Hills West Health Care Center) land, building and improvements. The interest rate on the note was 11.5%. The loan was repaid in September 1998 as part of the sale-leaseback transaction discussed in Note 6. On March 28, 1992, a loan agreement was entered into with HRPT Properties for the purpose of funding renovations to the Christopher East facility, maturing on January 31, 2013. Advances to AMS Properties, Inc. totaled approximately $883,000 for the years ended December 31, 2000 and 1999. The loan is interest bearing and principal is payable upon maturity. The interest rate on the note is 13.75%. The Bankruptcy Proceedings are considered an Event of Default as defined in the loan agreement. Current portion of long-term debt at December 31, 1999 includes the principal balance of

F-48

the note. In consideration of the terms of the Settlement Agreement, the Christopher East note obligation was terminated in July 2000. Interest paid was approximately $60,000 and $181,000 during the years ended December 31, 2000 and 1999, respectively. 8. Transactions with Affiliates

Mariner provided various services to the Facilities including, but not limited to, financial, legal, insurance, information systems, employee benefit plans and certain administrative services, as required. The combined financial statements reflect charges for certain corporate general and administrative expenses from Mariner's corporate office to the Facilities. Such corporate charges represent allocations based on determinations management believes to be reasonable (5% of total revenues). Administrative costs charged by Mariner were approximately $2,133,000 and $4,347,000 for the years ended December 31, 2000 and 1999, respectively. For the year ended December 31, 2000, fees charged by SNH for management services were approximately $1,968,000, all of which have been paid. The Facilities participated in the various benefit plans of Mariner, primarily the profit sharing and 401(k) plans. These plans include matching provisions for employee contributions to the 401(k) plan. The financial statements reflect charges for benefits attributable to the Facilities' employees. Such amounts totaled approximately $108,000 and $221,000 for the years ended December 31, 2000 and 1999, respectively. Through March 31, 1998, the Facilities participated in a program for insurance of workers' compensation risks through a captive insurance subsidiary of Mariner. Effective March 31, 1998, Mariner purchased a fully-insured workers' compensation policy with no deductible or retention with a catastrophic policy in place to cover any loss above $500,000 per occurrence. Additionally, in 1998 Mariner purchased general and professional liability insurance through a third party. The maximum loss exposure with respect to this policy is $100,000 per occurrence. Mariner obtains and provides insurance coverage for health, life and disability, auto, general liability and workers' compensation through its self-insurance and outside insurance programs and allocates to the Facilities based on its estimate of the actual costs incurred on behalf of the Facilities. Total insurance costs allocated were approximately $2,537,000 and $4,876,000 000 for the years ended December 31, 2000 and 1999, respectively. These costs are included in facility general and administrative costs in the accompanying combined statements of operations. The Facilities purchased certain therapy services from rehabilitation subsidiaries of Mariner. These purchases amounted to approximately $0 and $2,955,000 for the years ended December 31, 2000 and 1999, respectively. 9. Commitments and Contingencies

As discussed in Note 1, the Facilities are party to various agreements between GranCare and SNH. SNH is the lessor with respect to the Facilities leased by two subsidiaries of GranCare (the "Tenant Entities") under operating leases. Pursuant to a Collateral Pledge Agreement dated October 31, 1997, Mariner provided an unlimited guaranty to SNH, which is secured by a cash collateral deposit of $15,000,000, the earned interest on which is retained by SNH. In June 2000, the Facilities ceased payment of rents. As part of the Settlement Agreement, Mariner was released from its lease obligations.

F-49

Rent expense, net of amortization of unfavorable lease obligation, for all operating leases was approximately $8,748,000 and $9,314,000 for the years ended December 31, 2000 and 1999, respectively. From time to time, the Facilities have been subject to various legal proceedings in the ordinary course of business. In the opinion of management, except as described below, there are currently no proceedings which could potentially have a material adverse effect on the Facilities' financial position or results of operations after taking into account the insurance coverage maintained by Mariner. Although management believes that any of the proceedings discussed below will not have a material adverse impact on the Facilities if determined adversely to the Facilities, given the Facilities' current financial condition, lack of liquidity and the current lack of aggregate limit under Mariner's current GL/PL insurance policy, settling a large number of cases within the Company's $1 million self-insured retention limit could have a material adverse effect on the Facilities. On August 26, 1996, a class action complaint was asserted against GranCare in the Denver, Colorado District Court. On March 15, 1998, the Court entered an Order in which it certified a class action in the matter. On June 10, 1998, Mariner filed a Motion to Dismiss all claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and these motions were partially granted by the Court on October 30, 1998. Plaintiffs filed a writ with the Colorado Supreme Court and an appeal with the Colorado Court of Appeals. The Supreme Court writ has been denied, the Court of Appeals matter has been briefed and Oral Argument was set for January 18, 2000. In accordance with the Chapter 11 Proceedings and more particularly, Section 362 of the Bankruptcy Code, this matter was stayed on January 18, 2000. However, Mariner did agree to limited relief from the stay in order to allow for certain parts of the appeal to continue. On January 4, 2001, the Court of Appeals reversed the District Court's decision. Mariner is currently considering whether to pursue a request for rehearing and/or appeal to the Colorado Supreme Court. The Company intends to vigorously contest the remaining allegations of class status. 10. Income Taxes

The components of the net deferred tax asset are approximately as follows (in thousands):
December 31, 2000 1999

Deferred tax assets: Bad debts Amounts related to property and equipment Payroll and benefits Unfavorable lease obligations and other liabilities NOL carryforwards Total deferred tax assets Less valuation allowance Net deferred tax asset

$325 1,681 271 11,304 11,878 25,459 (25,459 ) $—

$598 1,585 620 12,736 7,205 22,744 (22,744 ) $—

The Facilities have established a full valuation allowance, which completely offsets all net deferred tax assets generated from the Facilities' net losses because its future realizability is uncertain. The net change in the valuation allowance was an increase of approximately $2,715,000 and $4,789,000 at December 31, 2000 and 1999, respectively.

F-50

The provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax loss as a result of the following:
Year ended December 31, 2000 1999

Federal statutory income tax rate Increase (decrease) in taxes resulting from:

(34.0 )%

(34.0 )%

State and local taxes, net of federal tax benefits Permanent book/tax differences, primarily resulting from goodwill amortization Impairment of assets Change in valuation allowance Effective tax rate

(4.7 ) 2.1 — 36.6 —%

(1.4 ) 0.9 23.6 10.9 —%

11.

Concentrations of Credit Risk

Financial instruments that potentially subject the Facilities to concentration of credit risk consist principally of trade receivables. There have been, and the Facilities expect that there will continue to be, a number of proposals to limit reimbursement allowable to skilled nursing facilities. Should the related government agencies suspend or significantly reduce contributions to the Medicare or Medicaid programs, the Facilities' ability to collect its receivables would be adversely impacted. Management believes that the remaining receivable balances from various payors, including individuals involved in diverse activities, subject to differing economic conditions, do not represent a concentration of credit risk to the Facilities. Management continually monitors and adjusts its allowance for doubtful accounts associated with its receivables. 12. Fair Value of Financial Instruments

The Facilities financial instruments include notes payable. Fair values for fixed rate debt instruments were estimated based on the present value of cash flows that would be paid on the note over the remaining note term using the Facilities' current incremental borrowing rate rather than the stated interest rate on the notes. The fair values of the financial instruments approximate their carrying values.

F-51

Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000)

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2000 and 1999 (dollars in thousands)
Balance at beginning of year Charged (Credited) to operations Write-offs/ Recoveries Balance at end of year

Description

Other

Year ended December 31, 2000: Allowance for doubtful accounts:

$1,534 $1,534

$1,758 $1,758

$(1,458 ) $(1,458 )

$— $—

$1,834 $1,834

Year ended December 31, 1999: Allowance for doubtful accounts:

$2,927 $2,927

$4,233 $4,233

$(5,468 ) $(5,468 )

$(158 ) $(158 )

$1,534 $1,534

F-52

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Crestline Capital Corporation: We have audited the accompanying consolidated balance sheets of CSL Group, Inc. and Subsidiaries (a business unit wholly owned by Crestline Capital Corporation through January 11, 2002) as Partitioned for Sale to SNH/CSL Properties Trust (see Notes 1 and 12) as of December 28, 2001 and December 29, 2000, and the related consolidated statements of operations, equity and cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust, as of December 28, 2001 and December 29, 2000 and the results of its operations, its equity and its cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Vienna, Virginia February 18, 2002

F-53

CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

CONSOLIDATED BALANCE SHEETS December 28, 2001 and December 29, 2000 (in thousands)
2001 2000

Assets Property and equipment, net Due from Marriott Senior Living Services, net Other assets Cash and cash equivalents Total assets Liabilities and equity Debt Accounts payable and accrued expenses Deferred income taxes Other liabilities Total liabilities Equity: Investments in and advances to parent Total liabilities and equity See Notes to Consolidated Financial Statements.

$

628,552 8,107 10,324 11,779 658,762

$

643,110 6,106 12,522 6,676 668,414

$

$

$

245,304 1,099 62,001 15,686 324,090

$

249,190 701 63,660 17,342 330,893

334,672 $ 658,762 $

337,521 668,414

F-54

CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands)
2001 2000 1999

Revenues Routine Ancillary

$253,709 23,752 277,461 38 277,499

$239,065 22,821 261,886 37 261,923

$223,794 22,704 246,498 92 246,590

Equity in earnings of affiliates Total revenues Operating costs and expenses Property-level operating costs and expenses Routine Ancillary Other operating costs and expenses Depreciation and amortization Management fees Property taxes and other Loss on impairment of asset Other Total operating costs and expenses Operating profit Corporate expenses Interest expense Interest income Income before income taxes and extraordinary item Provision for income taxes Income before extraordinary item Gain on early extinguishment of debt, net of taxes Net income

162,575 13,442 24,155 18,143 9,025 — — 227,340 50,159 (1,972 ) (20,127 ) 792 28,852 (11,540 ) 17,312 — $17,312

153,049 14,493 24,083 15,658 9,263 — — 216,546 45,377 (1,917 ) (19,586 ) 942 24,816 (10,175 ) 14,641 253 $14,894

145,778 15,414 21,624 14,965 8,549 3,522 1,650 211,502 35,088 (2,096 ) (17,061 ) 773 16,704 (6,849 ) 9,855 — $9,855

See Notes to Consolidated Financial Statements.

F-55

CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

CONSOLIDATED STATEMENTS OF EQUITY Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) Balance, January 1, 1999 Net income Advances to parent, net Balance, December 31, 1999 Net income Advances to parent, net Balance, December 29, 2000 Net income Advances to parent, net $398,803 9,855 (11,526 ) 397,132 14,894 (74,505 ) 337,521 17,312 (20,161 )

Balance, December 28, 2001

$334,672

See Notes to Consolidated Financial Statements.

F-56

CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands)
2001 2000 1999

Operating activities Net income Adjustments to reconcile net income to cash from operations: Depreciation and amortization Gain on early extinguishment of debt, net of taxes Loss on impairment of asset Amortization of debt premiums and deferred financing costs Change in amounts due from Marriott Senior Living Services Change in other operating accounts Cash provided by operations Investing activities Expansions of senior living communities Purchase of minority partnership interest Other capital expenditures Other Cash used in investing activities Financing activities Repayments of debt Issuances of debt Net advances to parent Other Cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$17,312 24,155 — — 85 (2,001 ) (878 ) 38,673

$14,894 24,083 (253 ) — (710 ) (377 ) 11,867 49,504

$9,855 21,624 — 3,522 (1,550 ) 2,156 2,820 38,427

— — (10,549 ) 341 (10,208 )

(3,204 ) — (10,380 ) 998 (12,586 )

(18,451 ) (7,010 ) (9,239 ) 535 (34,165 )

(3,201 ) — (20,161 ) — (23,362 ) 5,103 6,676 $11,779

(47,250 ) 92,370 (74,505 ) (3,863 ) (33,248 ) 3,670 3,006 $6,676

(4,197 ) — (11,526 ) — (15,723 ) (11,461 ) 14,467 $3,006

See Notes to Consolidated Financial Statements.

F-57

CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

Basis of Presentation and Organization

On June 21, 1997, Crestline Capital Corporation ("Crestline Capital", formerly known as HMC Senior Living Communities, Inc.), a wholly owned subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all the outstanding stock of CSL Group, Inc. and subsidiaries ("CSL Group", formerly known as Forum Group, Inc. "Forum") from Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International, Inc., pursuant to a stock purchase agreement dated June 21, 1997. In connection with the acquisition, Crestline Capital acquired the ownership of 29 senior living communities, and assigned to MSLS its interest as manager under long-term operating agreements. Subsequent to its acquisition of Forum, subsidiaries of Crestline Capital acquired two additional senior living communities. On December 29, 1998, Crestline Capital became a publicly traded company when Host Marriott completed its plan of reorganizing its business operations by spinning-off Crestline Capital to the shareholders of Host Marriott, as part of a series of transactions pursuant to which Host Marriott elected to be considered a real estate investment trust. On August 9, 2001, Crestline Capital and CSL Group entered into a stock purchase agreement (the "Stock Purchase Agreement") with Senior Housing Properties Trust ("SNH") and SNH/CSL Properties Trust ("SNH/CSL"). Pursuant to the Stock Purchase Agreement, SNH/CSL would purchase the stock of CSL Group and certain other subsidiaries of Crestline Capital that compose Crestline Capital's senior living business (the "Partitioned Business") for $600 million. The transaction was subject to a successful vote by at least two-thirds of Crestline Capital's shareholders, arranging additional mortgage debt financing, obtaining certain consents and customary closing conditions. The sale transaction closed on January 11, 2002 (see Note 12). These consolidated financial statements include only the assets and liabilities, along with the results from operations generated from the Partitioned Business, as described in the Stock Purchase Agreement. The Partitioned Business is an organizational unit of Crestline Capital and is not a distinct legal entity. As of December 28, 2001, the Partitioned Business consisted of the ownership of 31 senior living communities, a general partnership interest in one senior living community and a second mortgage note receivable on a senior living community. The Securities and Exchange Commission, in Staff Accounting Bulletin Number 55 (SAB 55), requires that historical financial statements of a subsidiary, division, or lesser business component of another entity include certain expenses incurred by the parent on its behalf. These expenses include officer and employee salaries, rent or depreciation, advertising, accounting and legal services, other selling, general and administrative expenses and other such expenses. Investments and advances from parent represents the net amount of investments and advances made by Crestline Capital as a result of the acquisition and operation of the Partitioned Business. These financial statements include the adjustments necessary to comply with SAB 55. The Partitioned Business operated as a wholly-owned business unit of Crestline Capital utilizing Crestline Capital's employees, insurance and administrative services since the Partitioned Business had no employees. Periodically, certain operating expenses, capital expenditures and other cash requirements of the Partitioned Business were paid by Crestline Capital and charged directly or allocated to the Partitioned Business. Certain general and administrative costs of Crestline Capital were allocated to the Partitioned Business using a variety of methods, principally including Crestline Capital's specific identification of individual cost items and otherwise through allocations based upon estimated levels of effort devoted by its general and administrative departments to individual entities or relative measures of size of the entities based on assets or revenues. In the opinion of management, the

F-58

methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. 2. Summary of Significant Accounting Policies

Principles of consolidation The consolidated financial statements include the accounts of the Partitioned Business and its subsidiaries and controlled affiliates. Investments in affiliates owned 20 percent or more and over which the Partitioned Business has the ability to exercise significant influence, but does not control, are accounted for using the equity method. All material intercompany transactions and balances have been eliminated. Fiscal year The Partitioned Business's fiscal year ends on the Friday nearest to December 31. Revenues Revenues represent operating revenues from senior living communities. Routine revenues consist of resident fees and health care service revenues, which are generated primarily from monthly charges for independent and assisted living apartments and special care center rooms and daily charges for healthcare beds and are recognized monthly based on the terms of the residents' agreements. Advance payments received

for services are deferred until the services are provided. Ancillary revenue is generated on a "fee for service" basis for supplemental items requested by residents and is recognized as the services are provided. A portion of revenues from health care services was attributable to patients whose bills are paid by Medicare or Medicaid under contractual arrangements. For fiscal years subsequent to 1998, the Partitioned Business is generally paid a fixed payment rate for its Medicare and Medicaid services and therefore, there are no contractual allowances for these fiscal years in the Partitioned Business's consolidated financial statements. Cash and cash equivalents All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents. Property and equipment Property and equipment are recorded at cost. Replacements and improvements that extend the useful life of property and equipment are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. In cases where management is holding for sale a particular property, management assesses impairment based on whether the estimated sales price less cost of disposal of each individual property to be sold is less than the net book value. A property is considered to be held for sale when a decision is made to dispose of the property. Otherwise, impairment is assessed based on whether it is probable that undiscounted future cash flows from each property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair value.

F-59

Concentration of credit risk Financial instruments that potentially subject the Partitioned Business to significant concentration of credit risk consist principally of cash and cash equivalents. The Partitioned Business maintains cash and cash equivalents with various high credit-quality financial institutions and limits the amount of credit exposure with any institution. Working capital Pursuant to the terms of the senior living operating agreements (see Note 6), the Partitioned Business is required to provide MSLS with working capital and supplies to meet the operating needs of the senior living communities. MSLS converts cash advanced by the Partitioned Business into other forms of working capital consisting primarily of operating cash, inventories, resident deposits and trade receivables and payables which are maintained and controlled by MSLS. Upon the termination of the operating agreements, MSLS is required to convert working capital and supplies into cash and return it to the Partitioned Business. As a result of these conditions, the individual components of working capital and supplies controlled by MSLS are not reflected in the Partitioned Business's consolidated balance sheets, however, the net working capital advanced is included in due from Marriott Senior Living Services on the Partitioned Business's consolidated balance sheets. Deferred revenue Monthly fees deferred for the non-refundable portion of the entry fees are recorded as deferred revenue and included in other liabilities in the Partitioned Business's consolidated balance sheets. These amounts are recognized as revenue as services are performed over the expected term of the residents' contracts. Liability for future health care services Certain resident and admission agreements at the communities entitled residents to receive limited amounts of health care up to defined maximums. The estimated liabilities associated with the health care obligation have been accrued in other liabilities in the Partitioned Business's consolidated balance sheets. As of December 28, 2001 and December 29, 2000, the liability totaled $815,000 and $977,000, respectively. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New statements of financial accounting standards During July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets". In the opinion of management the adoption of these statements will not have a material effect on the Partitioned Business's consolidated financial statements.

F-60

3.

Property and Equipment

Property and equipment consists of the following:
2001 2000

(in thousands)

Land Buildings and leasehold improvements Furniture and equipment

$107,425 569,144 55,527 732,096 (103,544 ) $628,552

$107,425 564,867 49,292 721,584 (78,474 ) $643,110

Less accumulated depreciation and amortization

In 1999, management determined that one of its senior living communities was impaired as a result of a deterioration of the community's operating results due to its size and age and the new supply of communities in its market. A $3.5 million pre-tax charge was recorded to reduce the net book value of the property to its fair value. 4. Restricted Cash

Restricted cash, which is included in other assets on the Partitioned Business's consolidated balance sheets, consists of the following:
2001 (in thousands) 2000

Debt service escrows Fixed asset escrows Real estate tax escrows Insurance escrows

$1,137 4,537 1,507 163 $7,344

$1,137 4,878 1,697 64 $7,776

The debt service, fixed asset, real estate tax and insurance escrows consist of cash transferred into segregated escrow accounts out of revenues generated by the senior living communities, pursuant to the secured debt agreements. Funds from these reserves are periodically disbursed by the collateral agent to pay for debt service, capital expenditures, insurance premiums and real estate taxes relating to the secured properties. In addition, the fixed asset escrows also include cash transferred into segregated escrow accounts pursuant to the senior living community operating agreements to fund certain capital expenditures at the senior living communities (see Note 6).

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CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Leases

The Partitioned Business is the lessee under capital and operating leases. Future minimum annual rental commitments for all non-cancelable leases as of December 28, 2001 are as follows:
Capital Leases Operating Leases

(in thousands)

2002 2003 2004 2005 2006 Thereafter Total minimum lease payments Less amount representing interest Present value of minimum lease payments

$1,258 1,477 1,384 1,384 1,384 7,008 13,895 (4,541 ) $9,354

$281 281 281 281 281 1,924 $3,329

The Partitioned Business leases two senior living communities under capital leases expiring in 2016. Upon the expiration of the lease or anytime prior to lease expiration, the Partitioned Business has the first right of refusal to submit a counter offer to any acceptable bona fide offer from a third party within 30 days of notice from the lessor. If the Partitioned Business fails to exercise its right of first refusal, then the lessor may proceed with the sale of the leased property and all assets therein. The assets recorded under capital leases, which are included in property and equipment on the Partitioned Business's consolidated balance sheets, were $12.6 million and $13.4 million as of December 28, 2001 and December 29, 2000, respectively, net of accumulated amortization of $4.8 million and $3.6 million, respectively. The amortization for assets recorded under capital leases is included in depreciation and amortization on the Partitioned Business's consolidated statements of operations. The Partitioned Business also has one long-term operating ground lease which expires in 2013. The operating lease includes three renewal options exercisable in five-year increments through the year 2028. Rent expense for fiscal years 2001, 2000 and 1999 was $279,000, $278,000 and $281,000, respectively. 6. Operating Agreements

The senior living communities are subject to operating agreements which provide for MSLS to operate the senior living communities, generally for an initial term of 25 to 30 years with renewal terms subject to certain performance criteria at the option of MSLS of up to an additional five to ten years. The operating agreements provide for payment of base management fees equal to five percent of revenues and incentive management fees equal to 20% of operating profit (as defined in the operating agreements) over a priority return to the owner. In the event of early termination of the operating agreements, MSLS will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Partitioned Business has the option to terminate certain, but not all, management agreements if specified performance thresholds are not satisfied. No operating agreement with respect to a single community is cross-collateralized or cross-defaulted to any other operating agreement, and any single operating agreement may be terminated following a default by the

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Partitioned Business or MSLS, although such termination will not trigger the cancellation of any other operating agreement. Most of the senior living communities are also subject to pooling agreements whereby for the limited purpose of calculating management fees and exercising certain termination rights under the operating agreements, the management fees and rights are considered in the aggregate for the senior living communities in each pool. The operating agreements require MSLS to furnish certain services ("Central Administrative Services") which are generally furnished on a central or regional basis to other senior living communities in the Marriott retirement community system. Such services will include the following: (i) marketing and public relations services; (ii) human resources program development; (iii) information systems support and development; and (iv) centralized computer payroll and accounting services. In lieu of reimbursement for such services, MSLS is paid an amount equal to 2% of revenues. Generally, through the earlier of (i) the end of the seventh year of the operating agreement or (ii) the date upon which certain performance criteria have been met, 50% of the Central Administrative Services fee is payable only to the extent that operating profit for the communities exceeds a priority return to the owner. However, the payment of fees for the Central Administrative Services were generally waived for the first year of the operating agreement.

The Partitioned Business is required under the operating agreements to contribute a percentage of revenues into an interest-bearing reserve account to cover the cost of (a) certain routine repairs and maintenance to the senior living communities which are normally capitalized and (b) replacements and renewals to the senior living communities' property and improvements. The annual contribution amount (expressed as a percentage of revenues) generally will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The amount contributed for fiscal years 2001, 2000 and 1999 was $7.3 million, $6.9 million and $6.4 million, respectively. The operating agreements provide that the Partitioned Business shall separately fund the cost of certain major or non-routine repairs, alterations, improvements, renewals and replacements to the senior living communities. 7. Debt

Debt consists of the following as of December 28, 2001 and December 29, 2000. See Note 12 "Subsequent Event," for a discussion of 2002 transactions:
2001 (in thousands) 2000

LaSalle mortgage debt secured by eight senior living communities with $237 million of real estate assets, with an interest rate of 10.01%, maturing through 2020 (amount includes debt premium of $12.8 million in 2001 and $13.5 million in 2000) GMAC mortgage debt secured by eight senior living communities with $115 million of real estate assets, with an interest rate of 4.87%, maturing in July 2005 Revenue bonds with an interest rate of 5.875%, due 2027 Capital lease obligations Other notes Total debt

$128,880 92,370 14,700 9,354 — $245,304

$131,298 92,370 14,700 9,842 980 $249,190
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Scheduled debt maturities at December 28, 2001, excluding the unamortized debt premiums of $12.8 million, are as follows (in thousands): 2002 2003 2004 2005 2006 Thereafter $2,500 2,967 3,154 95,870 3,846 124,178 $232,515 In 2000, the Partitioned Business entered into five loan agreements totaling $92.4 million secured by mortgages on eight senior living communities. The non-recourse loans bear interest at the 30-day LIBOR rate plus 275 basis points (4.8688% at December 28, 2001). The loans mature in July 2005 and there is no principal amortization during the term of the loans. The proceeds of the financing were used to repay the existing loan secured by the senior living communities with a principal balance of $43.5 million, which bore interest at 9.93% and had a scheduled maturity of January 1, 2001. In connection with the prepayment of the existing loan in 2000, the Partitioned Business recognized an extraordinary gain on the early extinguishment of debt of $253,000, net of income taxes of $175,000. The indentures governing the mortgages of certain of the Partitioned Business's senior living communities contain restrictive covenants that, among other restrictions, (i) require maintenance of segregated cash collection of all rents for certain of the senior living communities; (ii) require separate cash reserves for debt service, property improvements, real estate taxes and insurance; and (iii) limit the ability to incur additional indebtedness, enter into or cancel leases, enter into certain transactions with affiliates or sell certain assets. As of December 28, 2001 and December 29, 2000, the Partitioned Business was in compliance with all debt covenants. In conjunction with the acquisition of Forum, the Partitioned Business recorded the debt assumed at its fair value. The Partitioned Business is amortizing this premium to interest expense over the remaining life of the related debt. The amortization of this debt premium for fiscal years 2001, 2000 and 1999 was $684 thousand, $1.1 million and $1.6 million, respectively. Cash paid for interest for fiscal years 2001, 2000 and 1999 totaled $19.6 million, $20.8 million and $18.6 million, respectively. Deferred financing costs, which are included in other assets on the Partitioned Business's consolidated balance sheets, was $3.8 million net of accumulated amortization of $1.2 million as of December 28, 2001 and $3.4 million net of accumulated amortization of $.4 million as of December 29, 2000. There was no deferred financing cost in 1999. 8. Income Taxes

Total deferred tax assets and liabilities as of December 28, 2001 and December 29, 2000 were as follows:
2001 2000

(in thousands)

Deferred tax assets Deferred tax liabilities Net deferred income tax liability

$15,900 (77,901 ) $(62,001 )

$17,359 (81,019 ) $(63,660 )

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The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities was as follows:
2001 2000

(in thousands)

Property and equipment Debt adjustment to fair value at acquisition Net operating losses and other, net Net deferred income tax liability

$(74,914 ) 5,244 7,669 $(62,001 )

$(80,552 ) 5,700 11,192 $(63,660 )

The provision for income taxes for fiscal years 2001, 2000 and 1999 consists of the following:
2001 2000 1999

(in thousands)

Current Deferred

$11,027 513 $11,540

$8,667 1,508 $10,175

$6,928 (79 ) $6,849

A reconciliation of the statutory Federal tax rate to the Partitioned Business's effective income tax rate for fiscal years 2001, 2000 and 1999 is as follows:
2001 2000 1999

Statutory federal tax rate State income taxes, net of federal tax benefit

35.0 % 5.0 40.0 %

35.0 % 6.0 41.0 %

35.0 % 6.0 41.0 %

The Partitioned Business was included in the consolidated federal income tax return of Crestline Capital (the "Group"). Tax expense was allocated to the Partitioned Business as a member of the Group based upon the relative contribution to the Group's consolidated taxable income/loss and changes in temporary differences. This allocation method results in federal and net state tax expense allocated for all periods presented that is substantially equal to the expense that would have been recognized if the Partitioned Business had filed separate tax returns. For income tax purposes, the Partitioned Business, through CSL Group, has net operating loss carryforwards of $7.0 million which expire through 2006. 9. Fair Value of Financial Instruments

The fair values of certain financial liabilities are shown below:
2001 Carrying Amount Fair Value (in thousands) 2000 Carrying Amount Fair Value

Debt, net of capital leases

$235,950

$239,355

$239,348

$243,718

Valuations for secured debt are determined based on the expected future payments discounted at risk-adjusted rates. The fair values of other notes are estimated to be equal to their carrying value. The

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fair value of all of the Partitioned Business' other financial assets and liabilities are assumed to equal their carrying amounts. In 1999, the Partitioned Business recorded a pre-tax charge of $1.7 million, which is included in other operating costs and expenses, to fully reserve a second mortgage note receivable due to uncertainty in the collectability of the note. 10. Continuing Lifecare Contracts

Residents at two of the communities are offered continuing care life contracts that provide reduced monthly rental rates in exchange for significant security deposits, which become partially or totally non-refundable over time. At the Pueblo Norte senior living community, two types of continuing care contracts are currently offered to new residents. One contract provides that 10% of the resident admission fees is non-refundable upon occupancy. The remaining 90% of the resident admission fees becomes non-refundable at a rate of 1 1 / 2 % per month over the subsequent 60 months and is amortized over the expected life of the resident. The second contract type provides that the resident admission fee is 30% non-refundable and 70% fully refundable. The non-refundable portions are amortized over the expected life of the resident. The liability for the refundable portion of the admission fees at December 28, 2001 and December 29, 2000 is $4,849,000 and $5,161,000, respectively, and is included in other liabilities on the Partitioned Business's consolidated balance sheets. The non-refundable portion of the admission fees at December 28, 2001 and December 29, 2000 totaled $3,392,000 and $2,820,000, respectively, and is included in other liabilities on the Partitioned Business's consolidated balance sheets. Three other types of continuing care agreements are in effect at Pueblo Norte with existing residents but are no longer offered to new residents. One agreement provides that the resident admission fee is 10% non-refundable and 90% fully refundable. Each resident is entitled to 70 free days of care in the health center based on a prescribed formula. The second type of agreement provides that the resident admission fee is 1% refundable and 99% non-refundable. The non-refundable portion of the resident admission fees are amortized over the expected life of the resident. The liability at December 28, 2001 and December 29, 2000 for the non-refundable portion of these contracts is $2,522,000 and $3,208,000, respectively, and is included in other liabilities on the Partitioned Business's consolidated balance sheets. At two additional senior living communities, lifecare contracts are in effect with existing residents, but no longer offered to new residents. The agreements provide that the resident admission fees are either fully refundable or non-refundable. As of December 28, 2001 and December 29, 2000, the refundable portion of these contracts was $965,000 in both years, and the non-refundable portion of these contracts was $515,000 and $618,000, respectively, and are included in other liabilities on the Partitioned Business's consolidated balance sheets. 11. Litigation

On June 15, 1995, the Russell F. Knapp Revocable Trust (the "Plaintiff") filed a complaint in the United States District Court for the Southern District of Indiana (the "Indiana Court") against the general partner of one of CSL Group's subsidiary partnerships, CCC Retirement Partners, LP, formerly Forum Retirement Partners, LP, ("FRP"), alleging breach of the partnership agreement, breach of fiduciary duty, fraud, insider trading and civil conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff, MSLS, the general partner, CSL Group, Host Marriott and Crestline Capital entered into

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a Settlement and Release Agreement (the "Settlement Agreement"), pursuant to which Host Marriott agreed to purchase, at a price of $4.50 per unit, the partnership units of each limited partner electing to join in the Settlement Agreement. CSL Group held 79% of the outstanding limited partner units in the partnership at that time. Host Marriott and CSL Group also agreed to pay as much as an additional $.75 per unit (the

"Additional Payment") to the settling limited partners (the "Settling Partners"), under certain conditions, in the event that CSL Group within three years following the date of settlement initiates a tender offer for the purchase of units not presently held by CSL Group or the Settling Partners. On February 5, 1998, the Indiana Court entered an order approving the dismissal of the Plaintiff's case. In connection with the Settlement Agreement, CSL Group acquired 2,141,795 limited partner units in 1998 for approximately $9,638,000, increasing CSL Group's ownership interest in FRP to approximately 93%. In 1999, CSL Group and FRP completed a merger pursuant to a consent solicitation whereby the partnership unit holders received the right to receive cash consideration for each limited partnership unit from CSL Group. In connection with this merger, CSL Group acquired the remaining limited partnership units for approximately $6,158,000. Also, CSL Group paid the Settling Partners an Additional Payment in 1999 of approximately $557,000 pursuant to the merger transaction. As of December 28, 2001, CSL Group had a liability of $219,265 representing cash consideration for the remaining untendered FRP limited partnership units. The purchase price of the units for both transactions approximated fair value, and accordingly, no portion of the purchase price has been expensed. 12. Subsequent Event

On January 11, 2002, Crestline Capital completed the sale of its Partitioned Business to SNH/CSL pursuant to the Stock Purchase Agreement. Total consideration for the transaction totaled $600 million and assumption of certain liabilities. As part of the sale, Crestline Capital provided $25 million in seller financing to SNH. The note has a 10% interest rate and matures in two years and is prepayable without penalty at anytime. Contemporaneous with the closing, Crestline Capital prepaid the LaSalle debt totaling $116 million, excluding $12.8 million of debt premiums, and also paid a prepayment premium of $10.5 million. On January 25, 2002, SNH prepaid the GMAC debt totaling $93 million.

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REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of ILM II Senior Living, Inc.: In our opinion, the accompanying consolidated statement of net assets in liquidation and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the net assets in liquidation of ILM II Senior Living, Inc. and its subsidiary (the "Company") at August 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company adopted a plan of liquidation on August 31, 2001, and as a result changed its basis of accounting as of August 31, 2001, and for periods subsequent to August 31, 2001, from the going concern basis to the liquidation basis of accounting. /S/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts November 26, 2001

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REPORT OF INDEPENDENT AUDITORS The Shareholders of ILM II Senior Living, Inc. We have audited the accompanying consolidated balance sheet of ILM II Senior Living, Inc. and subsidiary, as of August 31, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ILM II Senior Living, Inc. and subsidiary, at August 31, 2000, and the consolidated results of their operations and their cash flows for each of the two years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /S/ ERNST & YOUNG LLP Dallas, Texas October 24, 2000 except for Note 9, as to which the date is December 15, 2000

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION August 31, 2001 (LIQUIDATION BASIS) (Dollars in thousands, except per share data)
2001

Assets Investment properties, at fair value Cash and cash equivalents Accounts receivable—related party Prepaid expenses and other assets

$45,500 1,298 247 11 $47,056

Liabilities Accounts payable and accrued expenses Accounts payable—related party Built-in gain taxes payable Accrued liquidation expenses Preferred shareholders' minority interest in consolidated subsidiary Total liabilities Net assets in liquidation See accompanying notes.

$129 966 3,705 2,404 152 7,356 $39,700

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ILM II Senior Living, Inc.

CONSOLIDATED BALANCE SHEET August 31, 2000

(GOING-CONCERN BASIS) (Dollars in thousands, except per share data) Assets Investment properties, at cost: Land Building and improvements Furniture, fixtures and equipment

$4,522 24,190 3,856 32,568 (8,813 ) 23,755 1,247 (1,106 ) 141 144 (84 ) 60 11,258 376 15 6 $35,611

Less: accumulated depreciation

Mortgage placement fees Less: accumulated amortization

Loan origination fees Less: accumulated amortization

Cash and cash equivalents Accounts receivable—related party Prepaid expenses and other assets Deferred rent receivable

Liabilities and Shareholders' Equity Accounts payable and accrued expenses Accounts payable—related party Construction loan payable Preferred shareholders' minority interest in consolidated subsidiary Total liabilities Shareholders' equity: Common stock, $0.01 par value, 12,500,000 shares authorized, 5,181,236 shares issued and outstanding Additional paid-in capital Accumulated deficit Total shareholders' equity

$121 40 570 143 874

52 44,823 (10,138 ) 34,737 $35,611

See accompanying notes.

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENTS OF INCOME (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (Dollars in thousands, except per share data)
2001 2000 1999

Revenue:

Rental and other Interest

$4,555 170 4,725

$5,401 57 5,458 1,190 184 294 1,137 104 2,909 2,549 — — — 6,160 $8,709 $1.68 $0.64

$5,265 56 5,321 1,235 184 344 1,778 83 3,624 1,697 — — — — $1,697 $0.32 $0.85

Expenses: Depreciation Amortization General and administrative Professional fees Director compensation

1,191 200 462 2,193 102 4,148

Operating income Unrealized gain on appreciation of investment properties Liquidation expense Built-in gain tax Gain on sale of Villa Santa Barbara Net income Earnings per share of common stock Cash dividends paid per share of common stock

577 22,809 (2,404 ) (3,705 ) — $17,277 $3.34 $2.38

The above earnings and cash dividends paid per share of common stock are based upon the 5,181,236 shares outstanding during the year. See accompanying notes.

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional Paid-in Capital Accumulated Deficit Shares Amount Total

Balance at August 31, 1998 Cash dividends paid Net income Balance at August 31, 1999 Cash dividends paid Net income Balance at August 31, 2000 Cash dividends paid Net income

5,181,236 — — 5,181,236 — — 5,181,236 — —

$52 — — 52 — — 52 — —

$44,823 — — 44,823 — — 44,823 — —

$(12,837 ) (4,404 ) 1,697 (15,544 ) (3,303 ) 8,709 (10,138 ) (12,314 ) 17,277

$32,038 (4,404 ) 1,697 29,331 (3,303 ) 8,709 34,737 (12,314 ) 17,277

Balance at August 31, 2001

5,181,236

$52

$44,823

$(5,175 )

$39,700

See accompanying notes.

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (In thousands)
2001 2000 1999

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on Sale of Villa Santa Barbara Unrealized gain on appreciation of property Depreciation and amortization Charitable contribution of subsidiary's preferred stock and accrued dividends Changes in assets and liabilities: Accounts receivable—related party Prepaid expenses and other assets Deferred rent receivable Accounts payable—related party Built-in gain tax payable Accrued liquidation cost payable Accounts payable and accrued expenses Net cash provided by operating activities Cash flows provided by (used in) investing activities: Proceeds from sale of Santa Barbara Additions to investment properties Net cash provided by (used in) investing activities Cash flows used in financing activities: Loan origination fees paid (Paydown of) proceeds from construction loan facility Cash dividends paid to shareholders Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Cash paid for state income taxes Cash paid for interest

$17,277

$8,709

$1,697

— (22,809 ) 1,392 9 129 4 6 926 3,705 2,404 8 3,051

(6,160 ) — 1,374 9 (39 ) 53 31 (487 ) — — (98 ) 3,392

— — 1,419 9 (64 ) 86 32 478 — — 48 3,705

— (127 ) (127 )

10,144 (288 ) 9,856

— (377 ) (377 )

— (570 ) (12,314 ) (12,884 ) (9,960 ) 11,258 $1,298 $17 $28

— (600 ) (3,303 ) (3,903 ) 9,345 1,913 $11,258 $17 $60

(72 ) 1,165 (4,404 ) (3,311 ) 17 1,896 $1,913 $42 $11

Interest capitalized

$28

$62

$17

See accompanying notes.

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ILM II Senior Living, Inc.

NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Plan of Liquidation

ILM II Senior Living, Inc. (the "Company), formerly PaineWebber Independent Living Mortgage, Inc. II, was organized as a corporation on February 5, 1990 under the laws of the State of Virginia. On September 12, 1990, the Company commenced a public offering of up to 10,000,000 shares of its common stock at $10 per share, pursuant to the final prospectus, as amended, incorporated into a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration Statement No. 33-33857), (the "Prospectus"). The public offering terminated on May 10, 1991 with a total of 5,181,236 shares issued. The Company received capital contributions of $51,812,356, of which $200,000 represented the sale of 20,000 shares to an affiliate at that time, PaineWebber Group, Inc. ("PaineWebber"). For discussion purposes, PaineWebber will refer to PaineWebber Group, Inc. and all affiliates that provided services to the Company in the past. The Company has elected to qualify and be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended, for each taxable year of operations (see Note 2). ILM II Holding now holds title to the five remaining Senior Housing Facilities which comprise the balance of investment properties on the accompanying consolidated statement of net assets and balance sheet, subject to certain mortgage loans payable to the Company. Such mortgage loans and the related interest expense are eliminated in the consolidation of the financial statements of the Company. The capital stock of ILM II Holding was originally owned by the Company and PaineWebber. ILM II Holding had issued 100 shares of Series A Preferred Stock to the Company in return for a capital contribution in the amount of $495,000 and had issued 10,000 shares of common stock to PaineWebber in return for a capital contribution in the amount of $5,000. The common stock represented approximately 99 percent of the voting power and 1 percent of the economic interest in ILM II Holding, while the preferred stock represented approximately 1 percent of the voting power and 99 percent of the economic interest in ILM II Holding. The Company completed its restructuring plans by converting ILM II Holding to a REIT for tax purposes. In connection with these plans, on November 21, 1996, the Company requested that PaineWebber sell all of the stock held in ILM II Holding to the Company for a price equal to the fair market value of the 1% economic interest in ILM II Holding represented by the common stock. On January 10, 1997, this transfer of the common stock of ILM II Holding was completed at an agreed upon fair value of $40,000, representing a $35,000 increase in fair value. This increase in fair value is based on the increase in values of the Senior Housing Facilities which occurred between April 1994 and January 1996, as supported by independent appraisals. With this transfer completed, effective January 23, 1997, ILM II Holding recapitalized its common stock and preferred stock by replacing the outstanding shares with 50,000 shares of new common stock and 275 shares of a new class of nonvoting, 8% cumulative preferred stock issued to the Company (the "Preferred Stock"). The number of authorized shares of preferred and common stock in ILM II Holding were also increased as part of the recapitalization. Following the recapitalization, the Company made charitable gifts of one share of the Preferred Stock in ILM II Holding to each of 111 charitable organizations so that ILM II Holding would meet the stock ownership requirements of a REIT as of January 30, 1997. The Preferred Stock has a liquidation preference of $1,000 per share plus any accrued and unpaid dividends. Dividends on the Preferred Stock will accrue at a rate of 8% per annum on the original $1,000 liquidation preference and will be cumulative from the date of issuance. Since ILM II Holding is not expected to have sufficient cash flow in the foreseeable future to make the required dividend payments, it is anticipated that dividends will accrue and be paid at

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liquidation. The Company recorded the contribution of the Preferred Stock in ILM II Holding to the charitable organizations at the amount of the initial liquidation preference of $111,000. Such amount was included in general and administrative expense on the income statement for the year ended August 31, 1997. Cumulative dividends accrued as of August 31, 2001 and 2000, on the preferred stock in ILM II Holding totaled approximately $40,000 and $32,000, respectively.

As part of the fiscal 1994 Settlement Agreement with AHC, ILM II Holding retained AHC as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement. As discussed further in Note 5, the management agreement with AHC was terminated in July 1996. Subsequent to the effective date of the Settlement Agreement with AHC, management investigated and evaluated the available options for structuring the ownership of the properties in order to maximize the potential returns to the existing shareholders while maintaining the Company's qualification as a REIT under the Internal Revenue Code (see Note 2). As discussed further in Note 4, on September 12, 1994, the Company formed a new subsidiary, ILM II Lease Corporation ("Lease II"), for the purpose of operating the Senior Housing Facilities. On September 1, 1995, after the Company received the required regulatory approval, the Company distributed all of the shares of capital stock of Lease II to the holders of record of the Company's common stock. The Senior Housing Facilities were leased to Lease II effective September 1, 1995 (see Note 4 for a description of the Facilities Lease Agreement). Lease II is a public company subject to the reporting obligations of the Securities and Exchange Commission. On February 7, 1999, the Company entered into an agreement and plan of merger, which was subsequently amended, with CSLC, the corporate parent of Capital. At a special meeting of Shareholders on June 22, 2000, holders of more than two-thirds of the outstanding shares of the Company's common stock voted in favor of approval of the then proposed Agreement and Plan of Merger. On August 15, 2000, the Company caused ILM II Holding to complete the sale of its 75% co-tenancy interest in its senior living facility located in Santa Barbara, California ("Villa Santa Barbara"), to CSLC for $10,143,750. In consideration for the sale, the Company received $9,543,750 in cash and CSLC contributed $600,000 toward the Company's outstanding construction loan debt and assumed certain then current transaction expenses of the Company in connection with the previously announced proposed merger. The remaining 25% co-tenancy interest in Villa Santa Barbara was formerly owned by ILM Holding, Inc. ("Holding I"), a subsidiary of ILM Senior Living, Inc. ("ILM I") and was transferred to CSLC at the time the merger between ILM I and CSLC was consummated. A gain on the sale of approximately $6,160,000 was recognized in the accompanying consolidated statement of income for the year ended August 31, 2000. In November 2000, the Facilities Lease Agreement, which was scheduled to expire on December 31, 2000, was extended through the earlier of the date on which the merger of the Company with CSLC was consum- mated or March 31, 2001, and on a month-to-month basis thereafter if the merger was not consummated by that time. Although there can be no assurance, the Facilities Lease Agreement is expected to continue on a month-to-month basis until the Senior Housing Facilities are sold. On February 8, 2001, the Company received notice from CSLC terminating the merger agreement. CSLC stated in its termination letter that it terminated the merger agreement because of its concerns relating to the Company's claimed election in 1996 to defer built-in gain taxes upon conversion of ILM II Holding from a "C" Corporation to a REIT. As previously reported in the Company's public filings, the Company claimed this election based upon the advice of its outside tax accountants; has

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operated since 1996 under the belief that such election was validly perfected; and, in February 2001, pursued administrative relief with the Internal Revenue Service to ensure the availability of the Company's election to defer such corporate level built-in gain taxes. On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter. On July 6, 2001, in a proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Annual Meeting of Shareholders, the proposal to extend the finite-life corporate existence of the Company was not approved by the Shareholders. The Company's Articles of Incorporation required holders of a majority of its outstanding shares to approve the proposal Accordingly, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its Senior Housing Facilities commencing not later than December 31, 2001. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. Upon liquidation of the Senior Housing Facilities, net proceeds and remaining cash reserves, after paying all liquidation and dissolution expenses, will be distributed to the Company's Shareholders and the Company will be dissolved. Pursuant to its obligation to liquidate and distribute its assets on December 31, 2001 in accordance with its Articles of Incorporation, on November 20, 2001, the Company and ILM II Holding entered into a purchase and sale agreement with BRE/Independent Living, LLC, a Delaware limited liability company ("BRE") pursuant to which the Company agreed to sell, and BRE agreed to purchase, all of the Company's right, title and interest in and to its Senior Housing Facilities and certain other related assets. In consideration for the sale of the Senior Housing Facilities, BRE agreed, subject to certain conditions and apportionments, to pay the Company a purchase price of $45.5 million, approximately $2.275 million of which will be paid as a refundable deposit, into escrow, on or before November 27, 2001 (the "Deposit"). Each of the parties' respective obligations under such agreement is subject to customary closing conditions and includes a broad "diligence out" for BRE through December 31, 2001, which may be extended until March 1, 2002, providing BRE with the right, in its sole discretion, to

terminate the agreement and receive a refund of the Deposit if BRE is not satisfied with any aspect of the Senior Housing Facilities. In the event BRE fails to terminate the agreement on or before January 31, 2002 pursuant to the termination right mentioned above, unless BRE elects for the Deposit to become non-refundable, the Company will be permitted to enter into a back-up agreement with a third party for the sale of the Senior Housing Facilities, which third party agreement will become effective in the event BRE terminates the agreement. Further, under certain circumstances, BRE is entitled to terminate the agreement and receive up to $2.4 million from the Company as liquidated damages and in certain other circumstances, the Company would be entitled to terminate the agreement and retain the Deposit as liquidated damages. Prior to entering into such agreement and in view of the pending termination of the Company's finite life corporate existence, the Company thought it was prudent to conduct an auction of the Company and the Senior Housing Facilities and accordingly authorized management to work expeditiously with the Company's legal and financial advisors to identify prospective purchasers of the Company's capital stock or assets (by means of merger, strategic business combination, tender offer or sale of the Company's Senior Housing Facilities) and to elicit bona fide offers for transactions to be consummated on or prior to December 31, 2001 which would maximize current shareholder value. As part of a

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five-week auction process that ended on October 24, 2001, liquidation announcements for the Company were published in the Wall Street Journal and The Washington Post . Through the process, 160 potential purchasers were identified, comprehensive due diligence packages were distributed, and 126 potential purchasers expressed interest in reviewing information relating to one or more of the Senior Housing Facilities. Of those potential purchasers, 17 provided formal indications of interest, including eight parties who were interested in acquiring only a single senior or assisted living facility. Initial indications of interest for the Senior Housing Facilities, in terms of purchase price, ranged from a low of $34.0 million to a high of $51.0 million, the highest indication having been withdrawn shortly after it was made. Based upon the non-withdrawn indications of interest received, the Company's Board of Directors, with the advice of its legal and financial advisors, concluded that the BRE indication of interest was the highest in terms of a proposed purchase price and was most likely to maximize current shareholder value. Accordingly, the Company immediately entered into negotiations with BRE which culminated in the execution of the agreement mentioned above. Upon consummation of the transactions contemplated by such agreement or otherwise upon sale of the Senior Housing Facilities to a third party, the Company intends to liquidate and distribute its assets in accordance with the Virginia Stock Corporation Act, which provides for the distribution of the Company's assets first to the Company's creditors for purposes of discharging all of the Company's liabilities, and then, to the extent assets are remaining, to the Company's shareholders in accordance with their respective rights and interests. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. 2. Summary of Significant Accounting Policies

The Company's significant accounting policies are summarized as follows: A. Basis of presentation and accounting estimates

In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. As of August 31, 2001, the Company adopted a plan of liquidation and, accordingly, adjusted the carrying value of investment properties to $45,500,000 and recorded accrued expenses of $2,404,000. These expenses include estimates of costs to be incurred in carrying out the dissolution and liquidation of the Company. These costs include estimates of legal fees ($500,000); the potential Feldman litigation settlement ($440,000); taxes ($400,000); commissions ($460,000); insurance ($290,000); and other ($314,000). The investment properties were valued based on a Purchase and Sale agreement executed by the Company with a third party on November 20, 2001. The proposed sale price is subject to change upon completion of the due diligence period and amounts ultimately realized may vary significantly. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any.

F-78

The actual liquidation costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. The accrued expenses do not take into consideration possible litigation arising from the potential representations and warranties made as part of the sale of the Senior Housing Facilities. Such costs, if any, are unknown and are not estimable at this time. The accompanying financial statements include the financial statements of the Company and ILM II Holding. All intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the valuation of investment properties and the estimate of liquidation expenses. Actual results, therefore, could differ from these estimates. B. Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less. C. Investment properties

In accordance with the adoption of the liquidation basis of accounting, the Company increased the fair value of its investment properties as of August 31, 2001, to a value of $45,500,000, to equal the expected gross proceeds from the expected sale of the Senior Housing Facilities. This increase in fair value is included on the accompanying consolidated statement of net assets in liquidation at August 31, 2001. The investment properties were valued based on a Purchase and Sale agreement executed by the Company with a third party on November 20, 2001. The proposed sale price is subject to change upon completion of the due diligence period and amounts ultimately realized may vary significantly. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. Properties owned by the Company were initially recorded at the purchase price plus closing costs. Development costs and major renovations were capitalized as a component of costs, and routine maintenance and repairs were charged to expense as incurred. For the years ended August 31, 2000 and 1999, investment properties were carried at the lower of cost, reduced by accumulated depreciation. Depreciation expense was provided on a straight-line basis using an estimated useful life of 40 years for the buildings and improvements and five years for the furniture, fixtures and equipment. Mortgage placement fees were incurred by the Company and these fees are included in the accompanying consolidated balance sheets for fiscal year 2000, reduced by Accumulated Amortization of mortgage placement fees. Loan origination fees relating to the construction loan facility (see Note 6) are included on the accompanying consolidated balance sheet. These fees were being amortized to expense on a straight-line basis over the term of the loan and were fully written off at August 31, 2001. Interest paid on the construction loan facility was capitalized until the loan was repaid.

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D.

Rental revenue

In fiscal years 2001, 2000 and 1999, rental revenues consist of payments due from Lease II under the terms of the Facilities Lease Agreement described in Note 5. Base rental income under the facilities lease is recognized on a straight-line basis over the term of the lease. Deferred rent receivable on the balance sheet as of August 31, 2000 represents the difference between rental income on a straight-line basis and rental income received under the terms of the facilities lease. E. Income taxes

The Company has elected to qualify and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for each taxable year of operations. As a REIT, the Company is allowed a deduction for the amount of dividends paid to its shareholders, thereby effectively subjecting the distributed net taxable income of the Company to taxation at the shareholder level only, provided it distributes at least 90% of its taxable income and meets certain other requirements for qualifying as a real estate investment trust. In connection with the settlement agreement described in Note 1, the Company, through ILM II Holding, obtained title to the Senior Housing Facilities securing its mortgage loan investments. To retain REIT status, the Company must ensure that 75% of its annual gross income is received from qualified sources. Under the original investment structure, interest income from the Company's mortgage loans was a qualified source. The Senior Housing Facilities that are now owned by a subsidiary of the Company provide residents with more services, such as meals, activities, assisted living, etc., than are customary for ordinary residential apartment properties. As a result, a significant portion of the rents paid by the residents includes income

for the increased level of services received by them. Consequently, the rents paid by the residents likely would not be qualified rents for REIT qualification purposes if received directly by the Company. Therefore, if the Company received such rents directly, it could lose REIT status and be taxed as a regular corporation. After extensive review, the Board of Directors determined that it would be in the best interests of the Shareholders for the Company to retain REIT status and facilities lease the properties to a shareholder-owned operating company. As discussed further in Note 4, on September 12, 1994 the Company formed a new subsidiary, Lease II, for the purpose of operating the Senior Housing Facilities. The Senior Housing Facilities were leased to Lease II effective September 1, 1995 (see Note 4 for a description of the Facilities Lease Agreement). The Company reports on a calendar year basis for income tax purposes. All distributions during calendar years 2000 and 1999 were ordinary taxable dividends, except that 14.01% of distributions for 1999 represented a return of capital. 3. Built-in Gain Tax

The assumption of ownership of the Senior Housing Facilities through ILM II Holding, which was organized as a so-called "C" corporation for tax purposes, has resulted in a possible future tax liability which would be payable upon the ultimate sale of the Senior Living Facilities (the "built-in gain tax"). The amount of such tax would be calculated based on the lesser of the total net gain realized from the sale transaction or the portion of the net gain realized upon a final sale which is attributable to the period during which the properties were held in a "C" corporation. Any future appreciation in the value of the Senior Housing Facilities subsequent to the conversion of ILM II Holding to a REIT would not be subject to the built-in gain tax. The built-in gain tax would most likely not be incurred if the properties were to be held for a period of at least ten years from the date of the conversion of ILM II Holding to a REIT. However, since the end of the Company's original anticipated holding period as defined in the Articles of Incorporation is December 31, 2001, the

F-80

properties will not be held for such additional period of time. Based on management's current estimate of the increase in the values of the Senior Housing Facilities which occurred between April 1994 and January 1996, as supported by independent appraisals, a sale of the Senior Housing Facilities within ten years of the date of the conversion of ILM II Holding to a REIT would result in a built-in gain tax of approximately $3.8 million. The sale of the Company's interest in Villa Santa Barbara resulted in the recognition of a built-in gain of approximately $600,000, which was offset by pre-conversion net operating losses. Based in part upon advice from the Company's outside tax accountants, commencing in 1996 the Company has acted as though it had made an election in its 1996 tax return to allow the Company to avoid a corporate level tax upon conversion of ILM II Holding from a "C" Corporation to a REIT. Because proof of a formal election had not then been obtained, in February 2001 the Company pursued administrative relief with the Internal Revenue Service to ensure the availability of the benefits of this election. On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter and, accordingly, the built-in gain tax has been deferred. To avoid this built-in gain tax, the Directors had recommended to the Shareholders an amendment to the Articles of Incorporation to extend the Company's scheduled liquidation date. At the Annual Meeting of Shareholders on August 16, 2001, the proposal to extend the finite life corporate existence of the Company was not approved by Shareholders. Because the overall vote was insufficient to approve the extension, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its properties commencing not later than December 31, 2001. As a result of the adoption of the plan of liquidation, the built-in gain tax will be payable upon the disposition of the investment properties. Accordingly, the Company has accrued a liability of $3,705,250 on the accompanying consolidated statement of net assets in liquidation at August 31, 2001, for the built-in gain tax. 4. Property Management Agreement

Lease II has retained Capital to be the property manager of the Senior Housing Facilities and the Company has guaranteed the payment of all fees due to Capital pursuant to a Management Agreement which commenced on July 29, 1996. For the years ended August 31, 2001, 2000, and 1999, Capital earned property management fees from Lease II of $656,000, $903,000 and $980,000, respectively. 5. Related Party Transactions

Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig received fees from the Company of $1,326,000 and $603,000, respectively. Accounts receivable—related party at August 31, 2001 and 2000 represents amounts due from an affiliated company, Lease II, for variable rent. Accounts payable—related party at August 31, 2001, represents unbilled legal fees due to to Greenberg Traurig, counsel to the Company

and its affiliates and a related party. Accounts payable—related party at August 31, 2000, includes $40,000 of expense reimbursements payable to Lease II. 6. Investment Properties Subject to Facilities Lease

As of August 31, 2001 and 2000, the Company, through its consolidated subsidiary, owned five Senior Housing Facilities (six Senior Housing Facilities through August 15, 2000, when Villa Santa Barbara

F-81

was sold) (see Note 1). The name, location and size of the properties and the date that the Company made its initial investment in such assets are as set forth below:
Rentable Units(2) Resident Capacities(2) Year Facility Built Date of Investment(1)

Name

Location

The Palms Crown Villa Overland Park Place Rio Las Palmas The Villa at Riverwood Villa Santa Barbara (3) (1)

Fort Myers, FL Omaha, NE Overland Park, KS Stockton, CA St. Louis County, MO Santa Barbara, CA

205 73 141 164 120

255 73 153 190 140

1988 1992 1984 1988 1986

7/18/90 4/25/91 4/9/92 5/14/92 5/29/92

Represents the date of the Company's original mortgage loan to Angeles Housing Concepts, Inc. (see Note 1). (2) Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. (3) The Company's investment in Villa Santa Barbara was sold on August 15, 2000. The Facilities Lease Agreement is between the Company's consolidated subsidiary, ILM II Holding, as owner of the Senior Housing Facilities and Lessor, and Lease II as Lessee. Through December 31, 2000, the Lessor had the right to terminate the Facilities Lease Agreement as to any property sold by the Lessor as of the date of such sale. The Facilities Lease Agreement was originally scheduled to expire on December 31, 2000, unless earlier terminated at the election of the Lessor in connection with the sale by the Lessor of the Senior Housing Facilities to a non-affiliated third party, but in November 2000, was extended beyond its original expiration date on a month-to-month basis by vote of the Board of Directors. The Facilities Lease Agreement is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Lease II pays annual base rent for the use of all of the Facilities in the aggregate amount of $3,555,427 ($3,995,586 per year and $4,035,600 per year in 2000 and 1999, respectively). The reduction in base rent from the previous years is due the sale of Villa Santa Barbara on August 15, 2000.) Lease II also pays variable rent, on a quarterly basis, for each Senior Housing Facility in an amount equal to 40% of the excess of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $11,634,000 ($13,021,000 through August 15, 2000, when Villa Santa Barbara was sold). For the years ended August 31, 2001, 2000, and 1999, variable rental income was $1,006,000, $1,437,000, and $1,261,000, respectively.

F-82

Condensed balance sheets as of August 31, 2001, 2000, and 1999, and condensed statements of operations for the years ended August 31, 2001, 2000, and 1999 of Lease II are as follows (in thousands):
2001 (in liquidation) 2000 1999

Assets

Current assets Furniture, fixtures, and equipment, net Other assets

$1,521 — 9 $1,530

$2,073 451 21 $2,545

$1,990 617 163 $2,770

Liabilities and Shareholders' Equity Current liabilities Other liabilities Shareholders' equity

$1,445 — 85 $1,530

$1,537 6 1,002 $2,545

$1,467 37 1,266 $2,770

Statement of Operations Revenues Operating expenses Income tax expense (benefit) Net (loss) income 7. Legal Proceedings

$14,180 15,041 56 $(917 )

$16,605 16,394 475 $(264 )

$16,250 15,339 342 $569

Feldman litigation On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990, commenced a purported class action on behalf of that trust and all other shareholders of the Company and ILM I in the Supreme Court of the State of New York, County of New York naming the Company, ILM I and their Directors as defendants. The class action complaint alleged various theories of redress and a broad range of damages. On October 15, 1999, the parties entered into a Stipulation of Settlement that was filed with the Court and approved by order dated October 21, 1999. In issuing that order the Court entered a final judgment dismissing the action and all non-derivative claims of the settlement class against the defendants with prejudice. This litigation was settled at no cost to the Company and ILM I. As part of the settlement, CSLC increased its proposed merger consideration payable to the Company and ILM I shareholders and was also responsible for a total of approximately $1.1 million (approximately 40% of which is allocable to the Company) in plaintiffs' attorneys fees and expenses upon consummation of the proposed merger. If the proposed merger was not consummated and if the Company and ILM I were to consummate an extraordinary transaction with a third party, then the Company and ILM I would be responsible for the plaintiffs' attorneys fees and expenses. On August 15, 2000, the merger of ILM I with CSLC was consummated and on February 28, 2001, CSLC terminated the proposed merger with the Company. Because of these events and based upon the Stipulation of Settlement, if the Company was to consummate an extraordinary transaction with a third party, the Company would be responsible for the Company's share of the plaintiff's attorney's fees and expenses.

F-83

As a result of the adoption of a plan of liquidation, a liability of $440,000 for a potential Feldman litigation settlement is included in accrued liquidation expense on the consolidated statement of net assets in liquidation at August 31, 2001. 8. Construction Loan Financing

During 1999 the Company obtained a construction loan facility with a major bank that provided the Company with up to $8.8 million to fund the capital costs of potential expansion programs. The construction loan facility was collateralized by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The loan was scheduled to expire on December 31, 2000, with possible extensions through September 29, 2003. Principal was due at expiration. Interest was payable monthly at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. On June 7, 1999, the Company borrowed approximately $1.2 million under the construction loan facility to fund the pre-construction capital costs incurred through April 1999, of the potential expansions of the Senior Housing Facilities. On August 16, 2000, the Company repaid approximately $600,000 of principal on the construction loan facility in connection with the sale of Villa Santa Barbara and the lender sold the remaining loan to CSLC. As part of this transaction, the Company agreed that the term of the loan would not be extended beyond December 31, 2000. On November 28, 2000, the Company and CSLC agreed that the maturity date of the loan would be extended until the date on which the merger of the Company with CSLC was consummated or the date on which the merger agreement was terminated, whichever occurred first. On February 28, 2001, CSLC terminated the proposed merger with the Company, and on April 3, 2001, the remaining principal balance plus accrued interest was repaid in full.

Amounts outstanding under the loan at August 31, 2001 and 2000 were $0 and $570,000, respectively. Loan origination fees of $144,000 were paid in connection with this loan facility and were amortized over the life of the loan. On April 3, 2001, unamortized loan origination fees totaling $29,867 were amortized to expense with repayment of the loan. Capitalized interest at August 31, 2001 and 2000, was $107,059 and $79,310, respectively. There were no amounts outstanding under the loan at August 31, 2001. 9. Dividends

On November 13, 2000, the Company's Board of Directors voted to reinstate the payment of regular quarterly dividends to shareholders with the dividend for the quarter ending November 30, 2000, which was paid on January 15, 2001. Payment of dividends had been suspended in June 2000 pending the then proposed merger. On November 13, 2000, the Company's board of directors also voted to distribute to shareholders the net proceeds of approximately $9.8 million or $1.89 per share from the sale of the Company's 75% interest in Villa Santa Barbara. On December 15, 2000, the Company's Board of Directors declared a quarterly dividend to distribute the net proceeds from the sale of the Company's investment in Villa Santa Barbara. A dividend of $1.89 per share of common stock, totaling approximately $9,792,000 was paid as of December 15, 2000, to Shareholders of record as of November 1, 2000. Also on December 15, 2000, the Company's Board of Directors declared a quarterly dividend for the quarter ended November 30, 2000, in the amount of $0.1622 per share of common stock. On January 15, 2001, the dividend totaling approximately $840,000 was paid to Shareholders of record at the close of business on December 15, 2000.

F-84

On March 15, 2001, the Company's Board of Directors declared a quarterly dividend for the quarter ended February 28, 2001, in the amount of $0.1622 per share of common stock. On April 16, 2001, the dividend totaling approximately $840,000 was paid to Shareholders of record at the close of business on March 30, 2001. In June 2001, the Company's Board of Directors declared a quarterly dividend for the quarter ended May 31, 2001. On July 16, 2001, a dividend of $0.1622 per share of common stock, totaling approximately $840,000 was paid to Shareholders of record as of June 30, 2001.

F-85

ILM II Lease Corporation

REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of ILM II Lease Corporation: In our opinion, the accompanying statement of net assets in liquidation and the related statements of operations, shareholders' equity and cash flows presents fairly, in all material respects, the net assets in liquidation of ILM II Lease Corporation (the "Company") at August 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company adopted a plan of liquidation on August 31, 2001, and as a result changed its basis of accounting as of August 31, 2001, and for periods subsequent to August 31, 2001, from the going-concern basis to the liquidation basis of accounting. /S/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts November 26, 2001

F-86

ILM II Lease Corporation

REPORT INDEPENDENT AUDITORS The Shareholders of ILM II Lease Corporation: We have audited the accompanying balance sheet of ILM II Lease Corporation as of August 31, 2000, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 assisting 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 financial position of ILM II Lease Corporation at August 31, 2000, and the results of its operations and its cash flows for each of the two years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /S/ ERNST & YOUNG LLP Dallas, Texas October 24, 2000 except for Note 9, as to which the date is December 15, 2000

F-87

ILM II Lease Corporation

STATEMENT OF NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS) August 31, 2001 (Dollars in thousands, except per share data)
2001

Assets Cash and cash equivalents Accounts receivables, net Tax refund receivable—federal and state Prepaid taxes and other assets Deposits Deferred tax asset, net

$931 108 346 460 9 128 1,982

Liabilities Accounts payable and accrued expenses Accrued liquidation expenses Real estate taxes payable Accounts payable—related party Security deposits Total current liabilities

$633 412 314 353 49 1,761

Commitments and contingencies Net assets in liquidation See accompanying notes.

$221

F-88

ILM II Lease Corporation

BALANCE SHEET AUGUST 31, 2000 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data)
2000

Assets Cash and cash equivalents Accounts receivables, net Accounts receivable—related party Accounts receivable—Capital Senior Living Corporation State tax refund receivable Prepaid taxes and other assets Total current assets Furniture, fixtures and equipment Less: accumulated depreciation

$1,894 21 40 39 21 58 2,073 1,604 (1,153 ) 451 9 12 $2,545

Deposits Deferred tax asset, net

Liabilities and Shareholders' Equity Accounts payable and accrued expenses Federal income taxes payable Real estate taxes payable Accounts payable—related party Security deposits Total current liabilities Deferred rent payable Total liabilities Commitments and contingencies Shareholders' equity: Common stock, $0.01 par value, 20,000,000 shares authorized, 5,180,952 shares issued and outstanding Additional paid-in capital (Accumulated deficit) Retained earnings Total shareholders' equity

$542 276 305 378 36 1,537 6 1,543

52 448 502 1,002 $2,545

See accompanying notes.

F-89

ILM II Lease Corporation

STATEMENTS OF OPERATIONS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
2001 2000 1999

Revenue: Rental and other Interest

$14,148 32 14,180

$16,562 43 16,605 5,401 2,820 1,425 722 1,024 634 603 903 1,483 391 62 291 635 16,394 211 — 211 333 142 475 $(264 ) $(0.05 )

$16,232 18 16,250 5,265 2,740 1,196 705 1,062 636 527 980 1,433 228 51 223 293 15,339 911 — 911 226 116 342 $569 $0.10

Expenses: Facilities lease rent Dietary, salaries, wages and food service Administrative salaries and wages Marketing salaries and wages Utilities Repairs and maintenance Real estate taxes Property management fees Other property operating expenses General and administrative Directors compensation Professional fees Depreciation

4,555 2,541 1,307 684 983 549 481 656 1,306 614 61 493 811 15,041

Operating (loss) income before income taxes Liquidation expense (Loss) income before income taxes Income tax expense (benefit): Current Deferred

(861 ) 412 (1,273 ) (377 ) (115 ) (492 )

Net (loss) income Net (loss) income per share of common stock

$(781 ) $(0.15 )

The above net income (loss) per share of common stock is based upon the weighted average number of shares outstanding for the years ended August 31, 2001, 2000 and 1999, of 5,180,952. See accompanying notes.

F-90

ILM II Lease Corporation

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional Paid-in Capital Retained Earnings Shares Amount Total

Balance at August 31, 1998 Net income Balance at August 31, 1999 Net loss Balance at August 31, 2000 Net loss Balance at August 31, 2001

5,180,952 — 5,180,952 — 5,180,952 — 5,180,952

$52 — 52 — 52 — $52

$448 — 448 — 448 — $448

$197 569 766 (264 ) 502 (781 ) $(279 )

$697 569 1,266 (264 ) 1,002 (781 ) $221

See accompanying notes.

F-91

ILM II Lease Corporation

STATEMENTS OF CASH FLOWS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (In thousands)
2001 2000 1999

Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation expense Deferred tax expense (benefit), net Changes in assets and liabilities: Accounts receivable, net Accounts receivable—related party Accounts receivable—Capital Senior Living Corporation Federal & state tax refund receivable Prepaid taxes and other assets Accounts payable and accrued expenses Accrued liquidation expense Federal income taxes payable Accounts payable—related party Termination fee payable Real estate taxes payable Security deposits

$(781 )

$(264 )

$569

811 (116 ) (87 ) 40 39 (325 ) (402 ) 91 412 (276 ) (25 ) — 9 13

635 142 59 10 (39 ) — 294 (83 ) — 49 41 — 75 (13 )

293 116 9 52 — 137 (302 ) (164 ) — 226 50 (650 ) 21 24

Deferred rent payable Net cash (used in) provided by operating activities Cash flows from investing activity: Additions to furniture, fixtures and equipment Net cash used in investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure: Cash paid during the period for federal income taxes Cash paid during the period for state income taxes

(6 ) (603 )

(31 ) 875

(39 ) 342

(360 ) (360 ) (963 ) 1,894 $931

(469 ) (469 ) 407 1,487 $1,894

(352 ) (352 ) (10 ) 1,497 $1,487

$180 $43

$231 $57

$— $5

See accompanying notes.

F-92

ILM II Lease Corporation

NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Plan of Liquidation

ILM II Lease Corporation ("the Company") was organized as a corporation on September 12, 1994 under the laws of the state of Virginia. Through August 31, 1995, the Company had no significant operations. The Company was formed by ILM II Senior Living, Inc. ("ILM II"), formerly PaineWebber Independent Living Mortgage Inc. II, to operate six rental housing projects that provide independent-living and assisted-living services for independent senior citizens ("the Senior Housing Facilities") under a facilities lease agreement ("the Facilities Lease Agreement"). ILM II initially made mortgage loans to Angeles Housing Concepts, Inc. ("AHC") secured by the Senior Housing Facilities between July 1990 and July 1992. In March 1993, AHC defaulted under the terms of such mortgage loans and in connection with the settlement of such default, title to the Senior Housing Facilities was transferred, effective April 1, 1994, to certain majority-owned, indirect subsidiaries of ILM II, subject to the mortgage loans. Subsequently, the indirect subsidiaries of ILM II were merged into ILM II Holding, Inc. ("ILM II Holding"). As part of the fiscal 1994 settlement agreement with AHC, AHC was retained as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement which was assigned to the Company as of September 1, 1995. As discussed further in Note 6, the management agreement with AHC was terminated in July 1996. ILM II has elected to qualify and be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the Code"), for each taxable year of operations. In order to maintain its status as a REIT, 75% of ILM II's annual gross income must be Qualified Rental Income as defined by the Code. The rent paid by the residents of the Senior Housing Facilities likely would not be deemed to be Qualified Rental Income because of the extent of services provided to residents. Consequently, the operation of the Senior Housing Facilities by ILM II or its subsidiaries over an extended period of time could adversely affect ILM II's status as a REIT. Therefore, ILM II formed the Company to operate the Senior Housing Facilities, and by means of a distribution, transferred the ownership of the common stock of the Company to the holders of ILM II common stock on September 1, 1995 (see Note 4). Because the Company, which is taxed as a so-called "C" corporation, is no longer a subsidiary of ILM II, it can receive service-related income without endangering the REIT status of ILM II. The Company's sole business is the operations of the Senior Housing Facilities. The Company leases the Senior Housing Facilities from ILM II Holding, which is now a subsidiary of ILM II that holds title to the Senior Housing Facilities, pursuant to the Facilities Lease Agreement. The lease is accounted for as an operating lease in the Company's financial statements. In July 1996, following the termination of the property management agreement with AHC, the Company entered into a property management agreement (the "Management Agreement") with Capital Senior Management 2, Inc. ("Capital") to handle the day-to-day operations of the Senior Housing Facilities.

On February 7, 1999, ILM II entered into an agreement and plan of merger with CSLC, the corporate parent of Capital. In connection with the proposed merger, the Company received notice from ILM II Holding indicating that the Facilities Lease Agreement would terminate on the date of consummation of the merger of ILM II and CSLC. The Facilities Lease Agreement was originally scheduled to expire on December 31, 2000. On August 15, 2000, ILM II caused ILM II Holding to terminate the Facilities Lease Agreement with respect to the Company's 75% leasehold interest in Villa Santa Barbara and ILM II sold the Senior Housing facility to CSLC.

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The Facilities Lease Agreement was originally scheduled to expire on December 31, 2000. In November 2000, the Facilities Lease Agreement was extended on a month-to-month basis beyond its original expiration date. On November 28, 2000, the Facilities Lease Agreement was extended through the earlier of the date on which the merger of ILM II with CSLC was consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, ILM II received notice from CSLC terminating the merger agreement. As a result, the Facilities Lease Agreement is currently on a month-to-month basis. ILM II's existing corporate finite life is scheduled to expire on December 31, 2001. On July 6, 2001, ILM II's Board of Directors recommended to its shareholders that ILM II's Articles of Incorporation be amended to extend ILM II's finite-life existence from December 31, 2001, until December 31, 2008. On August 16, 2001, at ILM II's Annual Meeting of Shareholders, the proposal was not approved by the shareholders. As a result, ILM II announced that it will liquidate the Senior Housing Facilities commencing not later than December 31, 2001. The Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM II. Accordingly, upon the liquidation of the Senior Housing Facilities and the resulting termination of the Facilities Lease Agreement, the Company will carry out a plan of liquidation. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. It is currently expected that the Company will have nominal value after payment of its expenses. 2. Summary of Significant Accounting Policies

Basis of presentation and accounting estimates In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated net realizable value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. As of August 31, 2001, the Company adopted a plan of liquidation and recorded accrued expenses of $412,000. These costs include estimates of insurance ($193,000), and other costs ($219,000) such as legal fees, accounting fees, tax preparation and filing fees and other professional services. The actual costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the estimate of liquidation expenses. Actual results, therefore, could differ from those estimates. Furniture, fixtures and equipment Furniture, fixtures and equipment are carried at the lower of cost, reduced by accumulated depreciation, or fair value in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." Depreciation expense was provided on a straight-line basis using an estimated useful life of 3 to 5 years until 1998, when the Company changed the estimated useful lives of its assets to the lease termination date of December 31, 2000, as such assets are not subject to repurchase by ILM II Holding upon lease expiration or termination. Since December 31, 2000, such assets are charged to expense in the month purchased.

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Revenue Units at the Senior Housing Facilities are generally rented for terms of twelve months or less. The base rent charged varies depending on the unit size, with added fees collected for more than one occupant per unit and for assisted living services. Included in the amount of base rent charged are certain meals, housekeeping, medical and social services provided to the residents of each Senior Housing Facility.

Rent expense The Company rents the Senior Housing Facilities from ILM II Holding pursuant to a month-to-month operating lease. Rent expense is recognized on a straight-line basis over the term of the lease agreement. Deferred rent payable represented the difference between rent expense recognized on a straight-line basis and cash paid for rent pursuant to the terms of the Facilities Lease Agreement. Advertising expense The Company's policy is to expense all advertising costs as incurred. For the years ended August 31, 2001, 2000 and 1999, advertising expenses were $684,000, $722,000 and $705,000, respectively. Income tax expense Income tax expense is provided for using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less. 3. Property Management Agreement

The Company retained Capital to be the property manager of the Senior Housing Facilities pursuant to a Management Agreement, which commenced on July 29, 1996. The term of the Management Agreement originally expired on July 29, 2001 but, in November 2000, the term was modified to be coterminous with the Facilities Lease Agreement. As a result, the term of the Management Agreement is currently being extended on a month-to-month basis. Under the Management Agreement, Capital generally is required to perform all operational functions necessary to operate the Senior Housing Facilities other than certain administrative functions. The functions performed by Capital include periodic reporting to and coordinating with the Company, leasing the individual units in the Senior Housing Facilities, maintaining bank accounts, maintaining books and records, advertising and marketing the Senior Housing Facilities, hiring and supervising on-site personnel, and performing maintenance. Under the terms of the Management Agreement, Capital earns a base management fee equal to 4% of the gross operating revenues of the Senior Housing Facilities, as defined. Capital also earns an incentive management fee equal to 25% of the amount by which the net cash flow of the Senior Housing Facilities, as defined, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount is increased based on the percentage increase in the Consumer Price Index as well as 15% of Facility expansion costs. ILM II has guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the years ended August 31, 2001, 2000 and 1999, Capital earned property management fees from the Company of $656,000, $903,000 and $980,000, respectively.

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4.

Related Party Transactions

Jeffry R. Dwyer, President, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig earned fees from the Company of $134,000 and $34,000, respectively. There were no Accounts receivable—related party at August 31, 2001. Accounts receivable—related party at August 31, 2000 includes $40,000 in expense reimbursements due from Holding II for capital expenditures at the Senior Housing Facilities. Accounts Receivable—Capital Senior Living Corporation at August 31, 2001 and 2000 includes amounts due from Capital as part of the final settlement of property-level receivables and payables at lease termination with respect to the Company's 75% interest in Villa Santa Barbara. Accounts payable—related party at August 31, 2001, includes $247,000 in variable rent due to ILM II Holding and the remainder in accrued legal fees due to Greenberg Traurig, a related party. Accounts payable—related party at August 31, 2000 primarily includes $356,000 for variable rent due to ILM II Holding. 5. Capital Stock

Prior to September 1, 1995, the Company was a wholly-owned subsidiary of ILM II. Pursuant to a reorganization and distribution agreement, ILM II capitalized the Company with $500,000, an amount estimated to provide the Company with necessary working capital. On September 1, 1995, MAVRICC Management Systems, Inc., as the distribution agent, caused to be issued on the stock records of the Company the distributed Common Stock of the Company, in uncertificated form, to the holders of record of ILM II Common Stock at the close of business on July 14, 1995. One share of the Company's Common Stock was distributed for each outstanding share of ILM II Common Stock. No certificates or

scrip representing fractional shares of the Company's Common Stock were issued to holders of ILM II Common Stock as part of the distribution. In lieu of receiving fractional shares, each holder of ILM II Common Stock who would otherwise have been entitled to receive a fractional share of the Company's Common Stock received a cash payment equivalent to $0.14 per share for such fractional interest. 6. The Facilities Lease Agreement

ILM II Holding (the "Lessor"), a direct subsidiary of ILM II, leases the Senior Housing Facilities to the Company (the "Lessee"), pursuant to the Facilities Lease Agreement. Such lease was originally scheduled to expire on December 31, 2000. On August 15, 2000, ILM II caused ILM II Holding to terminate the Facilities Lease Agreement with respect to the Company's 75% leasehold interest in Villa Santa Barbara and ILM II sold its interest in the Senior Housing facility to CSLC. In November 2000, the Facilities Lease Agreement was extended through the earlier of the date on which the merger of ILM II with CSLC was consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, ILM II received notice from CSLC terminating the merger agreement. The lease is accounted for as an operating lease in the Company's financial statements. ILM II's existing corporate finite life is scheduled to expire on December 31, 2001. Upon such expiration, the Facilities Lease Agreement is expected to continue on a month-to-month basis until it is terminated as a result of the expected sale of the Senior Housing Facilities. Although ILM II recommended to its shareholders that its finite life existence be extended, the ILM II shareholders did not approve the proposal to extend ILM II's corporate finite life at their Annual Meeting on August 16, 2001. Accordingly, ILM II announced that, pursuant to its Articles of Incorporation, ILM II will liquidate its properties commencing not later than December 31, 2001.

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Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM II Holding at August 31, 2001, are summarized as follows:
Location Year Facility Built Rentable Units(1) Resident Capacities(1)

Name

The Palms Crown Villa Overland Park Place Rio Las Palmas The Villa at Riverwood Villa Santa Barbara(2) (1)

Fort Myers, FL Omaha, NE Overland Park, KS Stockton, CA St. Louis County, MO Santa Barbara, CA

1988 1992 1984 1988 1986

205 73 141 164 120

255 73 153 190 140

Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. (2) The Facilities Lease Agreement with respect to Villa Santa Barbara was terminated on August 15, 2000, upon the sale of ILM II's interest in Villa Santa Barbara. Pursuant to the Facilities Lease Agreement, the Company paid annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $3,555,427 ($3,995,586 and $4,035,600 per year in 2000 and 1999, respectively). The reduction in base rent from the previous years is due to the termination of the Facilities Lease Agreement with respect to Villa Santa Barbara which was sold by ILM II to CSLC on August 15, 2000. The Facilities Lease Agreement is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Also, any fixed assets of the Company at a Senior Housing Facility would remain with the Senior Housing Facility at the termination of the lease. The Company also paid variable rent, on a quarterly basis, for each Senior Housing Facility in an amount equal to 40% of the excess of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $13,021,000 through August 15, 2000, when the lease with respect to Villa Santa Barbara was terminated. Effective September 1, 2000, variable rent is payable quarterly in an amount equal to 40% of the excess of the aggregate total revenues over $11,634,000 (excluding Villa Santa Barbara). For the fiscal years ended August 31, 2001 and 2000, variable rent expense was $1,006,000 and $1,437,000, respectively. The Company's use of the properties is limited to use as a Senior Housing Facility. The Company has responsibility to obtain and maintain all licenses, certificates and consents needed to use and operate each Facility, and to use and maintain each Senior Housing Facility in compliance with all local board of health and other applicable governmental and insurance regulations. The Senior Housing Facilities located in California, Florida and Kansas are licensed by such states to provide assisted living services. Also, various health and safety regulations and standards

which are enforced by state and local authorities apply to the operation of all of the Senior Housing Facilities. Violations of such health and safety standards could result in fines, penalties, closure of a Senior Housing Facility or other sanctions.

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7.

Legal Proceedings and Contingencies

The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's management, will not have a material effect on the financial statements of the Company. 8. Construction Loan Financing

ILM II and the Company obtained a construction loan facility during 1999 that provided ILM II with up to $8.8 million to fund the capital costs of the potential expansion programs. The construction loan facility was collateralized by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The Company was a co-borrower on the construction loan. On April 3, 2001, the remaining $570,000 principal balance on the construction loan facility plus accrued interest was repaid by ILM II. Amounts outstanding under the construction loan facility at May 31, 2001 and August 31, 2000 were $0 and $570,000, respectively. 9. Federal Income Taxes

The Company is taxable as a so-called "C" corporation and, therefore, its income is subject to tax at the federal and state levels. The Company reports on a calendar year for tax purposes. Income taxes at the appropriate statutory rates have been provided for in the accompanying financial statements. Deferred income tax benefit reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets and liabilities as of August 31, 2001 and 2000, are comprised of the following amounts (in thousands):
2001 2000

Deferred tax asset—straight-line rent expense Deferred tax asset—book over tax depreciation Deferred tax asset—book over tax amortization Gross deferred tax asset Valuation allowance Gross deferred tax asset

$— 643 3 646 (518 ) $128

$3 332 9 344 (332 ) $12

The components of income tax expense (benefit) for fiscal 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999

Current: Federal State Total current Deferred: Federal State Total deferred

$(320 ) (57 ) (377 )

$276 57 333

$— — —

(98 ) (17 ) (115 ) $(492 )

122 20 142 $475

293 49 342 $342

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During the fourth quarter of fiscal year 2001, the Company recorded income tax expense of $186,000 to record a valuation allowance of $518,000 against deferred tax assets that are not expected to be recovered due to the termination of the Facilities Lease Agreement. The remaining deferred tax asset is expected to be realized through the carryback of net operating losses upon the termination of the Facilities Lease Agreement and the write off of fixed assets. The reconciliation of income tax computed for fiscal 2001, 2000 and 1999, at U.S. federal statutory rates to income tax expense (benefit) is as follows (in thousands):
2001 2000 1999

Tax at U.S. statutory rates State income taxes, net of federal tax benefit Valuation allowance Other

$(433 ) (76 ) 186 (169 ) $(492 )

34 % 6% 15 % 7% 62 %

$72 13 332 58 $475

34 % 6% 158 % 27 % 225 %

$293 49 — — $342

34 % 6% 0% 0% 40 %

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (Liquidation Basis) November 30, 2001 (Unaudited) and August 31, 2001 (Dollars in thousands, except per share data)
November 30, 2001 August 31, 2001

ASSETS Investment properties, at fair value Cash and cash equivalents Accounts receivable—related party Prepaid expenses and other assets

$45,500 945 717 4 $47,166

$45,500 1,298 247 11 $47,056

LIABILITIES Accounts payable and accrued expenses Accounts payable — related party Built-in gain taxes payable Accrued liquidation expenses Preferred shareholders' minority interest in consolidated subsidiary Total liabilities Net assets in liquidation See accompanying notes.

$264 920 3,705 2,115 154 7,158 $40,008

$129 966 3,705 2,404 152 7,356 $39,700

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION

(Liquidation Basis) For the three months ended November 30, 2001 (Unaudited) (Dollars in thousands, except per share data) Net assets in liquidation, August 31, 2001 Increase (decrease) during the three months ended November 30, 2001: Operating activities: Rental and other Interest income General and administrative Professional fees Director's compensation $39,700

1,163 5 (81 ) (426 ) (36 ) 625

Liquidating activities: Provision for liquidation expenses Net increase in assets in liquidation Net assets in liquidation, November 30, 2001

(317 ) 308 $40,008

See accompanying notes.

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENT OF INCOME (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended November 30, 2000

Revenue: Rental and other Interest

$1,139 90 1,229

Expenses: Depreciation Amortization Professional fees General and administrative Directors' compensation

298 44 667 200 24 1,233

Net income (loss) Basic income (loss) per share of common stock Cash dividends paid per share of common stock

$(4 ) $(0.00 ) $0.00

The above earnings and cash dividends paid per share of common stock are based upon the 5,181,236 shares outstanding for each period.

See accompanying notes.

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ILM Senior Living, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional Paid-In Capital Retained Earnings Shares Amount Total

Shareholders' equity at August 31, 2000 Cash dividends paid Net loss Shareholders' equity at November 30, 2000 See accompanying notes.

5,181,236 — — 5,181,236

$52 — — $52

$44,823 — — $44,823

$(10,138 ) — (4 ) $(10,142 )

$34,737 — (4 ) $34,733

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ILM II Senior Living, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands)
Three Months Ended November 30, 2000

Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense Accrued dividends on subsidiary's preferred stock Changes in assets and liabilities: Accounts receivable — related party Prepaid expenses and other assets Deferred rent receivable Accounts payable and accrued expenses Accounts payable — related party Net cash provided by operating activities Cash flows from investing activity: Additions to operating investment properties

$(4 )

342 2 100 (18 ) 6 53 324 805 (41 )

Net cash used in investing activity Cash flows from financing activity: Cash dividends paid to shareholders Net cash used in financing activity Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Cash paid for interest

(41 )

— — 764 11,258 $12,022 $—

See accompanying notes.
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ILM II Senior Living, Inc.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. General

The accompanying consolidated financial statements, footnotes and discussions should be read in conjunction with the consolidated financial statements and footnotes contained in ILM II Senior Living, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended August 31, 2001. In the opinion of management, the accompanying interim consolidated financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim periods. In connection with the Company's adoption of a plan of liquidation as of August 31, 2001, the accompanying consolidated financial statements for the three months ended November 30, 2001, have been prepared on the liquidation basis of accounting in accordance with accounting principles generally accepted in the United States of America for interim financial information, which, among other things, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Key estimates include the valuation of investment properties and the estimate of liquidation expenses. Actual results, therefore, could differ from the estimates and assumptions used. The results of operations for the three-month period ended November 30, 2001, are not necessarily indicative of the results that may be expected for the year ending August 31, 2002. The Company was incorporated on February 5, 1990 under the laws of the State of Virginia as a Virginia finite-life corporation, formerly PaineWebber Independent Mortgage Inc. II. On September 12, 1990, the Company sold to the public in a registered initial offering 5,181,236 shares of common stock, $.01 par value. The Company received capital contributions of $51,812,356, of which $200,000 represented the sale of 20,000 shares to an affiliate at that time, PaineWebber Group, Inc. ("PaineWebber"). For discussion purposes, the term "PaineWebber" will refer to PaineWebber Group, Inc., and all affiliates that provided services to the Company in the past. The Company elected to qualify and be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended, for each taxable year of operations. The Company originally invested the net proceeds of the initial public offering in six participating mortgage loans collateralized by senior housing facilities located in five different states ("Senior Housing Facilities"). ILM II Holding, Inc. ("ILM II Holding"), a majority-owned subsidiary of the Company, now holds title to the five remaining Senior Housing Facilities which comprise the balance of the operating investment properties on the accompanying statements of net assets in liquidation, subject to certain mortgage loans payable to the Company. Such mortgage loans and the related interest expense are eliminated in the consolidation of the financial statements of the Company. The Company made charitable gifts of one share of the preferred stock in ILM II Holding to each of 111 charitable organizations so that ILM II Holding would meet the stock ownership requirements of a REIT as of January 30, 1997. The preferred stock has a liquidation preference of $1,000 per share plus any accrued and unpaid dividends. Dividends on the preferred stock accrue at a rate of 8% per annum on the original $1,000 liquidation preference and are cumulative from the date of issuance. It is anticipated that dividends will accrue and be paid at liquidation of ILM II Holding. Cumulative dividends accrued as of November 30, 2001 on the preferred stock in ILM II Holding totaled approximately $43,000.

As part of the fiscal 1994 Settlement Agreement with AHC, ILM II Holding retained AHC as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement. The management agreement with AHC was terminated in July 1996. Subsequent to the

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effective date of the settlement agreement with AHC, in order to maximize the potential returns to the Company's existing Shareholders while maintaining the Company's qualification as a REIT under the Internal Revenue Code, the Company formed a new corporation, ILM II Lease Corporation ("Lease II"), for the purpose of operating the Senior Housing Facilities under the terms of a facilities lease agreement (the "Facilities Lease Agreement"). All of the shares of capital stock of Lease II were distributed to the holders of record of the Company's common stock and the Senior Housing Facilities were leased to Lease II (see Note 2 for a description of the Facilities Lease Agreement). Lease II is a public company subject to the reporting obligations of the Securities and Exchange Commission. All responsibility for the day-to-day management of the Senior Housing Facilities, including administration of the property management agreement with AHC, was transferred to Lease II. On July 29, 1996, the management agreement with AHC was terminated and Lease II retained Capital Senior Management 2, Inc. ("Capital") to be the new property manager of its Senior Housing Facilities pursuant to a management agreement (the "Management Agreement"). Plan of Liquidation On July 6, 2001, in its definitive proxy statement, the Company's Board of Directors recommended to the Company's Shareholders that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Company's Annual Meeting of Shareholders, the proposal to extend the finite-life corporate existence of the Company was not approved by the Company's Shareholders. Pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it would commence the liquidation of its Senior Housing Facilities not later than December 31, 2001. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. Pursuant to the Company's plan of liquidation and in accordance with its Articles of Incorporation, on November 16, 2001, the Company and ILM II Holding entered into a purchase and sale agreement with BRE/Independent Living, LLC, a Delaware limited liability company ("BRE"), pursuant to which the Company agreed to sell, and BRE, agreed to purchase, all of the Company's right, title and interest in and to its Senior Housing Facilities and certain other related assets (the "BRE" Agreement"). In consideration for the sale of the Senior Housing Facilities, BRE agreed, subject to certain conditions and apportionments, to pay the Company $45.5 million, approximately $2.275 million of which was paid as a refundable deposit into escrow (the "BRE Deposit"). Prior to entering into the BRE Agreement, the Company authorized management to work expeditiously with the Company's legal and financial advisors to identify prospective purchasers of the Company's capital stock or assets (by means of merger, strategic business combination, tender offer or sale of the Company's Senior Housing Facilities) and to elicit bona fide offers for transactions to be consummated on or prior to December 31, 2001 which would maximize current shareholder value. As part of a five-week auction process that ended on October 24, 2001, liquidation announcements for the Company were published in The Wall Street Journal and The Washington Post . Throughout this process, 160 potential purchasers were identified, comprehensive due diligence packages were distributed, and 126 potential purchasers expressed interest in reviewing information relating to one or more of the Senior Housing Facilities. Of those potential purchasers, 17 candidates provided formal indications of interest, including eight parties who were interested in acquiring only a single senior or assisted living facility. Initial indications of interest for the Senior Housing Facilities, in terms of purchase price, ranged from $34.0 million to $51.0 million, the highest indication having been

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withdrawn shortly after it was made. Based upon the non-withdrawn indications of interest received, the Company's Board of Directors, after consultation with its legal and financial advisors, concluded that BRE's indication of interest was the transaction with the highest price and was most likely to be consummated. Accordingly, the Company entered into negotiations with BRE which culminated in the execution of the BRE Agreement. On January 15, 2002, the Company received a letter from BRE stating its intention not to consummate the BRE transaction at the agreed upon purchase price contained in the BRE Agreement. The Company determined that such refusal to consummate the BRE Agreement in accordance with its terms constituted a breach by BRE of the BRE Agreement. Accordingly, the Company notified BRE that it was terminating the BRE Agreement. In a separate letter to the Company, BRE instructed the escrow agent to refund the BRE Deposit to BRE.

Following BRE's breach, on January 23, 2002, the Company and ILM II Holding entered into a purchase and sale agreement with Five Star Quality Care, Inc., a publicly traded Maryland corporation ("FVE"), pursuant to which the Company and ILM II Holding (for purposes of discussing the FVE transaction, collectively, the "Seller") agreed to sell, and FVE agreed to purchase, all of the Seller's right, title and interest in its senior and assisted living facilities and certain related assets (the "FVE Agreement"). In consideration for the sale of these facilities, FVE agreed, subject to certain conditions, to pay the Seller $45.5 million in cash, approximately $5 million of which has been paid by FVE into escrow in the form of a deposit (the "FVE Deposit"). Each of the parties' respective obligations under the FVE agreement is subject to customary closing conditions. FVE's obligation to close the transaction is subject to a due diligence inspection period ending February 22, 2002, providing FVE with the right to notify the Seller about certain property conditions or defects requiring more than $250,000 to remediate. Upon such notification, the Seller may elect to terminate the FVE Agreement and return the FVE deposit to FVE, or to refund a portion of the escrow deposit or agree to reduce the purchase price, on a dollar-for-dollar basis, by the amount such defect exceeds $250,000. If the Seller so elects to terminate the FVE Agreement, FVE may rescind such notice of property defect and continue with the transaction on the previously agreed terms. Further, after the inspection period has expired, if either party should breach the FVE Agreement, the non-breaching party will be entitled to the escrow deposit as liquidated damages, and in the case of the Seller's breach in limited circumstances, FVE may seek specific performance or monetary remedies as liquidated damages. Upon consummation of the transactions contemplated by the FVE Agreement, the Company intends to use the net proceeds therefrom to pay in full and discharge all of its outstanding liabilities, debts and other obligations to creditors. After the satisfaction in full of all creditor claims, the Company intends to distribute the remaining net proceeds, net of professional advisory fees and expenses and administrative expenses, to its Shareholders in the form of a liquidating distribution to be paid pro rata in accordance with the respective equity interests of the Company's Shareholders. There can be no assurance whether the transactions contemplated by the FVE Agreement will be consummated or, if consummated, what the exact timing thereof would be. If the transactions contemplated by the FVE Agreement are not consummated, there can be no assurance as to the timing of any such liquidating distribution or the amount of any residual sale proceeds or assets that would be distributed to the Company's Shareholders, if any. On or about February 1, 2002, BRE filed suit against the Company, its President and Chief Executive Officer, ILM II Holding and its President in the Supreme Court of the State of New York alleging

F-107

various causes of action for breach of contract, tortious interference with contractual relations and unjust enrichment. BRE seeks compensatory and punitive damages in an amount in excess of $10 million to be determined at trial. BRE alleges, among other things, that the Company and ILM II Holding breached the no-solicitation provision of the BRE Agreement, the President and Chief Executive Officer of the Company and the President of ILM II Holding tortiously interfered with BRE's contractual relations with the Company and ILM II Holding, and the Company and ILM II Holding were unjustly enriched as a result of their alleged breach. The Company believes these allegations are without merit and will vigorously defend this action. In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated fair market value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. The investment properties at November 30, 2001 were valued based on the purchase and sale agreement described above. The proposed sale price is subject to change upon completion of due diligence and amounts ultimately realized may vary significantly. There can be no assurance as to whether the transactions contemplated will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. The actual liquidation costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. The accrued expenses do not take into consideration possible litigation arising from the potential representations and warranties made as part of the sale of the Senior Housing Facilities. Such costs, if any, are unknown and are not estimable at this time. As reported, in December 2000, the Company distributed to shareholders approximately $9.8 million ($1.89 per share of common stock) representing the net proceeds from the sale of the Company's 75% interest in the Senior Housing Facility located in Santa Barbara, California. 2. Operating Investment Properties Subject to Facilities Lease Agreement

At November 30, 2001, through its consolidated subsidiary, the Company owned five Senior Housing Facilities. The name, location and size of the properties are as set forth below: Name The Palms Crown Villa Overland Park Place Rio Las Palmas The Villa at Riverwood (1) Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. In 1994, in order to maximize the potential returns to the existing Shareholders while maintaining the Company's qualification as a REIT under the Internal Revenue Code, the Company formed a new
Location Year Facility Built Rentable Units (1) Resident Capacities (1)

Fort Myers, FL Omaha, NE Overland Park, KS Stockton, CA St. Louis County, MO

1988 1992 1984 1988 1986

205 73 141 164 120

255 73 153 190 140

F-108

corporation, Lease II, for the purpose of operating the Senior Housing Facilities under the terms of a Facilities Lease Agreement dated September 1, 1995 between the Company's consolidated affiliate, ILM II Holding, as owner of the properties and lessor (the "Lessor"), and Lease II as lessee (the "Lessee"). The facilities lease is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. The Facilities Lease Agreement, which was originally scheduled to expire on December 31, 2000, is expected to continue on a month-to-month basis until the Senior Housing Facilities are sold. Pursuant to the Facilities Lease Agreement, Lease II pays annual base rent for the use of all of the Facilities in the aggregate amount of $3,555,427 ($3,995,586 per year in 2000). The reduction in base rent from the previous year was due to the sale of Villa Santa Barbara on August 15, 2000. Lease II also pays variable rent, on a quarterly basis, for each Senior Housing Facility in an amount equal to 40% of the excess of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $11,634,000. Variable rent was $274,000 and $256,000 for the three-month periods ended November 30, 2001 and 2000, respectively. On July 29, 1996, Lease II retained Capital to be the property manager of the Senior Housing Facilities and the Company guaranteed the payment of all fees due to Capital pursuant to a Management Agreement. For the three-month periods ended November 30, 2001 and 2000, Capital earned property management fees from Lease II of $153,000 and $208,000, respectively. 3. Related Party Transactions

Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the three-month periods ended November 30, 2001 and 2000, Greenberg Traurig earned fees from the Company of $296,000 and $603,000, respectively. Accounts receivable—related party at November 30, 2001, includes base and variable rent due from Lease II. Accounts receivable—related party at August 31, 2001, includes variable rent due from Lease II. Accounts payable—related party at November 30, 2001, includes unbilled legal fees due to Greenberg Traurig, Counsel to the Company and its affiliate and a related party, as described above. At August 31, 2001, accounts payable—related party includes $40,000 of expense reimbursements payable to Lease II. 4. Legal Proceedings and Contingencies Feldman Litigation On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990, commenced a purported class action on behalf of that trust and all other shareholders of the Company and ILM I in the Supreme Court of the State of New York, County of New York naming the Company, ILM I and their Directors as defendants. The class action complaint alleged various theories of redress and a broad range of damages.

F-109

On October 15, 1999, the parties entered into a Stipulation of Settlement that was filed with the Court and approved by order dated October 21, 1999. In issuing that order the Court entered a final judgment dismissing the action and all non-derivative claims of the settlement class against the defendants with prejudice. This litigation was settled at no cost to the Company and ILM I. As part of the settlement, CSLC increased its proposed merger consideration payable to the Company and ILM I shareholders and was also responsible for a total of approximately $1.1 million (approximately 40% of which is allocable to the Company) in plaintiffs' attorneys fees and expenses upon consummation of the proposed merger. If the proposed merger was not consummated and if the Company and ILM I were to consummate an extraordinary transaction with a third party, then the Company and ILM I would be responsible for the plaintiffs' attorneys fees and expenses. On August 15, 2000, the merger of ILM I with CSLC was consummated and on February 28, 2001, CSLC terminated the proposed merger with the Company. Because of these events and based upon the Stipulation of Settlement, if the Company was to consummate an extraordinary transaction with a third party, the Company would be responsible for the Company's share of the plaintiff"s attorney's fees and expenses. As a result of the adoption of a plan of liquidation, a liability of $440,000 for a potential Feldman litigation settlement is included in accrued liquidation expense on the consolidated statement of net assets in liquidation at November 30, 2001 and August 31, 2001. Built-in Gain Tax The assumption of ownership of the Senior Housing Facilities through ILM II Holding, which was organized as a so-called "C" corporation for tax purposes, has resulted in a possible future tax liability which would be payable upon the ultimate sale of the Senior Living Facilities (the "built-in gain tax"). The amount of such tax would be calculated based on the lesser of the total net gain realized from the sale transaction or the portion of the net gain realized upon a final sale which is attributable to the period during which the properties were held in a "C" corporation. Any future appreciation in the value of the Senior Housing Facilities subsequent to the conversion of ILM II Holding to a REIT would not be subject to the built-in gain tax. Based on management's current estimate of the increase in the values of the Senior Housing Facilities which occurred between April 1994 and January 1996, as supported by independent appraisals, a sale of the Senior Housing Facilities within ten years of the date of the conversion of ILM II Holding to a REIT would result in a built-in gain tax of $3,705,000. A built-in gain tax liability of $3,705,000 payable upon the disposition of the investment properties as a result of the plan of liquidation is included on the accompanying consolidated statement of net assets in liquidation at November 30, 2001 and August 31, 2001.

F-110

ILM II Lease Corporation

STATEMENTS OF NET ASSETS IN LIQUIDATION (Liquidation Basis) November 30, 2001 (Unaudited) and August 31, 2001 (Dollars in thousands, except per share data)
November 30, 2001 August 31, 2001

Assets Cash and cash equivalents Accounts receivable, net Tax refund receivable—federal and state Prepaid taxes and other assets Deposits Deferred tax asset, net

$688 48 346 448 9 128 $1,667

$931 108 346 460 9 128 $1,982

Liabilities Accounts payable and accrued expenses Accrued liquidation expenses Real estate taxes payable Accounts payable — related party

$489 219 102 808

$633 412 314 353

Security deposits Total current liabilities Commitments and contingencies Net assets in liquidation See accompanying notes.

47 1,665 $2

49 1,761 $221

F-111

ILM II Lease Corporation

STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis) For the three months ended November 30, 2001 (Unaudited) (Dollars in thousands, except per share data) Net Assets in liquidation, August 31, 2001 Increase (decrease) during the three months ended November 30, 2001: Operating activities: Rental and other Interest income Property operating General and administrative Professional fees Director's compensation Total operating activities Liquidating activities: Provision for liquidation expenses Net decrease in assets in liquidation Net Assets in liquidation, November 30, 2001 $221

3,594 1 (3,432 ) (209 ) (132 ) (32 ) (210 )

(9 ) (219 ) $2

See accompanying notes.

F-112

ILM II Lease Corporation

STATEMENT OF OPERATIONS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended November 30, 2000

Revenue: Rental and other income Interest income

$3,548 10 3,558

Expenses: Facilities lease rent expense Dietary salaries, wages and food service expenses Administrative salaries, wages and expenses Marketing salaries, wages and expenses Utilities Repairs and maintenance Real estate taxes Property management fees Other property operating expenses General and administrative expenses Directors compensation Professional fees Depreciation expense

1,139 632 271 147 187 134 118 208 319 176 14 144 498 3,987

Loss before taxes Income tax expense: Current Deferred

(429 ) — 12 12

Net loss Basic loss per share of common stock

$(441 ) $(0.09 )

The above loss per share of common stock is based upon the 5,180,952 shares outstanding for each period. See accompanying notes.

F-113

ILM II Lease Corporation

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional Paid-In Capital Retained Earnings Shares Amount Total

Balance at August 31, 2000 Net loss Balance at November 30, 2000

5,180,952 — 5,180,952

$52 — $52

$448 — $448

$502 (441 ) $61

$1,002 (441 ) $561

See accompanying notes.

F-114

ILM II Lease Corporation

STATEMENT OF CASH FLOWS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands)
Three Months Ended November 30, 2000

Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used by operating activities: Depreciation expense Deferred tax expense Changes in assets and liabilities: Accounts receivable, net Accounts receivable — related party Prepaid expenses and other assets Accounts payable and accrued expenses Accounts payable — related party Real estate taxes payable Deferred rent payable Security deposits, net Net cash used by operating activities Cash flows from investing activity: Purchase of furniture, fixtures and equipment Net cash used by investing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

$(441 ) 498 12 (11 ) — (92 ) (46 ) (69 ) (199 ) (6 ) 5 (348 ) (129 ) (129 ) (477 ) 1,894 $1,417

See accompanying notes.

F-115

ILM II Lease Corporation

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. General

The accompanying financial statements, footnotes and discussions should be read in conjunction with the financial statements and footnotes contained in ILM II Lease Corporation's (the "Company") Annual Report on Form 10-K for the year ended August 31, 2001. In the opinion of management, the accompanying interim financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim periods.

In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated net realizable value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the estimate of liquidation expenses. Actual results, therefore, could differ from those estimates. The results of operations for the three-month period ended November 30, 2001, are not necessarily indicative of the results to be expected for the year ending August 31, 2002. When the Company adopted the plan of liquidation on August 31, 2001, accrued liquidation expenses of $412,000 were recorded. These costs include estimates of insurance ($193,000) and other costs ($219,000) such as legal fees, accounting fees, tax preparation and filing fees and other professional services. As of the period ended November 30, 2001, another $9,000 was provided for legal fees incurred as a result of the plan of liquidation and $202,000 of liquidation expenses were paid during the period. The actual costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. The Company was incorporated on September 12, 1994 under the laws of the Commonwealth of Virginia by ILM II Senior Living, Inc., a Virginia finite-life corporation ("ILM II"), formerly PaineWebber Independent Living Mortgage Inc. II, to operate six rental housing projects that provide independent-living and assisted-living services for independent senior citizens ("the Senior Housing Facilities") under a facilities lease agreement dated September 1, 1995 (the "Facilities Lease Agreement"), between the Company, as lessee, and ILM II Holding, Inc. ("ILM II Holding"), as lessor, and a direct subsidiary of ILM II. The Company's sole business is the operation of the Senior Housing Facilities. ILM II contributed $500,000 to the Company in return for all of the issued and outstanding shares of the Company's common stock. ILM II had originally made mortgage loans collateralized by the Senior Housing Facilities to Angeles Housing Concepts, Inc. ("AHC") between July 1990 and July 1992. In March 1993, AHC defaulted under the terms of such mortgage loans and in connection with the settlement of such default, title to the Senior Housing Facilities was transferred, effective April 1, 1994, to certain majority-owned, indirect subsidiaries of ILM II, subject to the mortgage loans. Subsequently, the indirect subsidiaries of ILM II were merged into ILM II Holding. As part of the fiscal 1994 settlement agreement with AHC, AHC was retained as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement, which was assigned to the Company as of September 1, 1995 and subsequently terminated in July 1996. ILM II is a public company subject to the reporting obligations of the Securities and Exchange Commission.

F-116

In July 1996, following termination of the property management agreement with AHC, the Company entered into a property management agreement (the "Management Agreement") with Capital Senior Management 2, Inc. ("Capital") to handle the day-to-day operations of the Senior Housing Facilities. Plan of Liquidation On July 6, 2001, ILM II's Board of Directors recommended to its shareholders that ILM II's Articles of Incorporation be amended to extend ILM II's finite-life existence from December 31, 2001, until December 31, 2008. On August 16, 2001, at ILM II's Annual Meeting of Shareholders, the proposal was not approved by the shareholders. As a result, ILM II announced that it will liquidate the Senior Housing Facilities commencing not later than December 31, 2001. On November 16, 2001, ILM II and ILM II Holding entered into a purchase and sale agreement (the "BRE Agreement") with BRE/Independent Living, LLC, a Delaware limited liability company ("BRE"), pursuant to which ILM II and ILM II Holding agreed to sell, and BRE agreed to purchase, all of ILM II's and ILM II Holding's right, title and interest in and to its Senior Housing Facilities and certain other related assets (the "Facilities"). In consideration for the sale of these Facilities, BRE agreed, subject to certain conditions, to pay ILM II $45.5 million, approximately $2.275 million of which was paid as a refundable deposit into escrow (the "BRE Deposit"). On January 15, 2002, ILM II received a letter from BRE, stating its intention not to consummate the BRE transaction at the agreed upon purchase price contained in the BRE Agreement. ILM II determined that such refusal to consummate the BRE Agreement in accordance with its terms constituted a breach by BRE of the BRE Agreement. Accordingly, ILM II notified BRE that it was terminating the BRE Agreement. In a separate letter to the Company, BRE instructed the escrow agent to refund the BRE Deposit to BRE. Following BRE's breach, on January 23, 2002, ILM II and ILM II Holding entered into a purchase and sale agreement with Five Star Quality Care, Inc., a publicly traded Maryland corporation ("FVE"), pursuant to which ILM II and ILM II Holding (for purposes of discussing the FVE transaction, collectively, the "Seller") agreed to sell, and FVE agreed to purchase, all of the Seller's right, title and interest in and to its senior and assisted living facilities and certain other related assets (the "FVE Agreement"). In consideration for the sale of these facilities, FVE agreed, subject to certain conditions, to pay the Seller $45.5 million, approximately $5 million of which has been paid by FVE into escrow as a deposit (the "FVE Deposit").

Each of the parties' respective obligations under the FVE agreement is subject to customary closing conditions. FVE's obligation to close the transaction is subject to a due diligence inspection period ending February 22, 2002, providing FVE with the right to notify the Seller about certain property conditions or defects requiring more than $250,000 to remediate. Upon such notification, the Seller may elect to terminate the FVE Agreement and return the FVE deposit to FVE, or to refund a portion of the escrow deposit or agree to reduce the purchase price, on a dollar-for-dollar basis, by the amount such defect exceeds $250,000. If the Seller elects to terminate the FVE Agreement, FVE may rescind such notice of property defect and continue with the transaction on the previously agreed terms. Further, after the inspection period has expired, if either party should breach the FVE Agreement, the non-breaching party will be entitled to the escrow deposit as liquidated damages, and in the case of the Seller's breach in limited circumstances, FVE may seek specific performance or monetary remedies as liquidated damages. There can be no assurance whether the transactions contemplated by the FVE Agreement will be consummated or, if consummated, what the exact timing thereof would be.

F-117

The Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM II. Accordingly, upon the liquidation of the Senior Housing Facilities and the resulting termination of the Facilities Lease Agreement, the Company will carry out a plan of liquidation. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. It is currently expected that the Company will have nominal value after payment of its expenses. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the estimate of liquidation expenses. Actual results, therefore, could differ from those estimates. 2. The Facilities Lease Agreement

ILM II Holding (the "Lessor"), a direct subsidiary of ILM II, leases the Senior Housing Facilities to the Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such lease was originally scheduled to expire on December 31, 2000. On August 15, 2000, ILM II caused ILM II Holding to terminate the Facilities Lease Agreement with respect to the Company's 75% leasehold interest in Villa Santa Barbara and sell its interest in the Senior Housing Facility. The Facilities Lease Agreement with respect to the remaining five Senior Housing Facilities has been extended on a month-to-month basis beyond its original expiration date and is expected to continue on a month-to-month basis until it is terminated as a result of the expected sale of the Senior Housing Facilities. The lease is accounted for as an operating lease in the Company's financial statements. Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM II Holding at November 30, 2001, are summarized as follows: Name The Palms Crown Villa Overland Park Place Rio Las Palmas The Villa at Riverwood (1) Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. Pursuant to the Facilities Lease Agreement, the Company pays annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $3,555,427 per year. The facilities lease is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Also, any fixed assets of the Company at a Senior Housing Facility would remain with the Senior Housing Facility at the termination of the lease. The Company also paid variable rent, on a quarterly basis, for each facility in an amount equal to 40% of the excess of aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $11,634,000 through August 15, 2000, when Villa Santa Barbara was sold. Effective September 1, 2000, variable
Location Year Facility Built Rentable Units (2) Resident Capacities (2)

Fort Myers, FL Omaha, NE Overland Park, KS Stockton, CA St. Louis County, MO

1988 1992 1984 1988 1986

205 73 141 164 120

255 73 153 190 140

F-118

rent is payable quarterly in an amount equal to 40% of the excess of the aggregate total revenues over $11,634,000 (excluding Villa Santa Barbara). Variable rent expense was $274,000 and $256,000 for the three-month periods ended November 30, 2001 and November 30, 2000, respectively. The Company's use of the properties is limited to use as Senior Housing Facilities. The Company has responsibility to obtain and maintain all licenses, certificates and consents needed to use and operate each Senior Housing Facility, and to use and maintain each Senior Housing Facility in compliance with all local board of health and other applicable governmental and insurance regulations. The Senior Housing Facilities located in California, Florida and Kansas are licensed by such states to provide assisted living services. In addition, various health and safety regulations and standards, which are enforced by state and local authorities, apply to the operation of all the Senior Housing Facilities. Violations of such health and safety standards could result in fines, penalties, closure of a Senior Housing Facility, or other sanctions. The Company retained Capital to be the property manager of the Senior Housing Facilities pursuant to a Management Agreement, which commenced on July 29, 1996. The term of the Management Agreement originally expired on July 29, 2001 but, in November 2000, the term was modified to be coterminous with the Facilities Lease Agreement. As a result, the term of the Management Agreement is currently being extended on a month-to-month basis. Under the Management Agreement, Capital generally is required to perform all operational functions necessary to operate the Senior Housing Facilities other than certain administrative functions. The functions performed by Capital include periodic reporting to and coordinating with the Company, leasing the individual units in the Senior Housing Facilities, maintaining bank accounts, maintaining books and records, advertising and marketing the Senior Housing Facilities, hiring and supervising on-site personnel, and performing maintenance. Under the terms of the Management Agreement, Capital earns a base management fee equal to 4% of the gross operating revenues of the Senior Housing Facilities, as defined. Capital also earns an incentive management fee equal to 25% of the amount by which the net cash flow of the Senior Housing Facilities, as defined, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount is increased based on the percentage increase in the Consumer Price Index as well as 15% of Facility expansion costs. ILM II has guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the three-month periods ended November 30, 2001, and 2000, Capital earned property management fees from the Company of $153,000 and $208,000. 3. Related Party Transactions

Jeffry R. Dwyer, Secretary, President and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the three-month periods ended November 30, 2001 and 2000, Greenberg Traurig earned fees from the Company of $9,000 and $30,000, respectively. Accounts payable—related party at November 30, 2001, includes $717,000 for base and variable rent due to ILM II Holding, $72,000 in accrued legal fees due to Greenberg Traurig, Counsel to the Company and a related party, and $19,000 in expense reimbursements due. At August 31, 2001, accounts payable—related party primarily includes $353,000 for variable rent due to ILM II Holding.

F-119

4.

Legal Proceedings and Contingencies

The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's Board of Directors, will not have a material effect on the financial statements of the Company.

F-120

Part II
INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution Set forth below is an estimate (except in the case of the registration fee) of the amount of fees and expenses to be incurred in connection with the issuance and distribution of the offered securities. All such fees and expenses are to be paid by the Company. Registration Fee Under Securities Act of 1933 Blue Sky Fees and Expenses American Stock Exchange Listing Fee Legal Fees and Expenses Accounting Fees and Expenses Printing and Engraving Distribution Agent, Transfer Agent and Registrar Fees and Expenses Miscellaneous Fees and Expenses Total: Item 14. Indemnification of Directors and Officers The Maryland General Corporation Law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) acts committed in bad faith or active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Company's charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. The Company's charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonably expenses in advance of final disposition of a proceeding to (i) any present or former director or officer or (ii) any individual who, while a director and at the Company's request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which he or she may become subject or which he or she may incur by reason of his or her status as a present or former director or officer of the Company. The Company's bylaws obligate it, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity, against any claim or liability to which he may become subject by reason of such status. The Company's charter and bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The Maryland General Corporation Law requires a corporation (unless its charter provides otherwise, which the Company's charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her $2,660 1,000 17,500 150,000 200,000 75,000 10,000 43,840 500,000

II-1

service in that capacity. The Maryland General Corporation Law permits a corporation to indemnify its directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceedings to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceedings and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the Maryland General Corporation Law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In accordance with the Maryland General Corporation Law, the Company's bylaws require it, as a condition to advancing expenses, to obtain (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the Company as authorized by the Company's bylaws and (2) a written statement by or on his or her behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. Item 15. Recent Sales of Unregistered Securities In the three years preceding the filing of this registration statement, we have sold the following securities that were not registered under the Securities Act of 1933: On September 17, 2001, we sold 1,000 shares of our common stock to Senior Housing Properties Trust for $1,000 in connection with our organization under Maryland law. On January 2, 2002 we issued 125,000 shares of our common stock to each of Barry M. Portnoy and Gerard M. Martin in connection with our acquisition of FSQ, Inc. No underwriters were used in the foregoing transactions. The sales of securities described above were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits:

Exhibit No.

Description

1.1* 2.1**

2.2** 2.3 2.4

Form of Underwriting Agreement Transaction Agreement, dated December 7, 2001, by and among Senior Housing Properties Trust, certain subsidiaries of Senior Housing Properties Trust party thereto, the Registrant, certain subsidiaries of the Registrant party thereto, FSQ, Inc., Hospitality Properties Trust, HRPT Properties Trust and Reit Management & Research LLC Agreement of Merger, dated December 5, 2001, among the Registrant, FSQ Acquisition, Inc. and FSQ, Inc. Sale-Purchase Agreement between ILM II Senior Living, Inc. and ILM II Holding, Inc. and the Registrant, dated January 23, 2002 First Amendment to Sale-Purchase Agreement among ILM II Senior Living, Inc., ILM II Holding, Inc. and Five Star Quality Care, Inc., dated February 22, 2002

II-2

2.5 3.1*** 3.2*** 4.1*** 4.2 5.1 10.1*** 10.2**** 10.3

Second Amendment to Sale-Purchase Agreement among ILM II Senior Living, Inc., ILM II Holding, Inc., and Five Star Quality Care, Inc., dated March 1, 2002 Articles of Amendment and Restatement of the Registrant Amended and Restated Bylaws of the Registrant Specimen Certificate for shares of common stock of the Registrant Description of Capital Stock of the Registrant (contained in Exhibits 3.1 and 3.2) Legal Opinion of Ballard Spahr Andrews & Ingersoll, LLP Stock Purchase Agreement, dated August 9, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc. Amendment to Stock Purchase Agreement, dated November 5, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc. Shared Services Agreement, dated January 2, 2002, between the Registrant and Reit Management & Research LLC

10.4 10.5†*** 10.6***** 10.7*****

10.8

10.9

10.10***** 10.11*****

10.12

Amendment No. 1 to Shared Services Agreement between the Registrant and Reit Management & Research LLC, dated January 14, 2002 2001 Stock Option and Stock Incentive Plan of the Registrant Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Guaranty Agreement, dated December 31, 2001, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Pledge of Shares of Beneficial Interest Agreement, dated December 31, 2001, made by the Registrant for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Security Agreement, dated December 31, 2001, by and among Five Star Quality Care Trust and the Landlord under the Master Lease Agreement by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, dated December 31, 2001 Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Guaranty Agreement, dated January 11, 2002, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Pledge of Shares of Beneficial Interest Agreement, dated January 11, 2002, made by FSQ, Inc. for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant
II-3

10.13

#10.14 #10.15*** 21.1 23.1 23.2 23.3 23.4 23.5 24.1 * ** *** **** ***** † # (b)

Security Agreement, dated January 11, 2002, by and among FS Tenant Holding Company Trust and the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Representative Form of Composite Copy of Operating Agreement, as amended through December 31, 2001 between certain subsidiaries of the Registrant and Marriott Senior Living Services, Inc. Representative Form of Pooling Agreement by and between certain subsidiaries of the Registrant and Marriott Senior Living Services, Inc. Subsidiaries of the Registrant Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained in Exhibit 5.1) Consent of Ernst & Young LLP Consent of KPMG LLP Consent of Arthur Andersen LLP Consent of PricewaterhouseCoopers LLP Power of Attorney (contained on page II-6)

To be filed by amendment. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 13, 2001. Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-69846. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated November 5, 2001. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 31, 2001. Indicates a management contract or a compensatory plan, contract or arrangement. Agreement filed is illustrative of numerous other agreements to which the Registrant is a party.

Financial Statement Schedules:

1. Schedule II—Valuation and Qualifying Accounts of Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. 2. Schedule II—Valuation and Qualifying Accounts of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network, Inc.)

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. Item 17. Undertakings (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and

II-4

Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-5

Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newton, Commonwealth of Massachusetts, on March 1, 2002. FIVE STAR QUALITY CARE, INC. By: /s/ EVRETT W. BENTON Evrett W. Benton President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement on Form S-1 has been signed below by the following persons in the capacities and on the dates indicated; and each of the undersigned officers and directors of Five Star Quality Care, Inc., hereby severally constitute and appoint Evrett W. Benton, Gerard M. Martin and Barry M. Portnoy to sign for him, and in his name in the capacity indicated below, this registration statement for the purpose of registering equity securities of the Registrant under the Securities Act of 1933,

and any and all amendments thereto, and any other registration statement filed by Five Star Quality Care, Inc. pursuant to Rule 462(b) which registers additional amounts of equity securities for the offering or offerings contemplated by this registration statement (a "462(b) Registration Statement"), hereby ratifying and confirming our signatures as they may be signed by our attorneys to this registration statement, any 462(b) Registration Statement and any and all amendments to either thereof.
Signature Title Date

/s/ EVRETT W. BENTON Evrett W. Benton /s/ BRUCE J. MACKEY JR. Bruce J. Mackey Jr. /s/ BARRY M. PORTNOY Barry M. Portnoy /s/ GERARD M. MARTIN Gerard M. Martin /s/ BRUCE M. GANS Bruce M. Gans /s/ JOHN L. HARRINGTON John L. Harrington /s/ ARTHUR G. KOUMANTZELIS Arthur G. Koumantzelis
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President and Chief Executive Officer

March 1, 2002

Chief Financial Officer and Treasurer

March 1, 2002

Managing Director

March 1, 2002

Managing Director

March 1, 2002

Director

March 1, 2002

Director

March 1, 2002

Director

March 1, 2002

Exhibit index
Exhibit No. Description

1.1* 2.1**

2.2** 2.3 2.4 2.5 3.1*** 3.2***

Form of Underwriting Agreement Transaction Agreement, dated December 7, 2001, by and among Senior Housing Properties Trust, certain subsidiaries of Senior Housing Properties Trust party thereto, the Registrant, certain subsidiaries of the Registrant party thereto, FSQ, Inc., Hospitality Properties Trust, HRPT Properties Trust and Reit Management & Research LLC Agreement of Merger, dated December 5, 2001, among the Registrant, FSQ Acquisition, Inc. and FSQ, Inc. Sale-Purchase Agreement between ILM II Senior Living, Inc. and ILM II Holding, Inc. and the Registrant, dated January 23, 2002 First Amendment to Sale-Purchase Agreement among ILM II Senior Living, Inc., ILM II Holding, Inc. and Five Star Quality Care, Inc., dated February 22, 2002 Second Amendment to Sale-Purchase Agreement among ILM II Senior Living, Inc., ILM II Holding, Inc., and Five Star Quality Care, Inc., dated March 1, 2002 Articles of Amendment and Restatement of the Registrant Amended and Restated Bylaws of the Registrant

4.1*** 4.2 5.1 10.1*** 10.2**** 10.3 10.4 10.5†*** 10.6***** 10.7*****

10.8

10.9

10.10***** 10.11*****

10.12

10.13

#10.14 #10.15*** 21.1 23.1 23.2 23.3 23.4 23.5 24.1
* ** *** **** ***** † #

Specimen Certificate for shares of common stock of the Registrant Description of Capital Stock of the Registrant (contained in Exhibits 3.1 and 3.2) Legal Opinion of Ballard Spahr Andrews & Ingersoll, LLP Stock Purchase Agreement, dated August 9, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc. Amendment to Stock Purchase Agreement, dated November 5, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc. Shared Services Agreement, dated January 2, 2002, between the Registrant and Reit Management & Research LLC Amendment No. 1 to Shared Services Agreement between the Registrant and Reit Management & Research LLC, dated January 14, 2002 2001 Stock Option and Stock Incentive Plan of the Registrant Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Guaranty Agreement, dated December 31, 2001, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Pledge of Shares of Beneficial Interest Agreement, dated December 31, 2001, made by the Registrant for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant Security Agreement, dated December 31, 2001, by and among Five Star Quality Care Trust and the Landlord under the Master Lease Agreement by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, dated December 31, 2001 Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Guaranty Agreement, dated January 11, 2002, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Pledge of Shares of Beneficial Interest Agreement, dated January 11, 2002, made by FSQ, Inc. for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Security Agreement, dated January 11, 2002, by and among FS Tenant Holding Company Trust and the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant Representative Form of Composite Copy of Operating Agreement, as amended through December 13, 2001 between certain subsidiaries of the Registrant and Marriott Senior Living Services, Inc. Representative Form of Pooling Agreement by and between certain subsidiaries of the Registrant and Marriott Senior Living Services, Inc. Subsidiaries of the Registrant Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained in Exhibit 5.1) Consent of Ernst & Young LLP Consent of KPMG LLP Consent of Arthur Andersen LLP Consent of PricewaterhouseCoopers LLP Power of Attorney (contained on page II-7)

To be filed by amendment. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 13, 2001. Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-69846. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated November 5, 2001. Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 31, 2001. Indicates a management contract or a compensatory plan, contract or arrangement. Agreement filed is illustrative of numerous other agreements to which the Registrant is a party.

QuickLinks Prospectus summary The offering

Summary historical and pro forma financial data Risk factors Forward-looking statements Use of proceeds Market price of common shares Dividend policy Capitalization Dilution Selected financial data Management's discussion and analysis of financial condition and results of operations Business Management Principal shareholders Certain relationships Federal income tax considerations for non-U.S. persons Shares eligible for future sale Description of capital stock Material provisions of Maryland law, our charter and bylaws Underwriting Legal matters Experts Where you can find more information Five Star Quality Care, Inc. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET At December 31, 2001 (amounts in thousands, except per share amounts) Five Star Quality Care, Inc. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share and per share amounts) Five Star Quality Care, Inc. CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share amounts ) Five Star Quality Care, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts) Five Star Quality Care, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended December 31, 2001 and the period April 27, 2000 (Inception) through December 31, 2000 (amounts in thousands, except share amounts) Five Star Quality Care, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) Five Star Quality Care, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (amounts in thousands, except per share amounts) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. COMBINED BALANCE SHEETS (Note 1) December 31, 2000 and 1999 (Dollars in thousands) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. COMBINED STATEMENTS OF OPERATIONS (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. COMBINED STATEMENTS OF CHANGES IN NET EQUITY (DEFICIT) OF PARENT COMPANY (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. COMBINED STATEMENTS OF CASH FLOWS (Note 1) Years ended December 31, 2000 and 1999 (Dollars in thousands) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. NOTES TO COMBINED FINANCIAL STATEMENTS December 31, 2000 and 1999 (Dollars in thousands) Forty-two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 2000 and 1999 (dollars in thousands) Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) COMBINED BALANCE SHEETS (Dollars in thousands) Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands) Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) COMBINED STATEMENTS OF DIVISIONAL EQUITY (DEFICIT) (Dollars in thousands) Years ended December 31, 2000 and 1999 Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) COMBINED STATEMENTS OF CASH FLOWS (Dollars in thousands) Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) NOTES TO COMBINED FINANCIAL STATEMENTS Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute Network) (Debtor in Possession as of January 20, 2000) SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2000 and 1999 (dollars in thousands) CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust CONSOLIDATED BALANCE SHEETS December 28, 2001 and December 29, 2000 (in thousands) CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust CONSOLIDATED STATEMENTS OF

OPERATIONS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust CONSOLIDATED STATEMENTS OF EQUITY Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) CSL Group, Inc. and Subsidiaries as Partitioned for Sale to SNH/CSL Properties Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ILM II Senior Living, Inc. CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION August 31, 2001 (LIQUIDATION BASIS) (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED BALANCE SHEET August 31, 2000 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENTS OF INCOME (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (In thousands) ILM II Senior Living, Inc. NOTES TO FINANCIAL STATEMENTS ILM II Lease Corporation REPORT OF INDEPENDENT ACCOUNTANTS ILM II Lease Corporation REPORT INDEPENDENT AUDITORS ILM II Lease Corporation STATEMENT OF NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS) August 31, 2001 (Dollars in thousands, except per share data) ILM II Lease Corporation BALANCE SHEET AUGUST 31, 2000 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENTS OF OPERATIONS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENTS OF CASH FLOWS (IN LIQUIDATION AS OF AUGUST 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (In thousands) ILM II Lease Corporation NOTES TO FINANCIAL STATEMENTS ILM II Senior Living, Inc. CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (Liquidation Basis) November 30, 2001 (Unaudited) and August 31, 2001 (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis) For the three months ended November 30, 2001 (Unaudited) (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENT OF INCOME (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data) ILM Senior Living, Inc. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data) ILM II Senior Living, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands) ILM II Senior Living, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) ILM II Lease Corporation STATEMENTS OF NET ASSETS IN LIQUIDATION (Liquidation Basis) November 30, 2001 (Unaudited) and August 31, 2001 (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis) For the three months ended November 30, 2001 (Unaudited) (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENT OF OPERATIONS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands, except per share data) ILM II Lease Corporation STATEMENT OF CASH FLOWS (Going Concern Basis) For the three months ended November 30, 2000 (Unaudited) (Dollars in thousands) ILM II Lease Corporation NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Part II Signatures Exhibit index

SALE-PURCHASE AGREEMENT BETWEEN ILM II SENIOR LIVING, INC. (ILM II) AND ILM II HOLDING, INC. (SELLER) AND FIVE STAR QUALITY CARE, INC. (FIVE STAR) (PURCHASER) AS OF JANUARY 23, 2002

SALE-PURCHASE AGREEMENT (this "AGREEMENT"), made as of the 23d day of January, 2002, between ILM II SENIOR LIVING, INC., a Virginia finite-life corporation, with principal offices at 1750 Tysons Boulevard, Suite 1200, Tysons Corner, Virginia 22102 ("ILM II"), ILM II Holding, Inc., a Virginia corporation having the same address as ILM II ("SELLER") and FIVE STAR QUALITY CARE, INC., a Maryland corporation, with principal offices at 400 Centre Street, Newton, Massachusetts 02458 ("PURCHASER"). RECITALS: A. Seller is the owner in fee of a portfolio of four independent living facilities and one assisted living facility located in California, Florida, Kansas, Missouri and Nebraska (collectively, the "FACILITIES"). B. Seller is a wholly-owned subsidiary of ILM II and ILM II has agreed to guaranty all of Seller's obligations hereunder. C. Purchaser desires to purchase, and Seller desires to sell, Seller's interest in the "Assets" (as hereinafter defined) on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the representations and covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ILM II, Seller and Purchaser, intending to be legally bound, hereby agree as follows: ARTICLE 1 CERTAIN DEFINITIONS. Certain capitalized terms used in this Agreement shall, for the purposes of this Agreement, have the meanings ascribed to such terms in this ARTICLE 1. Other capitalized terms used in this Agreement and not defined in this ARTICLE 1 shall have the meanings ascribed to such terms elsewhere in this Agreement. A. REAL PROPERTY. The "REAL PROPERTY" shall mean collectively, the five parcels of real property legally described on EXHIBIT 1 (the "LAND"), together with: (i) all buildings, facilities, improvements located on the Land including without limitation the four independent living facilities and, one assisted living facility located thereon, all replacements or additions thereto between the date hereof and the Closing Date (as hereinafter defined) (the "IMPROVEMENTS"); (ii) all systems, facilities, fixtures, machinery, equipment and conduits to provide fire protection, security, heat, exhaust, ventilation, air conditioning, electrical power, light, plumbing, refrigeration, gas, sewer and water to the Real Property (including all replacements or additions thereto between the date hereof and the Closing Date) (the "FIXTURES"); (iii) all privileges, development and other rights, easements, hereditaments, and appurtenances thereto belonging; and (iv) all right, title and interest of Seller in and to any streets, alleys, passages and other rights-of-way included therein or adjacent thereto (before or after the vacation thereof). B. ASSETS. The "ASSETS" shall mean the aggregate of the following: (i) The Real Property; (ii) All site plans, architectural renderings, plans and specifications, engineering plans, as-built drawings, floor plans and other similar plans or diagrams, if any, which are in ILM II's or Seller's possession or under ILM II's or Seller's reasonable control as of the date of this Agreement (and any hereafter acquired which are in ILM II's or Seller's possession or under ILM II's or Seller's reasonable control on the Closing Date) and relate to the Real Property (the "PLANS");

(iii) All equipment, appliances, tools, machinery, supplies, building materials, furnishings, vehicles, computer hardware and other tangible property (including, without limitation, general operating inventory, maintenance and operating supplies, fuel and spare parts for such machinery and equipment) which is (a) owned by ILM II or Seller as of the date of this Agreement and (b) attached to, appurtenant to or located in the Improvements or used in the day-to-day operation or maintenance of the Improvements, but expressly excluding the Fixtures and any and all personal property owned by tenants in possession, public or private utilities licensees or contractors (the "EQUIPMENT", together with the Plans, the "PERSONAL PROPERTY"); (iv) All of the following owned by ILM II or Seller or exclusively issued or licensed to ILM II or Seller and used in connection with the operation of the Assets: (1) trademarks, trade names, service marks and other intellectual property rights, (2) warranties and guaranties; (3) computer software used in connection with any computer systems located at the Real Property; (4) direct dial telephone numbers for the Real Property; and (5) all goodwill in connection with the ownership, operation and maintenance of the Real Property (collectively, the "INTANGIBLE PROPERTY"); (v) All of ILM II's or Seller's right, claims, credits, causes of action, or right of setoff against third parties relating to the Real Property, including, without limitation, unliquidated rights under manufacturers' and vendors' warranties and guaranties but excluding all amounts representing reimbursements for items paid by ILM II or Seller (collectively, the "CLAIMS"); (vi) All leases and purchase money security agreements for any equipment, machinery, vehicles, furniture or other personal property located at the Real Property and used in the operation of the Real Property which are held by or on behalf of Seller; all maintenance, service and supply contracts, and all other contracts and agreements which are held by Seller or its affiliates in connection with the operation of the Real Property (collectively, the "CONTRACTS"), together with all deposits made or held by ILM II or Seller thereunder; (vii) All agreements in place whereby residents ("RESIDENTS") are in occupancy at the Real Property (the "RESIDENT AGREEMENTS") together with all deposits held by ILM II or Seller thereunder; (viii) All leases, sublease, licenses, concessions, and similar agreements granting an interest to any other person or entity for the use and occupancy of any portion of the Real Property (the "LEASES") excluding the Resident Agreements, together with all security deposits held by ILM II or Seller thereunder; (ix) All certificates of occupancy and other transferable licenses, permits, registrations, authorizations, use agreements, orders, or approvals of governmental or quasi-governmental agencies and authorities (whether federal, state, local, municipal, or foreign) or private parties relating to the construction, use, operation, or enjoyment of the Assets (collectively, the "PERMITS"); and (x) Originals or copies of all books, records, files, and papers, whether in hard copy or computer format, used in connection with the operation of the Real Property, including without limitation, sales, marketing and advertising materials, Resident Agreements, leases and all related correspondence, lists of present suppliers, and personnel and employment records (collectively, the "FILES AND RECORDS"). C. HAZARDOUS MATERIALS. "HAZARDOUS MATERIALS" shall mean any solid wastes, toxic or hazardous substances, wastes or contaminants, polychlorinated biphenyls, paint containing lead and urea formaldehyde foam insulation, as any of those teams is currently defined in or for the purposes of any Relevant Environmental Laws (as hereinafter defined). D. PROPERTY. "PROPERTY" shall mean the Real Property and Assets as they relate to any single Facility.

E. RELEVANT ENVIRONMENTAL LAWS. "RELEVANT ENVIRONMENTAL LAWS" shall mean all requirements of law currently applicable to the Real Property or any part thereof with respect to: (i) the installation, existence or removal of or exposure to asbestos or asbestos-containing materials; (ii) the existence, discharge or removal of or exposure to Hazardous Materials; (iii) air emissions, water discharges, noise emissions and any other environmental, health or safety matter; and (iv) effects on the environment of the Real Property or any part thereof or of any activity heretofore, now or hereafter conducted on the Real Property; including, without limitation, the following: (a) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ.; (b) the Superfund Amendments and Reauthorization Act, Public Law 99-499, 100 Stat. 1613; (c) the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ.; (d) the National Environmental Policy Act, 42 U.S.C. Section 4321; (e) the Safe Drinking Water Act, 42 U.S.C. Section 300F ET SEQ.; (f) the Toxic Substances Control Act, 15 U.S.C. Section 2601; (g) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801; (h) the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 ET SEQ.; (i) the Clean Air Act, 42 U.S.C. Section 7401 ET SEQ.; (j) applicable State and City statutes where each property is located, and the rules and regulations promulgated pursuant thereto, regulating the storage, use and disposal of Hazardous Materials; (k) Environmental Protection Agency regulations pertaining to Asbestos (including, without limitation, 40 C.F.R. Part 61, Subpart M); and (l) Occupational Safety and Health Administration regulations pertaining to Asbestos (including, without limitation, 29 C.F.R. Sections 1910.1001 and 1926.58). ARTICLE 2 SALE-PURCHASE. In consideration of, and upon and subject to, the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the mutual receipt and legal sufficiency of which is hereby acknowledged, Seller agrees to sell and convey all of Seller's right, title and interest in and to the Assets to Purchaser, and Purchaser agrees to purchase the Assets from Seller. If an affiliate of ILM II and/or Seller holds an interest in any portion of the Assets, Seller shall cause such affiliate to transfer and assign such Assets to Purchaser or its designee.

ARTICLE 3 PURCHASE PRICE. The purchase price for the Assets (the "PURCHASE PRICE") is Forty-five Million Five Hundred Thousand Dollars ($45,500,000) allocated among the Properties as provided in Exhibit 2 and payable as follows: A. Purchaser shall deposit the sum of Five Million Dollars ($5,000,000) (together with all interest accrued thereon, the "DEPOSIT") on or prior to two business days of the date hereof to Chicago Title Insurance Company ("ESCROW AGENT"), by wire transfer of immediately available federal funds to an account designated by Escrow Agent (the "ESCROW ACCOUNT"), to be held by Escrow Agent pursuant to and in accordance with the provisions of this Agreement. The failure of Purchaser to deposit the Deposit shall be deemed Purchaser's election to terminate this Agreement and neither party shall have any obligations hereunder. B. Subject to the apportionments and other credits provided for in this Agreement, the balance of the Purchase Price on the Closing Date by wire transfer (with receipt confirmed by 2:00 p.m. Eastern Standard Time on the Closing Date) of immediately available federal funds to an account or accounts designated by Seller. ARTICLE 4 ASSETS. A. The Assets shall be sold, and title thereto conveyed, subject only to the "PERMITTED EXCEPTIONS" (as defined herein). B. Title to the Real Property shall be such title as Chicago Title Insurance Company (in such capacity, the "TITLE COMPANY") shall be prepared to insure as provided in ARTICLE 11 hereof, subject only to the Permitted Exceptions. ARTICLE 5 CLOSING. A. The "CLOSING" shall mean the consummation of each of the actions enumerated in ARTICLE 8 of this Agreement, or the waiver of such action by the party in whose favor such action is intended. The Closing shall take place at 10:00 A.M., Eastern Standard Time, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, New York 10166, on the date that is the 75th (seventy-fifth) day after the date hereof; PROVIDED, HOWEVER, that Purchaser may (i) accelerate the Closing Date with respect to any Property to a date designated by Purchaser by no less than five (5) days prior written notice and (ii) in the event Purchaser shall have been unable to complete its licensing by such seventy fifth (75th) day, and so long as Purchaser is proceeding to complete its licensing in good faith, to extend the Closing Date for an additional fifteen (15) days (as the same may be accelerated or extended as expressly provided herein, the "CLOSING DATE"), TIME BEING OF THE ESSENCE as to Purchaser's and Seller's obligation to close on or before the Closing Date. ARTICLE 6 VIOLATIONS. Subject to Article 10E, the Assets are sold and Purchaser shall accept same subject to any and all violations of law, rules, regulations, ordinances, orders or requirements noted in or issued by any Federal, state, county, municipal or other department or governmental agency having jurisdiction against or

affecting the Assets whenever noted or issued (collectively, "VIOLATIONS"). Seller shall have no obligation to cure or remove any Violations. ARTICLE 7 APPORTIONMENTS. A. The following shall be apportioned between Seller and Purchaser at the Closing with respect to each Property as of 11:59 p.m., Eastern Standard Time, of the day immediately preceding the Closing Date with respect to such Property, and the net amount thereof either shall increase the amount to be paid by Purchaser to Seller or be credited against the amount to be paid by Purchaser, as the case may be, at such Closing: (i) Real property taxes and assessments (or installments thereof), and payments required to be made to any business improvement district and vault charges; (ii) Water rates and charges; (iii) Sewer taxes and rents; (iv) Permit, license and inspection fees, if any, on the basis of the fiscal year for which levied, if the rights with respect thereto are transferable and being transferred to Purchaser; (v) Fuel, if any, at the cost per gallon most recently charged to Seller, based on the supplier's measurements thereof, plus sales taxes thereon; (vi) Amounts paid or payable by Seller to merchants' and other associations, to promotional funds and other similar contributions or payments; (vii) Deposits on account with any utility company servicing the Real Property, to the extent transferred to Purchaser shall not be apportioned, but Seller shall receive a credit in the full amount thereof (including accrued interest thereon, if any); (viii) Any rents or other amounts prepaid or payable under the Resident Agreements and the Leases shall be apportioned between the parties. All security deposits or reserves (and all interest earned thereon as required by either Legal Requirements or by the terms of the applicable Resident Agreements and the Leases) deposited under any of the Resident Agreements and the Leases shall be transferred or credited to Purchaser. As used in this Agreement, the term "rents" includes all rentals, additional rentals and any other sums and charges payable under the Resident Agreements and the Leases or in the normal course by Residents and tenants under the Resident Agreements and the Leases for services rendered in connection with the occupancy or use of the Real Property or the services provided at the Real Property or in connection with the occupancy of the Real Property by such tenants and the Residents. Delinquent rents for the period prior to the Closing Date shall remain the property of Seller. Purchaser shall deliver to Seller any rents, received by Purchaser which are properly allocable to rental periods occurring before the Closing Date. It shall be conclusively presumed between Purchaser and Seller that all rents received after the Closing Date from Residents and/or tenants under the Leases and the Resident Agreements with rental delinquencies on the Closing Date shall be applied as follows: (i) first, to rent then due and payable to Purchaser (including any previously unpaid or delinquent rent then due and payable to Purchaser), (ii) second, to rent due for the period in which the Closing occurs, to be apportioned as provided above; (iii) third, to the delinquent rents of such Residents and/or tenants under the Leases and Resident Agreements attributable to the period prior to the Closing Date due to Seller, and (iv) fourth, to future rent due and payable to Purchaser. The amount of any

refund or credit due to tenants under the Leases or as the result of the collection by or on behalf of Seller prior to the Closing Date of contributions by such tenants for operating expenses and/or taxes (collectively, "TENANT ITEMS") which exceed the actual amount of such operating expenses and/or taxes payable by such tenants with respect to periods prior to the Closing Date shall be prorated as soon as such actual operating expenses and/or taxes are known, and Seller shall promptly pay to Purchaser upon demand the amount due as a result of such proration. Seller shall not have the right to sue for or take any other legal action relating to unpaid rents attributable to periods preceding the Closing Date. Seller agrees to cooperate with Purchaser in the preparation of the financial statements and other financial data respecting the ownership and operation of the Real Property for calendar year 2001 and 2002, and subsequent periods for which such statements and data must be prepared in order to compute, charge and prorate the Tenant Items. As soon as reasonably possible after the preparation of the aforesaid financial statements and data, Purchaser will render statements for the Tenant Items to the tenants and Residents of the Real Property under their respective Leases and Resident Agreements. From time to time as Purchaser receives payment of the Tenant Items from the tenants and/or Residents, Purchaser will retain amounts attributable to Tenant Items due Purchaser and will promptly remit to Seller that portion of the Tenant Items allocable to the Real Property prior to the Closing Date; and (ix) All other items customarily apportioned in connection with the sale of similar properties similarly located. B. Apportionment of real property taxes, water rates and charges, sewer taxes and rents and vault charges shall be made on the basis of the most recently ended fiscal year of Seller for which such taxes, rents and charges were assessed. Purchaser agrees to assume liability for anyreal property tax rate, water rates or charges, sewer taxes or rents or vault charges fixed, for periods after the Closing Date. C. The amount of any of the unpaid taxes, assessments, water charges, sewer rents and vault charges which Seller is obligated to pay and discharge, with interest and penalties thereon (if any) to the Closing Date may, at Seller's option, be credited to Purchaser out of the balance of the Purchase Price, provided that official invoices therefor with interest and penalties thereon (if any) are furnished by Seller at the Closing and provided that the Title Company will mark same as paid and omit same as exceptions from Purchaser's title insurance policy. D. If any refund of real property taxes, water rates or charges, sewer taxes or rents or vault charges is made after the Closing Date covering a period prior to the Closing Date, the same shall be applied first to the reasonable out-of-pocket costs incurred in obtaining same and the balance, if any, of such refund shall, to the extent received by Purchaser, be paid to Seller (for the period prior to the Closing Date) and to the extent received by Seller, be paid to Purchaser (for the period commencing with the Closing Date). E. If there shall be any meters measuring water consumption or sewer usage at the Real Property (other than meters measuring water consumption or sewer usage for which Seller is obligated to pay directly to the taxing authority or utility), Seller shall attempt to obtain readings to a date not more than thirty (30) days prior to the Closing Date. If such readings are not obtained (and if such readings are obtained, then with respect to any period between such reading and the Closing Date), water rates and charges and sewer taxes and rents, if any, shall be apportioned based upon the last meter readings, subject to reapportionment when readings for the relevant period are obtained after the Closing Date. F. If any adjustment or apportionment is miscalculated at the Closing, or the complete and final information necessary for any adjustment is unavailable at the Closing, the affected adjustment shall be calculated as soon as practicable after the Closing. The provisions of this ARTICLE 7 shall survive through and including the date that is one year after the Closing Date.

ARTICLE 8 CLOSING DELIVERIES. A. At each Closing, Seller shall deliver to Purchaser or shall cause the appropriate affiliate of Seller, including without limitation ILM II and Lease Corporation (as defined below), with an interest in such Property's Assets to deliver, executed and acknowledged, as applicable, the following with respect to such Property: (i) A Special Warranty Deed (or local equivalent in each relevant State) for each Real Property, reasonably acceptable to Purchaser, conveying title to the Real Property, free from all liens and encumbrances other than the Permitted Exceptions; (ii) A general bill of sale for the Personal Property, reasonably acceptable to Purchaser, conveying, as more particularly set forth therein, to Purchaser all of Seller's right, title and interest in and to the Personal Property; (iii) Security deposits deposited under the Resident Agreements and the Leases (if any, together with accrued interest thereon) by, at Purchaser's option, (a) payment of the aggregate amount thereof to Purchaser, or (b) a credit to Purchaser against the Purchase Price; (iv) A certification of nonforeign status, in form required by Section 1445 of the Internal Revenue Code of 1986, as amended, (the "CODE") and the regulations issued thereunder; (v) Notice of Cancellation, of Facilities Lease Agreement to ILM II Lease Corporation, as amended ("LEASE CORPORATION") and termination of any management and leasing agreements relating to the Assets and the Management Agreement, dated as of July 29, 1996, as amended; (vi) Evidence of authority, good standing and due authorization of ILM II and Seller to entering into the within transaction and to perform all of its obligations hereunder, including, without limitation, the execution and delivery of all of the closing documents required by this Agreement, and setting forth such additional facts, if any, as may be needed to show that the transaction is duly authorized and is in conformity with ILM II's and Seller's organizational documents and applicable laws and to enable the Title Company to omit all exceptions and satisfy all requirements regarding Seller's standing, authority and authorization; (vii) Notice letter to Residents reasonably acceptable to Purchaser (the "RESIDENTS NOTIFICATION LETTER"); (viii) such title affidavits and indemnities required by the Title Company to enable the Title Company to issue the Title Policies as required hereby; (ix) a General Assignment and Assumption Agreement in form reasonably acceptable to Purchaser, assigning to Purchaser Seller's right, title and interest in and to the Surviving Contracts (as hereinafter defined), Intangible Property, the Claims, the Permits, and the Files and Records; (x) an Assignment of Leases in form reasonably acceptable to Purchaser, assigning to Purchaser Seller's right, title and interest in and to all of the Leases;

(xi) an Assignment of Resident Agreements in form reasonably acceptable to Purchaser, assigning to Purchaser Seller's and Lease Corporation's right, title and interest in and to all of the Resident Agreements; (xii) any required real estate transfer tax declaration or similar documents required in connection with any tax imposed by any governmental authority in connection with the transaction contemplated hereunder; (xiii) a termination of the Master Lease between Seller and Lease Corporation, dated September 1, 1995, in form reasonably acceptable to Purchaser; (xiv) all originals (or copies if originals are not available) of the Leases, Resident Agreements, Contracts, Permits, keys and lock combinations with respect to the Real Property in the possession of ILM II and Seller; (xv) a Closing Statement setting forth the Purchase Price, the amounts of all prorated items and all credits, debits and costs contemplated by this Agreement; and (xvi) such other instruments or documents which by the terms of this Agreement are to be delivered by ILM II and Seller at Closing. B. At the Closing with respect to a Property, Purchaser shall deliver to Seller, executed and acknowledged, as applicable, the following with respect to such Property: (i) The balance of the Purchase Price, less the Deposit (as prorated in accordance with Article 7) and all other amounts payable by Purchaser to Seller at the Closing pursuant to this Agreement; (ii) Evidence of authority, good standing (if applicable) and due authorization of Purchaser to enter into the within transaction and to perform all of its obligations hereunder, including, without limitation, the execution and delivery of all of the closing documents required by this Agreement, and setting forth such additional facts, if any, as may be needed to show that the transaction is duly authorized and is in conformity with Purchaser's organizational documents and applicable laws; (iii) A receipt for the security deposits paid over or credited to Purchaser at the Closing; and (iv) Such other instruments or documents which by the terms of this Agreement are to be delivered by Purchaser at Closing. C. The acceptance of title to the Real Property by Purchaser shall be deemed to be full performance and discharge of any and all obligations on the part of Seller to be performed pursuant to the provisions of this Agreement, except as set forth in this Agreement including without limitation where such agreements and obligations are specifically stated to survive the Closing. ARTICLE 9 CANCELLATION OF CONTRACTS. Within ten (10) days after receipt by Purchaser of copies of all Contracts, Purchaser shall provide to Seller in writing a list of any Contracts that Purchaser desires cancelled (the "CANCELLED CONTRACTS"). Seller shall, prior to the Closing Date, cancel the Cancelled Contracts, provided, however, Seller shall not be obligated to cancel any Cancelled Contract which provides by its tenors that such contract is cancelable upon no more than sixty (60) days' notice by Seller and without payment of a cancellation

fee or any other consideration. The "SURVIVING CONTRACTS" shall mean any Contracts, excluding the Cancelled Contracts. It is understood that the Management Agreement encumbering all of the Assets with Capital Senior Management 2, Inc., dated as of July 29, 1996 will be cancelled by Seller at or prior to Closing. ARTICLE 10 RIGHT OF INSPECTION. A. Purchaser, from time-to-time prior to the Closing and during regular business hours, upon reasonable notice to Seller, may inspect the Real Property, provided that (i) Purchaser shall not communicate with the Residents without the prior written consent of Seller, which consent shall reasonably be given by Seller, and (ii) Purchaser shall not perform any invasive tests with respect to the Real Property without the prior written consent of Seller in each instance, which consent shall be reasonably given. Any entry upon the Real Property shall be performed in a manner which is not materially disruptive to the Residents or the normal operation of the Real Property and shall be subject to the rights of the Residents. Purchaser shall (i) exercise reasonable care at all times that Purchaser shall be present upon the Real Property, (ii) at Purchaser's expense, observe and comply with all applicable laws and any conditions imposed by any insurance policy then in effect with respect to the Real Property and (iii) not engage in any activities which would violate the provisions of any permit or license pertaining to the Real Property. Seller shall have the right to have a representative of Seller accompany Purchaser during any such communication or entry upon the Real Property and shall make such representative available at all reasonable times. B. Purchaser hereby agrees to indemnify, defend and hold Seller, its officers, shareholders, directors, employees, advisors, attorneys and agents harmless from and against any and all liability, loss, cost, judgment, claim, damage or expense (including, without limitation, attorneys' fees and expenses), resulting from or arising out of the entry upon the Real Property by Purchaser and any of its employees, agents, consultants, contractors or advisors. The foregoing indemnification shall survive for a period of six months from the Closing or the termination of this Agreement. C. As a condition precedent to entering the Real Property in connection with any inspection, Purchaser shall maintain or cause to be maintained, at Purchaser's sole cost and expense, a policy of comprehensive general public liability and property damage insurance by an insurer or syndicate of insurers reasonably acceptable to Seller: (a) with a combined single limit of not less than One Million Dollars ($1,00,000.00) general liability and Two Million Dollars ($2,000,000.00) excess umbrella liability, (b) insuring Purchaser, Seller, their respective affiliates, Seller's lender and any other person or entity related to Seller or involved with the transaction contemplated by this Agreement (such additional persons or entities to be designated in writing by Seller), as additional insureds, against any injuries or damages to persons or property that may result from or are related to (x) Purchaser's entry upon the Real Property and (y) any inspection or other activity conducted thereon by representatives or agents of Purchaser and (c) containing a provision that "insurance provided by Purchaser hereunder shall be primary and noncontributing with any other insurance available to Seller." Purchaser shall deliver evidence of such insurance coverage to Seller prior to the commencement of the first inspection and evidence of continued coverage prior to any subsequent inspection, which evidence shall be acceptable to Seller in its reasonable discretion. D. Notwithstanding any provision in this Agreement to the contrary, unless required by applicable law or regulation, or except in the course of conducting a customary Phase I Environmental Assessment of the Real Property, neither Purchaser nor any representative or agent of Purchaser shall contact any Federal, state, county, municipal or other department or governmental agency regarding any Hazardous Materials on, or the environmental condition of, the Real Property without Seller's prior written consent thereto. In addition, if

Seller's consent is obtained by Purchaser, Seller shall be entitled to receive at least five (5) business days prior written notice of the intended contact and shall be entitled to have a representative present when Purchaser has any such contact with any governmental official or representative. E. The "Inspection Period" shall commence on the date hereof and end at 5:00 p.m. on February 22, 2002. At any time during the Inspection Period, Purchaser may deliver to Seller a notice (a "Material Defect Notice") identifying a Material Defect. A "Material Defect" shall mean one or more of the following conditions with respect to the Properties which in the aggregate will cost in excess of Two Hundred Fifty Thousand Dollars ($250,000) to cure or, if uncured, will reduce the fair market value of the Properties by Two Hundred Fifty Thousand Dollars ($250,000) or more: (i) Permitted Exceptions (as defined in Section 11C hereof) except Seller's Encumbrances (as defined in Section 11C hereof); (ii) (A) The presence in, upon or under any of the Properties, or any properties surrounding any of the Properties, of any Hazardous Materials or oil, or (B) the existence of any violation of any Relevant Environmental Laws at any of the Properties or the involvement of Seller or any other person in any activities at any of the Properties that could reasonably be expected to result in (x) any violations of any Relevant Environmental Laws, or (y) the creation of a lien under any Relevant Environmental Law on any of the Properties, or (C) the issuance of any notice of any claim or citation of noncompliance with respect to any violation of Relevant Environmental Laws, or (D) the existence of facts, circumstances, conditions or occurrences on any of the Properties that could reasonably be expected to result in the violation of any Relevant Environmental Laws or cause any of the Properties to be subject to any restrictions on the existing or contemplated development, use or transferability thereof under any Relevant Environmental Laws; (iii) A change to any of the Properties or its operations from that disclosed in the materials provided to Purchaser prior to the date of this Agreement (including, without limitation, any disruption in the operations of any of the Properties resulting from the reassignment or termination of facility personnel prior to Purchaser's having had an opportunity to offer employment to such personnel); (iv) A failure of any of the Properties or its operations to comply with applicable law; or (v) A defect in the physical condition of the Properties other than (A) normal wear and tear; or (B) the physical condition of the balconies at the Fort Myers, Florida property; and/or In the Material Defect Notice the Purchaser shall specify in detail the Material Defect and the basis upon which the Purchaser has concluded that the cost to cure or reduction in value is $250,000 or more. By notice to the Purchaser delivered within ten (10) days of the receipt of a Material Defect Notice, the Seller shall either (A) terminate this Agreement, whereupon the Deposit will be returned to Purchaser; or (B) agree to a reduction in the Purchase Price in the amount by which the amount specified by Purchaser in its Material Defect Notice exceeds $250,000, whereupon the provisions of this Agreement will remain in full force and effect. Notwithstanding the foregoing, in the event that Seller shall elect to terminate this Agreement pursuant to the preceding clause (A), Purchaser shall have the right, by notice in writing to Seller within five (5) days of the receipt of Seller's termination notice, to rescind Purchaser's Material Defect Notice, waive the Material Defect referred to therein and proceed to close on the Properties in accordance with the terms of this Agreement. ARTICLE 11 TITLE INSURANCE.

A. SURVEY. Within three days of the date hereof Seller shall deliver to Purchaser whatever surveys that Seller has in its file of each Property (the "SURVEYS") showing the location of all improvements, easements, encroachments and other matters. B. EVIDENCE OF TITLE. Purchaser shall obtain as expeditiously as possible, but in no event later than fourteen (14) days after the date hereof, a report of title for the Real Property issued by the Title Company (the "TITLE REPORT"). At Closing, Purchaser and Seller shall each pay one half to the Title Company (with Seller's portion not to exceed $75,000.00) of the entire amount of the premium payable for an ALTA owner's title insurance policy and endorsements reasonably required by Purchaser, without standard exceptions for parties in possession, mechanics' liens, and matters of survey, and subject only to the Permitted Exceptions, in the amount of the Purchase Price, naming Purchaser as the insured (the "TITLE POLICY"), and Title Company shall mark up and acknowledge the Title Report so as to constitute a Title Policy as of the Closing Date. The legal descriptions embodied within said Title Reports shall conform in all respects to the Surveys. Seller, to the extent available, will deliver to Purchaser any ALTA survey and title policy it may have in its possession. C. OBJECTIONS TO TITLE. For purposes of this Agreement, the term "Permitted Exceptions" means those exceptions set forth in the Title Reports. Other than (i) mechanics' liens for which Seller or any occupant of the Real Property is liable, (ii) judgment liens against Seller and (iii) any mortgages or deeds of trust encumbering all or any portion of the Assets, which Seller must cure ("SELLER'S ENCUMBRANCES"), Seller shall have no obligation to cause Permitted Exceptions to be cured. Notwithstanding the foregoing, Seller agrees that it shall reasonably cooperate with Purchaser in clearing any non-material title issues. D. Notwithstanding anything to the contrary contained in ARTICLE 11(A) of this Agreement, if the Title Report discloses judgments, bankruptcies or other returns against other persons or entities having names the same as or similar to that of Seller, Seller, on reasonable request, shall deliver to Purchaser or Title Company affidavits, if truthful, to the effect that such judgments, bankruptcies or other returns are not against Seller, in form and substance sufficient to permit removal of same as exceptions in Purchaser's title policy. E. Seller and Purchaser shall each pay one-half of (not to exceed $75,000 on the part of Seller) of the costs of examination of title and any owner's or mortgagee's policy of title insurance to be issued insuring Purchaser's title to the Assets, as well as all other title charges, survey fees, and recording charges incident to the Closing. ARTICLE 12 [Intentionally Deleted] ARTICLE 13 PURCHASER'S DEFAULT. After the expiration of the Inspection Period, if Purchaser shall default hereunder or shall fail or refuse to perform its obligations in accordance with this Agreement, the parties hereto agree that Seller's sole remedy shall be to terminate this Agreement and retain the Deposit as liquidated damages. Upon such termination, neither party to this Agreement shall have any further rights or obligations hereunder except subject to Article 16, Escrow Agent shall deliver to Seller and Seller shall retain the Deposit as liquidated damages. It is expressly understood and agreed that in the event of Purchaser's default, Seller's damages would be impossible to ascertain and that the Deposit constitutes a fair and reasonable amount of compensation in such event and in no event shall the delivery of the Deposit be construed as punitive damages. ARTICLE 14

REPRESENTATIONS AND WARRANTIES. A. Seller hereby represents and warrants to Purchaser that as of the date hereof and also at the Closing Date: (i) Schedule 14(A)(i) sets forth a true, correct and complete list of the Leases and Resident Agreements. Seller has delivered to Purchaser a true and correct copy of all of the Leases and if requested will provide copies of all Resident Agreements. With respect to each Lease and Resident Agreement, (i) the agreement is legal, valid, binding, enforceable, and in full force and effect; (ii) the agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) except as set forth in the rent roll delivered to Purchaser, to the best of Seller's knowledge no party is in breach or default, and no event has occurred which with notice or lapse of time, or both, would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; and (iv) no party has repudiated any provision of the agreement; (ii) Schedule 14(A)(ii) sets forth a true and correct list of the Contracts. Seller has made available to Purchaser a true and correct copy of all of the Contracts and if requested will provide copies regarding same. With respect to each Contract, to Seller's knowledge (i) the agreement is legal, valid, binding, enforceable, and in full force and effect; and (ii) to the best of Seller's knowledge no party is in breach or default, and no event has occurred which with notice or lapse of time, or both, would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; (iii) Attached hereto as Schedule 14(A)(iii) are true and correct copies of (i) an audited balance sheet and statement of income for Seller and a statement of income and statement of cash flows (including rent rolls) for fiscal year 2000 on an individual Property basis and (ii) an unaudited balance sheet and statement of income for Seller and a statement of income and statement of cash flows (including rent rolls) through November of fiscal year 2001 on an individual Property basis (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements present fairly, in all material respects, the financial position and results of the Real Property, as of such dates and its results of operations and cash flows for such periods, in accordance with applicable law and generally accepted accounting principles consistently applied; (iv) Seller is duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Virginia; Seller has taken all action required to authorize, execute, deliver and, subject to obtaining any consents or waivers required to be obtained prior to Closing in order to transfer any licenses, perform this Agreement and to make all of the provisions of this Agreement valid and enforceable and has caused this Agreement to be executed by a duly authorized officer of Seller; (v) This Agreement and all documents to be delivered to Purchaser by Seller at the Closing: are, and at the time of the Closing will be, duly authorized, validly executed and delivered by Seller; do, and at the time of the Closing will, constitute the legal, valid and binding obligations of Seller enforceable in accordance with their respective terms, subject to general principles of equity and bankruptcy, insolvency, reorganization, moratorium or other similar laws presently or hereafter in effect affecting the rights of creditors or debtors generally; do not conflict with any provision of any law or regulation to which Seller is subject or violate any provision of any agreement, Permit or judicial order to which Seller is a party or to which Seller or the Real Property is subject and do not require any approval or consent of or notice to any person entity, or governmental agency or authority, other than those actions relating to the transfer of licenses for the Assets to Purchaser. The representations and warranties contained in this Article 14((A)(v) shall survive the Closing; (vi) Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code;

(vii) Seller has not received written notice of any pending or threatened condemnation actions with respect to the Real Property or any part thereof; (viii) Except as set forth in Schedule 14(A)(viii) there are no actions, suits or proceedings pending against Seller or the Real Property in any court of law or in equity or before any court, administrative agency, commission or other public governmental authority; (ix) To Seller's knowledge, all of the Real Property is duly licensed and currently complies with licensing under applicable state and local laws to operate the Assets in the manner it is presently being operated. Other than the Violations, Seller has not received any notices of violations of any laws or regulations; (x) There are no unsatisfied judgments, orders or decrees of any kind against Seller and no legal action, suit or other legal or administrative proceeding pending, threatened or reasonably anticipated which could be filed before any Governmental Authority which has, or is likely to have, any material adverse effect on (a) the business or assets or the condition, financial or otherwise, of Seller or (b) the ability of Seller to perform its respective obligations under this Agreement; (xi) Seller has not filed any petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against Seller. No general assignment of any of Seller's property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee or similar appointee has been appointed for Seller or any of Seller's respective properties. Seller is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render Seller insolvent. Seller has now and will have as of the Closing Date sufficient capital or net worth to meet its current obligations as they come due. (xii) Environmental Matters. (a) To Seller's knowledge, Seller has not violated any Relevant Environmental Laws with respect to the Real Property or otherwise and neither Seller nor, to Seller's knowledge any other person has been or is involved in activities at any portion of the Real Property that could reasonably be expected to result in (x) any violations of Relevant Environmental Laws, or (y) the creation of a lien under any Relevant Environmental Law on any portion of the Real Property; (b) Seller has not received any notice of any claim or citation of noncompliance with respect to any violation of Relevant Environmental Laws and, to Seller's knowledge, there are no facts, circumstances, conditions or occurrences on the Real Property that could reasonably be expected to result in the violation of any such Relevant Environmental Laws or cause to be subject to any restrictions on the existing or contemplated development, use or transferability thereof under any Relevant Environmental Laws. (xiii) To Seller's knowledge, the Real Property and the uses thereof comply in all material respects with all applicable building and zoning ordinances and codes; (xiv) No Governmental Authority having jurisdiction over Seller or the Real Property has issued any citations with respect to any material deficiencies or other matters that fail to conform to applicable statutes, regulations or ordinances and that have not been corrected as of the date hereof or that shall not have been corrected on or prior to the Closing. Seller has not received written or oral notice from any agency supervising or having authority over the Real Property or services provided at the Real Property requiring such Property or any service, staff, or practice provided at the Real Property to be modified, restricted or conditioned

as to service or eligibility or be reworked or redesigned or additional furniture, fixtures, equipment or inventory to be provided at the Real Property so as to conform or comply with any existing in any applicable law, code or standard; (xv) Seller has no employees who work at or provide services to the Real Property. (xvi) Seller does not directly or indirectly own any assets other than the Assets. B. ILM II hereby represents and warrants to Purchaser that as of the date hereof and also at the Closing Date: (i) ILM II is duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Virginia; ILM II has taken all action required to authorize, execute, and deliver this Agreement and each document to be delivered by ILM II and/or Seller hereunder and to make all of the provisions of this Agreement valid and enforceable and has caused this Agreement to be executed by a duly authorized officer of ILM II; (ii) This Agreement and all documents to be delivered to Purchaser by ILM II and/or Seller at the Closing: are, and at the time of the Closing will be, duly authorized, validly executed and delivered by ILM II; do, and at the time of the Closing will constitute the legal, valid and binding obligations of ILM II enforceable in accordance with their respective terms, subject to general principles of equity and bankruptcy, insolvency, reorganization, moratorium or other similar laws presently or hereafter in effect affecting the rights of creditors or debtors generally; do not conflict with any provision of any law or regulation to which ILM II is subject or violate any provision of any agreement, Permit or judicial order to which ILM II is a party or to which ILM II or the Real Property is subject and do not require any approval or consent of or notice to any person entity, or governmental agency or authority, other than those actions relating to the transfer of licenses for the Assets to Purchaser. The execution and delivery of this Agreement and the sale of Assets hereunder do not require the approval of the shareholders of ILM II. The representations and warranties contained in Article 14B. (i) and (ii) shall survive the Closing; (iii) There are no unsatisfied judgments, orders or decrees of any kind against ILM II and no legal action, suit or other legal or administrative proceeding pending, threatened or reasonably anticipated which could be filed before any Governmental Authority which has, or is likely to have, any material adverse effect on (a) the business or assets or the condition, financial or otherwise, of ILM II or (b) the ability of ELM II to perform its obligations under this Agreement; (iv) ILM II has not filed any petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against ILM II. No general assignment of any of ILM H's property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee or similar appointee has been appointed for ILM II or any of ILM II's respective properties. ILM II is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render ILM II insolvent. ILM II has now and will have as of the Closing Date sufficient capital or net worth to meet its current obligations as they come due; and (v) ILM II does not directly or indirectly own any assets other than its interests in Seller. C. Purchaser represents and warrants to Seller that, as of the date hereof:

(i) Purchaser is a corporation duly organized, validly existing in and good standing under the laws of the State of Maryland and, is and in good standing and qualified to do business under the laws of Maryland; and Purchaser has taken all action required to execute, deliver and perform this Agreement and to make all of the provisions of this Agreement valid and enforceable obligations against Purchaser has caused this Agreement to be executed by a duly authorized officer of Purchaser, as applicable; (ii) This Agreement and all documents which are to be delivered to Seller by Purchaser, as applicable, at the Closing: are, or at the time of Closing will be, duly authorized, executed and delivered by Purchaser, as applicable; are, or at the time of Closing will be, legal, valid and binding obligations of Purchaser, as applicable, enforceable in accordance with their terms against Purchaser, as applicable, subject to general principles of equity and bankruptcy, insolvency, reorganization, moratorium or other similar laws presently or hereafter in effect affecting the rights of creditors or debtors generally; and do not conflict with any provision of any law or regulation to which Purchaser is subject, violate any provision of any judicial order to which Seller is a party or to which Seller is subject; (iii) There are no unsatisfied judgments, orders or decrees of any kind against Purchaser and no legal action, suit or other legal or administrative proceeding pending, threatened or reasonably anticipated which could be filed before any Governmental Authority which has, or is likely to have, any material adverse effect on (a) the business or assets or the condition, financial or otherwise, of Purchaser or (b) the ability of Purchaser to perform its respective obligations under this Agreement; (iv) Purchaser has filed no petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against Purchaser. No general assignment of any of Purchaser's property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee or similar appointee has been appointed for Purchaser or any of their respective properties. Purchaser is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render Purchaser insolvent. Purchaser has now and will have as of the Closing Date sufficient capital or net worth to meet its current obligations as they come due. Purchaser certifies that any financial statements and any financial statements of Purchaser or any affiliate of Purchaser, as applicable, submitted to Seller have been prepared in accordance with generally accepted accounting principles recognized by the American Institute of Certified Public Accountants or the Financial Accounting Standards Board, or any successors thereto, and are true and correct and that no circumstances have occurred or come to the attention of Purchaser since the date thereof which would have a material adverse effect on the financial condition of Purchaser or such affiliate as indicated on any such financial statements delivered to Seller; (v) Purchaser has never been denied a license to operate assisted living facilities by any state, county or municipal regulatory agency. D. All representations and warranties of Seller contained in this Agreement or in any certificate or instrument delivered by Seller to Purchaser pursuant to or in connection with this Agreement shall not survive the Closing. ARTICLE 15 CONDEMNATION AND DESTRUCTION. A. If, prior to the Closing Date, all or any "Significant Portion" (as hereinafter defined) of all or any of the Real Property is taken, or rendered unusable for its current purpose or reasonably inaccessible by eminent

domain (or is the subject of a pending or contemplated taking which has not been consummated), Seller shall notify Purchaser of such fact and Purchaser shall have the option to terminate this Agreement upon written notice to Seller delivered not later than five (5) days after receipt of Seller's notice. For purposes of this Article 15(A) and Article 15(B) hereof, a "SIGNIFICANT PORTION" shall mean twenty-five percent (25%) or more in the aggregate of the area of any parcel of the Land, when used in the context of a taking and $50,000 of damages to one or more Facilities when used in the context of a casualty. If this Agreement is terminated as aforesaid, neither party shall have any further rights or obligations hereunder except that Escrow Agent shall refund to Purchaser the Deposit. If Purchaser does not elect to terminate this Agreement, or if the portion of the Real Property which is taken or rendered unusable or reasonably inaccessible by eminent domain (or is the subject of a pending or contemplated taking which has not been consummated) is not a Significant Portion of the Real Property, Purchaser shall accept so much of the Real Property as remains after such taking with no abatement of the Purchase Price, and at the Closing, Seller shall assign and turn over to Purchaser, and Purchaser shall be entitled to receive and keep, all of Seller's interest in and to all awards for such taking by eminent domain. B. If, prior to the Closing Date, a Significant Portion of any or all of the Real Property is destroyed by fire or other casualty, Seller shall notify Purchaser of such fact and Purchaser shall have the option to terminate this Agreement upon ten (10) days notice to Seller given not later than five (5) days after receipt of Seller's notice. If Purchaser shall elect to terminate this Agreement as aforesaid, this Agreement shall terminate and neither party shall have any further rights or obligations hereunder except that Escrow Agent shall refund to Purchaser the Deposit (together with all interest thereon, if any). If Purchaser does not elect to terminate this Agreement as provided above, or if the portion of the Real Property so damaged or destroyed is not a Significant Portion of the Real Property, Purchaser shall accept the Real Property in its then "as is" condition with no abatement of the Purchase Price, and at the Closing, Seller shall assign to Purchaser, and Purchaser shall be entitled to receive, all of Seller's interest in and to all casualty insurance proceeds payable in connection with such casualty (except that the proceeds of any business interruption or rental value insurance payable to Seller shall be apportioned as of the Closing Date), and, Purchaser shall receive a credit against the Purchase Price at the Closing in the amount of any loss deductible in connection with casualty coverage. ARTICLE 16 ESCROW. A. The Deposit shall be held in escrow by Escrow Agent upon the following terms and conditions: (i) Escrow Agent shall deposit the Deposit in an interest-bearing account or invest the Deposit in a money market or monetary fund; (ii) Escrow Agent shall deliver to Seller the Deposit (together with all interest thereon, if any) at and upon the Closing; PROVIDED, however, that if the Closing occurs separately for one or more of the Properties from the rest of the Properties, the Deposit will be released only at the final Closing. (iii) If this Agreement is terminated in accordance with the terms hereof, or if the Closing does not take place under this Agreement by reason of the failure of either party to comply with such party's obligations hereunder, Escrow Agent shall pay the Deposit to Seller and/or Purchaser, as the case may be, in accordance with the provisions of this Agreement. B. It is agreed that:

(i) The duties of Escrow Agent are only as herein specifically provided, and, except for the provisions of Article 16(C) hereof, are purely ministerial in nature, and Escrow Agent shall incur no liability whatsoever except for its own willful misconduct or gross negligence; (ii) Escrow Agent shall not be liable or responsible for the collection of the proceeds of any checks used to pay the Deposit; (iii) In the performance of its duties hereunder, Escrow Agent shall be entitled to rely upon any document, instrument or signature believed by it to be genuine and signed by either of the other parties or their successors; (iv) Escrow Agent may assume that any person purporting to give any notice of instructions in accordance with the provisions hereof has been duly authorized to do so; (v) Escrow Agent shall not be bound by any modification, cancellation or rescission of this Agreement unless in writing and signed by it, Seller and Purchaser; (vi) Except as otherwise provided in Article 16(C) hereof, Seller and Purchaser shall jointly and severally reimburse and indemnify Escrow Agent for, and hold it harmless against, any and all loss, liability, costs or expenses in connection herewith, including reasonable attorneys' fees and disbursements, incurred without willful misconduct or gross negligence on the part of Escrow Agent arising out of or in connection with its acceptance of, or the performance of its duties and obligations under, this Agreement, as well as the reasonable costs and expenses of defending against any claim or liability arising out of or relating to this Agreement; (vii) Each of Seller and Purchaser hereby releases and forever discharges Escrow Agent from any liability arising out of any act done or omitted to be done by Escrow Agent in good faith in the performance of its duties hereunder; and (viii) Escrow Agent may resign for any reason upon ten (10) days written notice to Seller and Purchaser. If a successor Escrow Agent is not appointed by Seller and Purchaser within such ten (10) day period, Escrow Agent may petition a court of competent jurisdiction to name a successor. C. Escrow Agent is acting as a stakeholder only with respect to the Deposit. Escrow Agent, except (i) in the event of the Closing, (ii) in connection with a Termination Notice by Purchaser in accordance with Article 10 E. or (iii) if the Deposit is required to be delivered to Purchaser pursuant to Article 20 B., shall not deliver the Deposit except on seven (7) days' prior written notice to the parties and only if neither party shall object within such seven (7) day period. If there is any dispute as to whether Escrow Agent is obligated to deliver all or any portion of the Deposit or as to whom such Deposit is to be delivered, Escrow Agent shall not make any delivery, but in such event Escrow Agent may hold the same until receipt by Escrow Agent of an authorization in writing, signed by all of the parties having any interest in such dispute, directing the disposition of the Deposit (together with all interest thereon, if any), or in the absence of such authorization, Escrow Agent may hold the Deposit (together with all interest thereon, if any), until the final determination of the rights of the parties in an appropriate proceeding. Notwithstanding the foregoing if Purchaser delivers a Termination Notice in accordance with Article 10 E. or if Purchaser delivers notice to Escrow Agent that the Deposit is required to be paid to Purchaser pursuant to Article 20 B. of the Agreement, Seller authorizes and directs Escrow Agent to immediately deliver the Deposit to Purchaser without the necessity of any prior notice or consent by Seller. If such written authorization is not given or proceedings for such determination are not initiated within thirty (30) days after the date Escrow Agent shall have received written notice of such dispute, and thereafter diligently continued, Escrow Agent may, but is not required to, bring an appropriate action or proceeding for leave to

deposit the Deposit (together with all interest thereon, if any), with a court of competent jurisdiction pending such determination. Escrow Agent shall be reimbursed for all costs and expenses of such action or proceeding including, without limitation, reasonable attorneys' fees and disbursements, by the party determined not to be entitled to the Deposit, or if the Deposit is split between the parties hereto, such costs of Escrow Agent shall be split, PRO RATA, between Seller and Purchaser, in inverse proportion to the amount of the Deposit received by each. Upon making delivery of the Deposit (together with all interest thereon, if any), in the manner provided in this Agreement, Escrow Agent shall have no further obligation or liability hereunder. D. Escrow Agent has executed this Agreement solely to confirm that Escrow Agent has received the Deposit (if the Deposit is made by check, subject to collection) and will hold the Deposit, in escrow, pursuant to the provisions of this Agreement. ARTICLE 17 COVENANTS. A. ILM II and Seller each agrees that, prior to the Closing, it shall: (i) Not allow any new Resident Agreement to be entered into other than at market rate rent and in the ordinary course of business, and which Resident Agreement contains provisions consistent with the current standard form of Resident Agreement; (ii) Not allow any new Lease or Contract to be entered into or amend, modify or terminate airy existing Lease or Contract; (iii) Continue to operate the Facilities in a good and business like fashion consistent with past practices; (iv) Not create, incur or suffer to exist any mortgage, deed of trust, lien, pledge or other encumbrance in any way affecting any portion of the Real Property; (v) Maintain and operate the current insurance coverages on the Real Property; (vi) Maintain the Assets in their current condition, reasonable wear and tear excepted; PROVIDED, however, that notwithstanding the foregoing, Seller shall not be required to spend more than One Hundred Thousand Dollars ($100,000) between the date of this Agreement and the Closing Date on repairs and replacements to the Improvements, including, but not limited to, materials, labor, supervision and overhead; (vii) Continue to have paid all payroll expenses, taxes and assessments, water and sewer charges, utilities and obligations under the Contracts; and (viii) Not (and not permit any agent, partner or affiliate to) offer to sell, finance, joint venture or otherwise dispose of (or solicit or accept any such offer involving the sale, financing, joint venture or disposition of) the Assets or any interest therein (whether directly or indirectly, debt or equity) or negotiate or otherwise enter into discussions for the sale, financing, joint venture or disposition of all or any part of the Assets or any interest therein (whether directly or indirectly, debt or equity) as applicable, with any other party. B. Each of ILM II, Seller and Purchaser shall take all reasonable actions necessary to comply promptly with all Legal Requirements which may be imposed on it with respect to this Agreement (including furnishing all information in connection with approvals of or filings with any Governmental Entity) and shall

cooperate with and furnish information in connection with any such requirements imposed upon ILM II, Seller, and/or Purchaser. Each of ILM II, Seller and Purchaser shall take all reasonable actions necessary to obtain (and shall cooperate with the other in obtaining) each consent, authorization, order or approval of, and each exemption by, each Governmental Entity and other person or entity, required to be obtained or made by the parties hereto in connection with this Agreement or the taking of any action contemplated hereby or thereby. If Purchaser at the Closing Date has not been issued the necessary licenses from applicable state or local government entities required to operate the Assets as senior living facilities in the manner currently operated, Purchaser may terminate this Agreement. Notwithstanding the foregoing, if a required license is not obtained on any of the Properties (the "EXCLUDED ASSETS") as of the Closing Date (as the same may be extended as provided in Article 5), Purchaser may elect to close on only those Properties which have received the necessary licenses and satisfied all other closing requirements and the Purchase Price shall be reduced in an amount equal to the allocated Purchase Price of the Excluded Assets. In such event this Agreement shall terminate with respect to the Excluded Assets only and neither party shall have any additional obligations under this Agreement with respect to the Excluded Assets other than those obligations that expressly survive termination. ARTICLE 18 CLOSING COSTS. A. CLOSING COSTS. Seller shall pay all charges required under applicable law or customarily attributable to sellers of assets similar to Assets including without limitation, state, county, or municipal transfer taxes which are not required to be paid by Purchaser under applicable law or custom. Purchaser shall pay all charges required under applicable law or customarily attributable to purchasers including, without limitation, all recordation charges for the Deeds, and state, county or municipal transfer taxes and fees which are not required to be paid by Seller under applicable law or custom. Seller and Purchaser shall equally share the cost of the premiums for the title insurance with Seller's portion not to exceed $75,000. The parties shall each be solely responsible for the fees and disbursements of their respective counsel and other professional advisers. B. The provisions of this ARTICLE 18 shall survive the Closing. ARTICLE 19 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The obligation of Seller to consummate the Closing is subject to the satisfaction (or waiver by Seller) as of Closing of the following conditions: (i) Each of the representations and warranties made by Purchaser in this Agreement shall be true and correct in all material respects when made and on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date. (ii) Seller shall have received all of the deliveries required under Article 8(B). B. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The obligation of Purchaser to consummate the Closing is subject to the satisfaction (or waiver by Purchaser) as of Closing of the following conditions: (i) Purchaser shall have received all of the deliveries required under Article 8A. (ii) If the sale of the Assets or any portion thereof to Purchaser requires the approval of any Government Authority, such approval shall have been obtained.

(iii) Purchaser shall have obtained the necessary licenses from applicable state and local government entities required to operate the Assets as senior living facilities in the manner currently operated. (iv) No Material Defect shall have occurred subsequent to the Inspection Period; PROVIDED, however, that in such event Purchaser must deliver a Material Defect Notice and the Seller shall thereupon have the alternative rights specified in Section 10E hereof, such Material Defect Notice to be delivered by Purchaser prior to the date specified for Closing in Article 5 hereof, and the Seller's response thereto to be delivered within ten (10) business days thereafter. ARTICLE 20 SELLER'S INABILITY TO PERFORM: SELLER'S DEFAULT. If Seller shall default in its obligation to convey the Assets to Purchaser in accordance with the terms of this Agreement, then Purchaser, at its sole option, may either (i) terminate this Agreement, in which event Escrow Agent shall refund to Purchaser the Deposit (and all interest thereon, if any) and neither party shall thereafter have any further rights or obligations hereunder or (ii) bring an action against Seller for specific performance. In the event of Seller's Willful Default (as defined below), Purchaser shall be entitled to all remedies at law or at equity "SELLER'S WILLFUL DEFAULT" shall mean Seller's willful refusal to perform its obligation to convey the Assets to Purchaser in accordance with the terms of this Agreement, provided: (1) the reasons for such refusal do not include conditions beyond Seller's control or the unmarketability of title; and (2) Purchaser has satisfied all conditions required to be satisfied by it under this Agreement, is not otherwise in default under this Agreement and is ready, willing and able to deliver the Purchase Price due Seller under this Agreement. ARTICLE 21 CONDITION OF REAL PROPERTY. Purchaser shall accept the Real Property at the Closing in its "as is" condition as of the Closing Date, subject to the terms of this Agreement including without limitation the representations and warranties of Seller. Except as set forth in this Agreement and subject to the representations and warranties of Seller, Seller shall not be liable for any latent or patent defects in the Real Property or be bound in any manner whatsoever by any guarantees, promises, projections, operating expenses, set-ups or other information pertaining to the Real Property made, furnished or claimed to have been made or furnished, whether orally or in writing, by Seller or any other person or entity, or any partner, employee, agent, attorney or other person representing or purporting to represent Seller. Purchaser acknowledges that neither Seller nor any of the employees, agents or attorneys of Seller have made and do not make any oral or written representations or warranties whatsoever to Purchaser, whether express or implied, except as expressly set forth in this Agreement. Purchaser has not relied and is not relying upon any representations or warranties other than the representations and warranties expressly set forth in this Agreement, or upon any statements made in any informational materials with respect to the Real Property provided by Seller or any other person or entity, or any shareholder, employee, agent, attorney or other person representing or purporting to represent Seller. ARTICLE 22 NON-LIABILITY. Purchaser agrees that in any suit against ILM II or Seller, it shall look solely to the assets of ILM II and Seller, and not to the members, managers, directors, officers, employees, shareholders, partners or agents of ILM II and Seller or any other person, partnership, corporation or trust, as principal of ILM II and Seller or otherwise, and whether disclosed or undisclosed, to enforce its rights hereunder, and that none of the members, managers, directors, officers, employees, shareholders, partners or agents of ILM II and Seller or any other person, partnership, corporation or trust, as principals of ILM II and Seller or otherwise, and whether

disclosed or undisclosed, shall have any personal obligation or liability hereunder, and Purchaser shall not seek to assert any claim or enforce any of its rights hereunder against such party. ARTICLE 23 NOTICES. All notices, demands or requests made pursuant to, under or by virtue of this Agreement (in each case, a "NOTICE") must be in writing and sent to the party to which the Notice is being made by nationally recognized overnight courier or delivered by hand or by facsimile with receipt acknowledged in writing as follows: TO ILM II AND SELLER: ILM II Senior Living, Inc. 1750 Tysons Boulevard Suite 1200 Tysons Corner, VA 22102 Attention: J. William Sharman, Jr. Facsimile: (703) 749-1301 WITH A COPY TO: Greenberg Traurig, LLP 800 Connecticut Avenue Suite 500 Washington, District of Columbia 20006 Attention: Jeffry R. Dwyer, Esq. Facsimile: (202) 331-3101 TO PURCHASER: Five Star Quality Care, Inc. 400 Centre Street Newton, Massachusetts 02458 Attention: Evrett W. Benton, President Facsimile: (617) 796-8385 WITH COPIES TO: Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attention: Nancy S. Grodberg, Esq. Facsimile: (617) 338-2880 All Notices (i) shall be deemed given upon the date of delivery of such Notice or refusal to accept delivery of such Notice and (ii) may be given either by a party hereto or by such party's attorney set forth above. ARTICLE 24

BROKERS. Other than Cohen & Steers, the fees of which are the sole responsibility of Seller, Seller has (i) dealt with no brokers, salesman, finder, or consultant with respect to this Agreement and (ii) not entered into any written agreements with any broker, salesman, finder or consultant or has not agreed in writing with any real estate broker to pay any specific amount of commissions with respect to this Agreement. Seller agrees to indemnify, protect, defend and hold Purchaser harmless from and against all claims, losses, damages, liabilities, costs, expenses (including reasonable attorneys' fees and disbursements) and charges arising out of or in any way relating to the foregoing representation being untrue. ARTICLE 25 ENTIRE AGREEMENT. This Agreement contains all of the terms agreed upon between the parties with respect to the subject matter hereof, and all agreements heretofore had or made between the parties hereto are merged in this Agreement which alone fully and completely expresses the agreement of said parties. ARTICLE 26 AMENDMENTS. This Agreement may not be changed, modified or terminated, nor may any provision hereunder be waived, except by a written instrument executed by the parties hereto. ARTICLE 27 NO WAIVER. No waiver by either party of any failure or refusal to comply with its obligations under this Agreement shall be deemed a waiver of any other or subsequent failure or refusal to so comply. ARTICLE 28 SUCCESSORS AND ASSIGN. This Agreement shall inure to the benefit of, and shall bind, the heirs, executors, administrators, successors and permitted assigns of the respective parties. ARTICLE 29 PARTIAL INVALIDITY. If any term or provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. ARTICLE 30 ARTICLE HEADINGS; INCORPORATION OF EXHIBITS AND SCHEDULES. The headings of the various articles and sections of this Agreement have been inserted only for convenience, and are not part of this Agreement and shall not be deemed in any manner to modify, explain or restrict any of the provisions of this Agreement. Unless otherwise provided in this Agreement, any reference in this Agreement to an Exhibit or Schedule is understood to be a reference to the Exhibits and Schedules annexed to this Agreement. All Exhibits and Schedules annexed to this Agreement shall be incorporated into this Agreement as if fully set forth herein. ARTICLE 31 GOVERNING LAW. This Agreement shall be governed by, interpreted under and construed and enforced in accordance with, the laws of the State of New York. The parties hereby consent to the jurisdiction of the courts

of The Commonwealth of Massachusetts with respect to any disagreement as between the parties hereto and/or the Escrow Agent. ARTICLE 32 CONFIDENTIALITY. Except as may be required by law or in connection with any court or administrative proceeding, neither ILM II, Seller nor Purchaser nor their respective agents or designees shall issue or cause the publication of any press release or other public announcement (collectively, a "PUBLIC DISCLOSURE"), or cause, permit or suffer any other disclosure which sets forth the terms of the transactions contemplated hereby (other than to the parties' respective consultants and advisors and investors or potential investors, who, in turn, shall be bound by this Article 32), without first obtaining the written consent of the other party. If a party is required by law or in connection with any court or administrative proceeding, to issue or cause the publication of a Public Disclosure, such party shall provide the other parties with a copy of the Public Disclosure for their reasonable approval prior to publication. ARTICLE 33 NO RECORDING. The parties hereto agree that neither this Agreement nor any memorandum hereof shall be recorded. ARTICLE 34 ASSIGNMENT. None of the parties hereto may assign its rights or obligations under this Agreement or any direct or indirect ownership or other interest in such party without the prior written consent of the other party, and any such assignment made without such party's consent shall be void ab initio. Notwithstanding the foregoing, Purchaser may transfer to any affiliate of Purchaser, provided that the Purchaser originally named herein shall remain liable for all obligations of Purchaser hereunder. ARTICLE 35 COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which when so executed and delivered shall be deemed to be an original, but all such counterparts shall constitute one and the same agreement. ARTICLE 36 NO THIRD PARTY BENEFICIARY. The provisions of this Agreement are not intended to benefit any third parties. ARTICLE 37 SURVIVABILITY. Unless otherwise specifically stated to the contrary in any Section or Article of this Agreement, no representations or warranties contained herein shall survive after the Closing. ARTICLE 38 SEC FILINGS. Seller shall, at Purchaser's sole cost and expense, provide such information as Purchaser may from time to time reasonably request as may be required for Purchaser's filings with the Securities and Exchange Commission, including, without limitation, any filing made in connection with any equity offering by Purchaser.

ARTICLE 39 PURCHASER MANAGEMENT. At any time during the term hereof, Seller shall have the right, in its sole discretion, to elect for Purchaser to assume the management and operation of the facilities. In the event that Seller shall so elect, Purchaser shall waive the condition set forth in Article 10E(iii) with respect to any change referred to therein that arises from and after the date that Purchaser assumes control of such management and operations. [remainder of page intentionally blank]

IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. ILM II: ILM II SENIOR LIVING, INC.
By: /S/ J. W. SHARMAN, JR. -------------------------------Name: J. W. SHARMAN, JR. Title: PRES.

SELLER: ILM II HOLDING, INC.
By: /S/ DAVID CARLSON -------------------------------Name: DAVID CARLSON Title: PRESIDENT

PURCHASER: FIVE STAR QUALITY CARE, INC.
By: /S/ EVRETT W. BENTON -------------------------------Name: EVRETT W. BENTON Title: PRESIDENT

The undersigned has executed this Agreement solely to confirm its acceptance of the duties of Escrow Agent as set forth in ARTICLE 16 hereof. CHICAGO TITLE INSURANCE COMPANY
By: /s/ P. Eric Taylor -------------------------------Name: P. Eric Taylor Title: Vice President, Senior Counsel

OMITTED EXHIBITS The following exhibits to the Sale-Purchase Agreement have been omitted:
EXHIBIT ------I II EXHIBIT TITLE ------------LEGAL DESCRIPTION PURCHASE PRICE ALLOCATION

The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibits to the Securities and Exchange Commission upon request. OMITTED SCHEDULES The following schedules to the Sale-Purchase Agreement have been omitted:
SCHEDULE -------14(A)(I) 14(A)(II) 14(A)(III) 14(A)(VII) SCHEDULE TITLE -------------LEASES AND RESIDENT AGREEMENTS CONTRACTS FINANCIAL STATEMENTS ACTIONS, SUITS OR PROCEEDINGS

The Registrant agrees to furnish supplementally a copy of the foregoing omitted schedules to the Securities and Exchange Commission upon request.

Exhibit 2.4 FIRST AMENDMENT TO SALE-PURCHASE AGREEMENT THIS AMENDMENT TO SALE-PURCHASE AGREEMENT (this "AMENDMENT") is made as of February 22, 2002, among ILM II SENIOR LIVING, INC., a Virginia finite-life corporation ("ILM II"), ILM II HOLDING, INC., a Virginia corporation ("SELLER"), and FIVE STAR QUALITY CARE, INC., a Maryland corporation ("PURCHASER"). RECITALS: ILM II, Seller and Purchaser have entered into a Sale-Purchase Agreement dated as of January 23, 2002 (the "PURCHASE AGREEMENT"), and have agreed, subject to the terms and conditions set forth below, to amend the Purchase Agreement as provided below. NOW THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and agreements set forth in this Amendment, the parties agree as follows: Section 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. Section 2. AMENDMENTS. Effective as of the date hereof, the Purchase Agreement shall be amended as follows: (a) Article 1B of the Purchase Agreement is amended to add the following new subparagraph (ix) after subparagraph (viii) (and to renumber the existing subparagraphs (ix) and (x) of Article 1B as subparagraphs (x) and (xi), respectively): (ix) A capital improvement account (the "CAPITAL IMPROVEMENT ACCOUNT") having a balance of not less than $372,000; (b) Article 8A(ix) of the Purchase Agreement is amended in full to read as follows: (ix) a General Assignment and Assumption Agreement in form reasonably acceptable to Purchaser, assigning to Purchaser Seller's right, title and interest in and to the Surviving Contracts (as hereinafter defined), the Intangible Property, the Capital Improvement Account, the Claims, the Permits, and the Files and Records, together with any and all other documents and instruments that may be necessary to transfer the Capital Improvement Account to Purchaser; Section 3. MISCELLANEOUS (a) In consideration of Seller's execution of this Amendment, Purchaser acknowledges that it has not sent a Material Defect Notice pursuant to Article 10, Section E and will not send a Material Defect Notice prior to the expiration of the Inspection Period, PROVIDED, HOWEVER, that in no event shall the foregoing affect, limit or otherwise impair Purchaser's right to send a Material Defect Notice pursuant to Article 19B(iv) of the Purchase Agreement. (b) Except as herein provided, the Purchase Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed. 1

(c) Each party hereto represents that is has taken all action required to authorize, execute and deliver this Amendment, and to make all of the provisions of this Amendment valid and enforceable and had caused this Amendment to be executed by a duly authorized officer of such party. (d) This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall constitute one and the same agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2

EXECUTED under seal as of the date first above written. ILM II: ILM II SENIOR LIVING, INC.
By: /s/ J.W. Sharman, Jr. -------------------------------------------Name: J.W. Sharman, Jr. -------------------------------------------Title: President --------------------------------------------

SELLER: ILM II HOLDING, INC.
By: /s/ David Carlson -------------------------------------------Name: David Carlson -------------------------------------------Title: President --------------------------------------------

PURCHASER: FIVE STAR QUALITY CARE, INC.
By: /s/ Bruce J. Mackey, Jr. -------------------------------------------Name: Bruce J. Mackey, Jr. -------------------------------------------Title: Chief Financial Officer and Treasurer --------------------------------------------

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Exhibit 2.5 SECOND AMENDMENT TO SALE-PURCHASE AGREEMENT THIS SECOND AMENDMENT TO SALE-PURCHASE AGREEMENT (this "AMENDMENT") is made as of March 1, 2002, among ILM II SENIOR LIVING, INC., a Virginia finite-life corporation ("ILM II"), ILM II HOLDING, INC., a Virginia corporation ("Seller"), and FIVE STAR QUALITY CARE, INC., a Maryland corporation ("PURCHASER"). RECITALS: ILM II, Seller and Purchaser have entered into a Sale-Purchase Agreement dated as of January 23, 2002, as amended by a First Amendment to Sale-Purchase Agreement dated as of February 22, 2002 (the "PURCHASE AGREEMENT"), and have agreed, subject to the terms and conditions set forth below, to further amend the Purchase Agreement as provided below. NOW THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and agreements set forth in this Amendment, the parties agree as follows: Section 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. Section 2. AMENDMENTS. Effective as of the date hereof, the Purchase Agreement shall be amended as follows: (a) Article 5A of the Purchase Agreement is amended in full to read as follows: A. The "CLOSING" shall mean the consummation of each of the actions enumerated in ARTICLE 8 of this Agreement, or the waiver of such action by the party in whose favor such action is intended. The Closing shall take place at 10:00 A.M., Eastern Standard Time, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, New York 10166 on April 1, 2002; PROVIDED, HOWEVER, that in the event Purchaser shall have been unable to complete its licensing by April 1, 2002, and so long as Purchaser is proceeding to complete its licensing in good faith, Purchaser may extend the Closing Date to a date no later than May 1, 2002 (as the same may be accelerated or extended as expressly provided herein, the "CLOSING DATE"), TIME BEING OF THE ESSENCE as to Purchaser's and Seller's obligation to close on or before the Closing Date. In the event that Purchaser shall extend the Closing Date pursuant to the proceeding clause (ii) of this Article 5A with respect to any one or more Facilities, Seller will execute an Interim Management Agreement with Purchaser or its affiliate with respect to such Facilities, on terms substantially in accordance with the terms of the Management Agreement, dated as of July 29, 1996 (the "MANAGEMENT AGREEMENT"), among ILM II Lease Corporation, as owner, and Capital Senior Management 2, Inc., as manager, with such modifications as Purchaser and Seller may mutually agree (which modifications shall include, without limitations, a deletion of the provisions of Section 1.02(b)(i) of the Management Agreement); PROVIDED, HOWEVER, that as to the term of such Interim Management Agreement, the parties will agree that the term will expire upon the 1

Closing with respect to such Facilities, or if such Closing does not occur and the this Agreement is terminated for any reason, the term, at Seller's option, will extend for such reasonable period after such termination as may be necessary for Seller to find a replacement manager (not to exceed, however, one hundred eighty (180) days). In addition, any and all costs associated with finding and maintaining a replacement manager during such termination period will be borne by Purchaser unless such Closing does not occur and the Agreement is terminated due to Seller's or ILM II's default thereunder. Purchaser understands that Purchaser's agreement contained in this paragraph is material to Seller due to its REIT status, as its ability to actively manage the Facilities is severely restricted. Purchaser further agrees that Purchaser will indemnify and hold harmless Seller, ILM II and ILM II Lease Corporation from any and all claims and liabilities of any type or nature arising out of, or related to, the management or operation of the Facilities during any period that Purchaser is managing or operating the Facilities pursuant to the provisions of this Article 5A (including, without limitation, any claims of personal injury or property damage arising at the Facilities during such period) but excepting and excluding in all events any and all claims and liabilities covered by insurance to the extent provided in the Management Agreement. Section 3. MISCELLANEOUS (a) Except as herein provided, the Purchase Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed. (b) Each party hereto represents that is has taken all action required to authorize, execute and deliver this Amendment, and to make all of the provisions of this Amendment valid and enforceable and had caused this Amendment to be executed by a duly authorized officer of such party. (c) This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall constitute one and the same agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2

EXECUTED under seal as of the date first above written. ILM II: ILM II SENIOR LIVING, INC.
By: /s/ J.W. Sharman, Jr. ---------------------------Name: J.W. Sharman, Jr. ---------------------------Title: President ----------------------------

SELLER: ILM II HOLDING, INC.
By: /s/ David Carlson ---------------------------Name: David Carlson ---------------------------Title: President ----------------------------

PURCHASER: FIVE STAR QUALITY CARE, INC.
By: /s/ Bruce J. Mackey Jr. ---------------------------Name: Bruce J. Mackey Jr. ---------------------------Title: Chief Financial Officer ----------------------------

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Exhibit 5.1 [LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP] FILE NUMBER 892080 March 1, 2002 Five Star Quality Care, Inc. 400 Centre Street Newton, Massachusetts 02458 Re: Registration Statement on Form S-1 to be filed with the United States SECURITIES AND EXCHANGE COMMISSION ON OR ABOUT MARCH 1, 2002 Ladies and Gentlemen: We have served as Maryland counsel to Five Star Quality Care, Inc., a Maryland corporation (the "Company"), in connection with certain matters of Maryland law arising out of the registration of up to 3,450,000 shares (the "Shares") of Common Stock, $.01 par value per share, of the Company (the "Common Stock"), to be issued by the Company in an underwritten public offering, covered by the above-referenced Registration Statement, and all amendments thereto (the "Registration Statement"), to be filed by the Company with the United States Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the "Documents"): 1. The Registration Statement, and the related form of prospectus included therein, in the form in which it was transmitted to the Commission for filing under the 1933 Act; 2. The charter of the Company (the "Charter"), certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the "SDAT"); 3. The Amended and Restated Bylaws of the Company, certified as of the date hereof by an officer of the Company; 4. A certificate of the SDAT as to the good standing of the Company, dated as of a recent date; 5. Resolutions adopted by the Board of Directors of the Company (a) authorizing the filing of the Registration Statement, (b) authorizing the issuance of the Shares and (c) establishing a pricing committee of the Board of Directors (the "Pricing Committee") to

Five Star Quality Care, Inc. March 1, 2002 Page 2 determine certain terms of the issuance of the Shares (the "Resolutions"), certified as of the date hereof by an officer of the Company; 6. A certificate executed by an officer of the Company, dated as of the date hereof; and 7. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed the following: 1. Each individual executing any of the Documents, whether on behalf of such individual or any other person, is legally competent to do so. 2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so. 3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms. 4. Any Documents submitted to us as originals are authentic. The form and content of any Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise. 5. The Shares will not be issued or transferred in violation of any restriction or limitation contained in Article VI (Restriction on Transfer and Ownership of Shares) of the Charter. 6. In accordance with the Resolutions, the final terms of the issuance of the Shares will be authorized and approved by the Pricing Committee prior to the issuance of the Shares (such approval referred to herein as the "Corporate Proceedings").

Five Star Quality Care, Inc. March 1, 2002 Page 3 Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. Upon completion of the Corporate Proceedings, the issuance of the Shares will be duly authorized and, when and to the extent issued in accordance with the Resolutions and in the manner described in the Registration Statement, the Shares will be (assuming that, upon issuance, the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is then authorized to issue under the Charter) validly issued, fully paid and nonassessable. The foregoing opinion is limited to the laws of the State of Maryland, and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of any federal or state securities laws, including the securities laws of the State of Maryland, or as to federal or state laws regarding fraudulent transfers. To the extent that any matter as to which our opinion is expressed herein would be governed by any jurisdiction other than the State of Maryland, we do not express any opinion on such matter. The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you solely for submission to the Commission as an exhibit to the Registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity without, in each instance, our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein in the section entitled "Legal Matters" in the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933. Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP

BALLARD SPAHR ANDREWS & INGERSOLL, LLP

Exhibit 10.3 SHARED SERVICES AGREEMENT THIS SHARED SERVICES AGREEMENT (this "Agreement") is made and entered into as of January 2, 2002, by and between Five Star Quality Care, Inc., a Maryland corporation (the "Company"), and REIT Management & Research LLC, a Delaware limited liability company ("RMR"). WHEREAS, the Company wishes to: (i) purchase from RMR certain administrative services designed to assist the Company in the cost-efficient management of certain of the Company's corporate and business affairs, and (ii) make use of the advice and assistance of RMR and information available to RMR, and to have RMR undertake the duties and responsibilities hereinafter set forth, all in the manner and pursuant to terms and conditions as more specifically described herein; and WHEREAS, RMR is a limited liability company that provides management and administrative services, and RMR desires to provide those services requested by the Company on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. SERVICES. 1.1 SERVICES TO BE RENDERED. RMR shall provide the Company with the services described below (each, a "Service", and collectively, the "Services"), in each case to the extent requested by the Company: (a) ACCOUNTING SUPPORT. Advice and assistance with accounting, tax, audit and financial reporting of the Company, including, without limitation, advice and assistance in (i) setting up and maintaining systems for financial record keeping; (ii) conducting the administration of the day-to-day bookkeeping and accounting functions as are required for the proper management of the assets of the Company; (iii) conducting internal audits; (iv) contracting for and supervising the process for independent annual audits; and (v) preparation of financial reports as may be required by any governmental authority (excluding any Medicare, Medicaid or other rate setting, safety, health agency or quality of care authority) in connection with the ordinary conduct of the Company's business, including without limitation, periodic reports, returns or statements required under the Securities Exchange Act of 1934, as amended, the Internal Revenue Code of 1986, as amended, the securities and tax statutes of any jurisdiction in which the Company is obligated to file such reports, or the rules and regulations promulgated under any of the foregoing.

(b) CAPITAL MARKETS AND INVESTMENT ADVICE AND ASSISTANCE. (i) EQUITY CAPITAL MARKETS. Advice and services relating to equity capital raising transactions, but not including solicitation of investors as a broker, dealer or underwriter in any capital raising transactions. (ii) DEBT FINANCING. Advice and services relating to revolving lines of credit and other issuances of indebtedness. (iii) INVESTMENT. Advice and services relating to investments and other growth opportunities as may come to the attention of the Company or RMR, including without limitation, acquisitions, joint ventures and other business expansion transactions. (c) CASH MANAGEMENT. Advice and assistance in (i) operating and managing the Company's collection systems, concentration systems and electronic disbursements; (ii) managing the Company's short-term investments, including the acquisition and sale of money market instruments or other temporary investments in accordance with the Company's policies; (iii) maintaining bank accounts, including opening and closing of operating, security deposits, local depository and petty cash accounts; (iv) bank administration; and (v) maintaining bank relationships. (d) COMMON SUPPORT SERVICES. Provide common services, such as receptionists, cleaning services, some secretarial services to support personnel of the Company and staff personnel to operate the office equipment as is reasonably necessary. (e) HUMAN RESOURCES. Advice and assistance in management of the Company's 401(k) plan, Company employee recruitment, performance evaluation and establishment of salary, bonus and other compensation scales and executive and staff employee structure. (f) INSURANCE ADMINISTRATION. Assistance in (i) securing all forms of insurance, including property, casualty, workers' compensation; (ii) managing insurance policies; (iii) negotiation of premiums and arranging payment terms; (iv) managing claims; and (v) preparation of loss analysis. The amount and levels of insurance shall be determined in the sole and absolute discretion of the Company. (g) INVESTOR RELATIONS. Assistance in the preparation and coordination of (i) annual and quarterly reports to shareholders; (ii) presentations to the public; (iii) public relations; (iv) preparation of marketing materials; (v) internet web-site; and (vi) investor relations services. (h) LEGAL. Assistance in review of and advice concerning Company contracts and agreements, coordination and supervision of all third party legal services and oversight of processing of claims by or against the Company. (i) MANAGEMENT INFORMATION SYSTEMS. -2-

(i) APPLICATIONS DEVELOPMENT. Supervision and assistance related to development and maintenance of Company information technology system applications, including, without limitation, intra-net, financial, accounting and clerical systems. (ii) TELECOMMUNICATIONS. Supervision and assistance related to design, operation and maintenance of network infrastructure, including telephone and data transmission lines, voice mail, facsimile machines, cellular phones, pager, etc.; negotiation of contracts with third party vendors and suppliers; and local area network and wide area network communications support. (iii) OPERATIONS/TECHNICAL SUPPORT AND USER SUPPORT. Supervision and assistance related to design, maintenance and operation of the computing environment, including business specific applications, network wide applications, electronic mail and other systems; managing the purchase and maintenance of equipment, including hardware and software; configuration, installation and support of computer equipment; and education and training of the user community. (j) PROPERTY MAINTENANCE AND REPAIRS. Assist in obtaining, when appropriate, the services of property managers or management firms to perform customary property management services with regard to the facilities operated by or the real estate properties owned by or in the possession of the Company; performance of such supervisory, evaluation or monitoring services on behalf of the Company with respect to the activities of those property managers or management firms as would be performed by a prudent owner or lessee in the Company's business, including but not limited to, supervising the activities of property managers or management firms, reviewing the maintenance and renovation needs for governmental or regulatory compliance at the Company's properties, assessing capital and engineering projects, property inspections, and participating in property management budgeting, but excluding the actual on-site property management functions performed by Company personnel, property managers or management firms. (k) RESEARCH. Provision of periodic market research reports and special research assignments; investigation and evaluation of investment, financing, refinancing, leasing and other business opportunities; and making recommendations concerning these opportunities. (l) SECURITIES FILINGS. Advice and assistance in the preparation and filing of periodic and other reports required to be filed by Sections 13 and 15 of the Securities Exchange Act of 1934, as amended; advice and assistance in the preparation and filing of all offering documents (public and private), and all registration statements, prospectuses or other documents filed with the Securities and Exchange Commission (the "SEC") or any state (it being understood that the Company shall be responsible for the content of any and all of its offering documents and SEC filings, and RMR shall not be held liable for any costs or liabilities arising out of any misstatements or omissions in the -3-

Company's offering documents or SEC filings, whether or not material, and the Company shall indemnify RMR from such costs and liabilities). (m) SPECIAL PROJECTS. Provide direction and support of all special projects and such other services within the scope contemplated by this Agreement although not expressly covered in the subparagraphs of subparagraph 1.1. (n) SUPERVISION OF THIRD PARTY MANAGER ARRANGEMENTS. Provision of strategic advice and oversight concerning the Company's relationship with any and all, current or future, third party managers of its current or future facilities or properties, including, without limitation, Marriott Senior Living Services, Inc. (o) TAX ADMINISTRATION. Supervision, direction and assistance in the preparation, review and filing of all federal, state and other required tax returns; supervision and direction of ad hoc requests for assistance on tax related matters; and coordination of all activities with the Company's outside tax preparer. All tax matters shall be determined by the Company in its absolute and sole discretion. 1.2 PERFORMANCE OF SERVICES. RMR covenants that it will perform or cause to be performed the Services in a timely, efficient and workmanlike manner. RMR further covenants that it will maintain or contract for a sufficient staff of trained personnel to enable it to perform the Services hereunder. With the Company's approval, RMR may retain third parties or its affiliates to provide certain of the Services hereunder. In such cases, and notwithstanding anything herein to the contrary, the Company shall reimburse RMR for its actual out-of-pocket costs and expenses for arranging for such Services (including, without limitation, the fees and costs of such third parties or affiliates). Any arrangements between RMR and its affiliates for the provision of Services hereunder shall be commercially reasonable and on terms not less favorable than those which could be obtained from unaffiliated third parties. All services shall be performed as requested and/or authorized by the Company from time to time. 1.3 COMPENSATION. (a) PAYMENT FOR SERVICES. RMR shall be paid a fee for the Services provided to the Company under this Agreement (the "Service Fee") equal to 0.6% of total revenues ("Revenues") of the Company from all sources reportable under generally accepted accounting principles ("GAAP"). The Service Fee shall be estimated and paid monthly by the Company in advance based upon the prior calendar month's Revenues, and such payment shall be paid within 15 calendar days of the end of the applicable prior calendar month. The calculation of the fee for any month shall be based upon the Company's monthly financial statements and shall be in reasonable detail. A copy of the computations shall promptly be delivered to RMR accompanied by payment of the Service Fee thereon to be due and payable. The Services Fee shall be pro-rated for any partial month this Agreement shall be in effect. The aggregate Service Fee paid in any fiscal year shall be subject to adjustment as of the end of that year. On or before the 30th day after public availability of the Company's annual audited financial statements for each fiscal year, the Company shall -4-

deliver to RMR a notice setting forth (i) the Company's Revenues for such year, (ii) the Company's computation of the Service Fee payable for such year and (iii) the amount of the Service Fee theretofore paid to RMR in respect of such year. If the Service Fee payable for any fiscal year exceeds the aggregate amounts previously paid by the Company, the Company shall pay the deficit to RMR at the time of delivery of such notice. If the aggregate Service Fee payable for any fiscal year as shown in the notice is less than the aggregate amounts previously paid by the Company, the Company shall specify in such notice whether RMR should (i) refund to the Company an amount equal to the difference or (ii) grant the Company a credit against the Service Fee next coming due in the amount of the difference until that amount has been fully paid or otherwise discharged. (b) PAYMENT SUBORDINATION. No Service Fee payments shall be paid by the Company to RMR if any of the contractual rent obligations of the Company or any of its subsidiaries to Senior Housing Properties Trust or any of its subsidiaries (collectively "Senior Housing") pursuant to any lease agreement are in arrears or if such Service Fee payment would leave the Company with insufficient cash, credit facilities or current accounts receivable to make its next scheduled rent payment to Senior Housing pursuant to any lease agreement. Any Service Fee payment unpaid as a result of the preceding sentence shall accrue interest until paid at the Prime Rate (as defined below), and shall be automatically due and payable: (i) as and to the extent cash, credit facilities or current accounts receivable are available after payment of, or provision for, rent, (ii) upon any termination of the Agreement, or (iii) upon the occurrence of any event of default by the Company enumerated in subparagraph 3.2. This subparagraph 1.3(b) is only intended to define the relative rights of RMR and Senior Housing. Without intending to limit the generality of the foregoing, nothing in this subparagraph 1.3(b) shall: (i) impair, as between the Company and RMR, the obligation of the Company to pay any amounts owing hereunder in accordance with the terms hereof; or (ii) affect the relative rights of RMR and creditors of the Company other than Senior Housing. For purposes of this Agreement, "Prime Rate" shall mean the Prime Rate or base rate on corporate loans at large U.S. money center commercial banks as published in the WALL STREET JOURNAL or, if publication of such rate shall be suspended or terminated, Prime Rate shall mean the annual rate of interest, determined daily and expressed as a percentage, from time to time announced by one of the three largest national or New York State chartered banking institutions having their principal office in New York, New York and selected by RMR at the time such publication is suspended or terminated. All interest hereunder shall be calculated on the basis of actual days elapsed and a 360-day year. 1.4 REIMBURSEMENT. The Company shall reimburse RMR for reasonable out-of-pocket expenses of RMR employees incurred in their performance of the Services (the "Expenses") and for reasonable third party expenses RMR incurs on behalf of the Company that are not billed directly to the Company, in each case within 30 days of receipt of the invoice therefor, but only to the extent, as to such third party expenses and costs, the Company shall have approved such expenses and costs. RMR shall submit to the Company such reports detailing said expenses and supporting receipts and bills, or other suitable evidence, as may be, reasonably requested by the Company. -5-

Section 2. LIMITATIONS. 2.1 NON-COVERED SERVICES. For the avoidance of doubt, Services outside the scope of this Agreement include, without limitation, and the Company, and not RMR, shall be responsible for: (i) any and all clinical services to residents or patients at all facilities leased by the Company, whether or not managed or operated by the Company, and (ii) any and all reimbursement or rate setting policies and reports to Medicare, Medicaid, any rate setting authority, safety, health agency or quality of care authority or any other third parties. 2.2 LIMITS OF RMR RESPONSIBILITY. RMR assumes no responsibility other than to render the services described herein in subparagraphs 1.1 and 4.1 in good faith and shall not be responsible for any action of the Company in following or declining to follow any advice or recommendation of RMR. 2.3 THIRD PARTY COSTS. Except to the extent expressly provided herein to the contrary, all third party costs incurred in connection with actions to be taken by the Company shall solely be the responsibility of the Company, including, but not limited to, all listing and registration fees or other costs of the SEC, any state or local governments, any national securities exchange and the NASD, Inc. Section 3. TERM; TERMINATION. 3.1 TERM. The initial term of this Agreement shall commence on the date hereof and expire on December 31, 2002 (the "Initial Term") and shall be automatically renewed for successive one-year terms (each, a "Renewal Term") upon the expiration of the Initial Term and each Renewal Term unless notice of non-renewal is given in writing by the Company or RMR not less than ninety (90) calendar days before the expiration of the Initial Term or any Renewal Term. 3.2 DEFAULT; BANKRUPTCY; ETC. At the option of the Company or RMR, this Agreement may be terminated immediately by written notice from the nondefaulting party to the other party if any of the following events shall have occurred: (a) RMR or the Company shall have violated any provision of this Agreement and, after written notice from the Company or RMR, as the case may be, of the violation, shall have failed to cure the default within thirty (30) days; (b) a petition shall have been filed against RMR or the Company for an involuntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, and that petition shall not have been dismissed within ninety (90) days of filing; or a court having jurisdiction shall have appointed a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of RMR or the Company for any substantial portion of its property, or ordered the winding up or liquidation of its affairs, and that appointment or order shall not have been rescinded or vacated within ninety (90) days of the appointment or order; (c) RMR or the Company shall have commenced a voluntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in -6-

effect, or shall have made any general assignment for the benefit of creditors, or shall have failed generally to pay its debts as they became due; or (d) any direct or indirect Change in Control (as defined in Section 12) of the Company, except as otherwise permitted by Section 12. Each party agrees that, if any of the events specified in paragraphs (b), (c) or (d) of this subparagraph 3.2 occur, it will give written notice thereof to the other within seven (7) days following the occurrence of the event. 3.3 COMPANY TERMINATION. In the event the Company's Board of Directors shall not have ratified this Agreement following the spin-off of the Company from Senior Housing prior to January 31, 2002, the Company shall have the option to terminate this Agreement by giving written notice to RMR on or before January 31, 2002. Any termination of this Agreement pursuant to this subparagraph 3.3 shall be effective as of January 31, 2002. 3.4 ACTION UPON TERMINATION. From and after the effective date of any termination of this Agreement by the Company pursuant to subparagraph 3.2 or 3.3, RMR shall be entitled to no compensation for services rendered hereunder for the remainder of the then current term of this Agreement but shall be paid all compensation due for services performed prior to termination, including, without limitation the then current year's Service Fee through the date of termination. In the event of any termination of this Agreement by RMR pursuant to subparagraph 3.2, RMR shall be entitled to compensation for the remainder of the then current term of this Agreement. Upon the expiration or sooner termination of this Agreement, RMR immediately shall deliver to the Company all property and documents of the Company then in its custody or possession. This subparagraph 3.4 hereof shall govern the rights, liabilities and obligations of the parties upon termination of this Agreement; and, except as provided in Section 8, a termination shall be without further liability of either party to the other for breach or violation of this Agreement prior to termination. Section 4. SENIOR EXECUTIVES. 4.1 ADDITIONAL SERVICES. To the extent requested by the Company, RMR shall make its executive officers and directors reasonably available to the Company for the provision of additional services, including day-to-day activities enumerated in subparagraph 1.1. The parties acknowledge and agree that no additional compensation shall be due and payable for any additional services requested by the Company and provided by executive officers and directors of RMR pursuant to this subparagraph 4.1. 4.2 CO-EMPLOYMENT OF SENIOR EXECUTIVES. The parties acknowledge and agree that certain senior executives of the Company may be employees of both the Company and RMR. Each party shall be solely responsible for payment of compensation to such senior executives for services rendered to or on behalf of such party. Section 5. PREVENTION OF PERFORMANCE. RMR shall not be determined to be in violation of this Agreement if it is prevented from performing any Services hereunder for any reason beyond its reasonable control, including without limitation, acts of God, nature, or of -7-

public enemy, strikes, or limitations of law, regulations or rules of the Federal or of any state or local government or of any agency thereof. Section 6. COMPANY RESTRICTIONS. 6.1 OWNERSHIP AND FINANCING LIMITATIONS. At no time during the term of this Agreement, may the Company or any of its subsidiaries, directly or indirectly, own or finance (including sale and leaseback transactions), or participate in the ownership or financing of, any real estate property (collectively, the "Properties") of a type then owned or financed by Senior Housing, HRPT Properties Trust, Hospitality Properties Trust or any other publicly owned real estate investment trust, corporation or other entity that is managed by RMR (a "Benefited Party"); provided that if the Company or any of its subsidiaries proposes to enter into any transaction involving the ownership or financing of a Property prohibited by this subparagraph 6.1 ("Proposed Transaction"), it shall provide notice of the Proposed Transaction to the relevant Benefited Party describing the Proposed Transaction in sufficient detail and offer the relevant Benefited Party the right to acquire or finance the acquisition of the Property and negotiate in good faith with the relevant Benefited Party. If, after ten (10) business days, the Company and the relevant Benefited Party have not reached agreement on the terms of the acquisition or financing, the Company (or any subsidiary of the Company) shall be free to acquire or finance such Property itself or with others, free of the restrictions of this subparagraph 6.1. The Company agrees that irreparable damage would occur if any of the provisions of this subparagraph 6.1 were not performed in accordance with their terms and that the Benefited Parties' remedy at law for the Company or its subsidiaries' breach of its obligations under this subparagraph 6.1 would be inadequate. Upon any such breach, the relevant Benefited Party shall be entitled (in addition to any other rights or remedies it may have at law) to seek an injunction enjoining and restraining the Company or such subsidiaries from continuing such breach. The Company agrees that the period of restriction and the geographical area of restriction imposed upon the Company are fair and reasonable. If the provisions of this subparagraph 6.1 relating to the period or the area of restriction are determined to exceed the maximum period or areas which a court having jurisdiction over the matter would deem enforceable, such period or area shall, for purposes of this Agreement, be deemed to be the maximum period or area which such court determines valid and enforceable. 6.2 ADDITIONAL COVENANTS. In the event RMR shall enter into an advisory arrangement or agreement with any other publicly owned entity, other than the Benefited Parties, RMR shall provide the Company with notice thereof. The notice shall specify in reasonable detail the identity of the entity, the types of properties owned or financed by such additional entity, and such entity shall be deemed and become a "Benefited Party" for all purposes of this Agreement. Section 7. RMR RESTRICTIONS. Other than activities or arrangements existing as of the date hereof or those consented to by the Company, RMR shall not directly or indirectly provide any advice or assistance to any business or enterprise that is competitive with the Company's business, including, but not limited to, any business or enterprise that manages or operates senior apartments, congregate communities, assisted living properties, nursing homes or other healthcare properties. -8-

Section 8. INDEMNIFICATION; REMEDIES. 8.1 BY THE COMPANY. The Company shall indemnify, defend and hold RMR, and its directors, officers, employees and agents harmless from and against any and all damages, claims, losses, expenses, costs, obligations and liabilities, including, without limiting the generality of the foregoing, liabilities for all reasonable attorneys', accountants' and experts' fees and expenses incurred (collectively, "Losses and Expenses") or suffered by them by reason of or arising out of the course of performing the Services and any duties on behalf of the Company and its subsidiaries as prescribed hereby, except for matters covered by subparagraph 8.2 hereof. 8.2 BY RMR. RMR shall indemnify, defend and hold the Company and its subsidiaries and their respective directors, trustees, officers, employees and agents harmless from and against Losses and Expenses suffered by them by reason of or arising out of any willful bad faith or gross negligence in the performance of any obligation or agreement of RMR herein. 8.3 COMPANY REMEDIES. Except as otherwise provided in subparagraph 8.2 hereof, RMR does not assume any responsibility under this Agreement other than to render the Services called for under this Agreement in good faith. Except as otherwise provided in subparagraph 8.2 hereof, the Company's remedy on account of the failure of RMR to render the Services as and when required hereunder shall be to terminate this Agreement; provided however, that if RMR acts with willful bad faith or gross negligence, the Company's remedy shall be to procure services elsewhere and to charge RMR the difference between the reasonable increased cost, if any, to procure new services, and the Service Fee, pro-rated, that would have been payable to RMR had RMR performed such Services under this Agreement. 8.4 RMR REMEDIES. Except as otherwise provided in subparagraph 8.1, the Company does not assume any responsibility under this Agreement other than to pay the Services Fee in accordance with the terms of this Agreement. Except as otherwise provided in subparagraph 8.1, RMR's sole remedy on account of the failure of the Company to pay the Service Fee as and when required under this Agreement shall be to terminate this Agreement and receive the Service Fee payable for the then remaining Initial Term or Renewal Term of this Agreement, as the case may be. Section 9. SELF-DEALING. Neither RMR nor any Affiliate of RMR shall, directly or indirectly, sell any property or assets to the Company or purchase any property or assets from the Company, lease any property from the Company or borrow any money from the Company, except as approved by the Company. In addition, except as otherwise provided in Section 1 hereof, neither RMR nor any Affiliate of RMR shall receive any commission or other remuneration, directly or indirectly, in connection with the activities of the Company or any joint venture or partnership in which the Company is a party. The foregoing prohibitions shall not apply to (i) the lease of office space by the Company from an Affiliate of RMR, (ii) the Company's acquisition of FSQ, Inc., or (iii) FSQ, Inc.'s provision of management services to or on behalf of the Company. As used in this Agreement, the term "Affiliate" means, as to RMR, (i) any other Person (as defined below) directly or indirectly controlling, controlled by or under common control with RMR, (ii) any other Person that owns beneficially, directly or indirectly, five percent (5%) or -9-

more of the outstanding capital stock, shares or equity interests of RMR, or (iii) any officer, director, trustee, employee or general partner of RMR or of any Person controlling, controlled by or under common control with RMR. The term "Person" means and includes individuals, corporations, limited partnerships, general partnerships, limited liability companies, joint stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts and other entities. Section 10. RELATIONSHIP OF THE PARTIES. 10.1 NO PARTNERSHIP OR JOINT VENTURE. The parties are not partners or joint venturers with each other and neither the terms of this Agreement nor the fact that the Company and RMR have joint interests in any one or more investments, have common employees or have a tenancy relationship shall be construed so as to make them partners or joint venturers or impose any liability on either of them. 10.2 CONFLICTS OF INTEREST. The parties acknowledge that, as of the date hereof, (i) the Company is a tenant of an Affiliate of RMR pursuant to a lease agreement relating to office space, (ii) the Company and its subsidiaries lease all or substantially all of their real estate from Senior Housing and may enter into additional leases or other transactions with Senior Housing, and (iii) RMR is the investment advisor to Senior Housing pursuant to an advisory agreement. The parties agree that these relationships shall not affect either party's rights and obligations under this Agreement; PROVIDED, HOWEVER, the Company acknowledges and agrees that whenever any conflicts of interest arise resulting from the relationships described in this subparagraph 10.2 or any such relationship as may arise or be present in the future by and between the Company and any of RMR, Affiliates of RMR or any publicly owned entity with whom RMR has a relationship or contract: (i) RMR will act on its own behalf and on behalf of Senior Housing or such entity and not on the Company's behalf, and (ii) the Company shall make its own decisions and require and obtain the advice and assistance of independent third parties at its own cost, as it may deem necessary. Section 11. RECORDS. RMR shall maintain appropriate books and records relating to Services performed pursuant to this Agreement, which books and records shall be available for inspection by representatives of the Company upon reasonable notice during ordinary business hours. Section 12. ASSIGNMENT. The Company may terminate this Agreement in the event of its assignment by RMR except in the case of an assignment to a corporation, partnership, trust, or other successor entity which may take over the property and carry on the affairs of RMR; provided that, following such a permitted assignment, one or more of the persons who controlled the operations of RMR immediately prior to the assignment shall control the operations of the successor, including the performance of its duties under this Agreement, and this successor shall be bound by the same restrictions by which RMR was bound prior to such assignment. A permitted assignment or any other assignment of this Agreement by RMR shall bind the assignee hereunder in the same manner as RMR is bound hereunder. This Agreement shall not be assignable by the Company without the prior written consent of RMR, except in the case of any assignment by the Company to a trust, corporation, partnership or other entity which is the successor to the Company so long as there is no Change in Control, in which case the successor -10-

shall be bound hereby and by the terms of said assignment in the same manner and to the same extent as the Company is bound hereby. For purposes of this Agreement, a "Change in Control" shall mean (a) the acquisition by any person or entity (each a "Person"), or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC) of 9.8% or more, or rights, options or warrants to acquire 9.8% or more, of the outstanding shares of voting stock of the Company, (b) any one or more sales or conveyances to any Person of all or any material portion of the assets (including capital stock) or business of the Company, or (c) the cessation, for any reason, of the individuals who at the beginning of any twenty-four (24) consecutive month period commencing on the date hereof, or any anniversary thereof, constitute the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of any such period or whose election or nomination for election was previously so approved) to constitute a majority of the Board of Directors of the Company then in office. Section 13. ARBITRATION. The Company and RMR agree that any and all disputes and disagreements arising out of or relating to this Agreement, other than actions or claims for injunctive relief or claims raised in actions or proceedings brought by third parties, shall be resolved through negotiations or, if the dispute is not so resolved, through binding arbitration conducted in Boston, Massachusetts under the J.A.M.S./Endispute Comprehensive Arbitration Rules and Procedures, with the following amendments to those rules. First, the parties agree that in no event shall the arbitration from commencement to issuance of an award take longer than 180 days. Second, the parties agree that the arbitration tribunal shall consist of three arbitrators and that the parties elect not to have the optional appeal procedure provided for in Rule 23. Third, in lieu of the depositions permitted in Rule 15(E) and (F), the parties agree that the only depositions shall be a single deposition to last no longer than one six-hour day that each party may take of the opposing party or an individual under the control of the opposing party. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Section 14. NOTICES. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a business day or is required to be delivered on or before a specific day which is not a business day, the day of receipt or required delivery shall automatically be extended to the next business day. (c) All such notices shall be addressed: -11-

If to the Company, to: Five Star Quality Care, Inc. 400 Centre Street Newton, Massachusetts 02458 Attn: President If to Senior Housing, to: Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: President If to Hospitality Properties Trust, to: Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: President If to HRPT Properties Trust, to: HRPT Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: President If to RMR, to: REIT Management & Research LLC 400 Centre Street Newton, Massachusetts 02458 Attn: President (d) By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address up to two other addresses within the United States of America. Section 15. ENTIRE AGREEMENT. This Agreement constitutes and sets forth the entire agreement and understanding of the parties pertaining to the subject matter hereof, and no prior or contemporaneous written or oral agreements, understandings, undertakings, negotiations, promises, discussions, warranties or covenants not specifically referred to or contained herein or attached hereto shall be valid and enforceable. No supplement, modification, termination in whole or in part, or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be -12-

deemed, or shall constitute, a waiver of any other provision hereof (whether or not similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided. Section 16. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, each of their respective successors and permitted assigns. Section 17. SEVERABILITY. If any provision of this Agreement shall be held invalid by a court with jurisdiction over the parties to this Agreement, then and in that event such provision shall be deleted from the Agreement, which shall then be construed to give effect to the remaining provisions thereof. If any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then in that event, to the maximum extent permitted by law, such invalidity, illegality or enforceability shall not affect any other provisions of this Agreement or any other such instrument. Section 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall be considered one and the same instrument. Section 19. AMENDMENTS. The Agreement shall not be amended, changed, modified, terminated, or discharged in whole or in part except by an instrument in writing signed by each of the parties hereto, or by their respective successors or assigns, or otherwise as provided herein. Section 20. GOVERNING LAW. This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts. Section 21. INTERPRETATION. The Company and RMR agree and covenant to construe the provisions of and give effect to this Agreement in such a manner to enable Senior Housing to continue to comply with its REIT qualification requirements under applicable tax laws. Section 22. CAPTIONS. The headings and titles of the various paragraphs of this Agreement are inserted merely for the purpose of convenience, and do not expressly or by implication limit, define, extend or affect the meaning or interpretation of this Agreement or the specific terms or text of the paragraph so designated. Section 23. ATTORNEYS' FEES. If any arbitration or legal action is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that arbitration or action in addition to any other relief to which it or they may be entitled. Section 24. SURVIVAL. The provisions of Sections 3, 13 and 14 and subparagraphs 8.1 and 8.2 of this Agreement shall survive the termination hereof. [Remainder of page intentionally left blank.] -13-

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. FIVE STAR QUALITY CARE, INC.
By: /s/ Bruce J. Mackey Jr. -------------------------------------------Name: Bruce J. Mackey Jr. Title: Chief Financial Officer and Treasurer

REIT MANAGEMENT & RESEARCH LLC
By: /s/ Jennifer B. Clark -------------------------------------------Name: Jennifer B. Clark Title: Vice President

Exhibit 10.4 AMENDMENT NO. 1 TO SHARED SERVICES AGREEMENT THIS AMENDMENT NO. 1 TO SHARED SERVICES AGREEMENT (this "AMENDMENT") is made and entered into as of January 14, 2002, by and between Five Star Quality Care, Inc., a Maryland corporation (the "COMPANY"), and REIT Management & Research LLC, a Delaware limited liability company ("RMR"). RECITALS: The Company an RMR have entered into a Shared Services Agreement dated as of January 2, 2002 (the "SHARED SERVICES AGREEMENT"), and have agreed, subject to the terms and conditions set forth below, to amend the Shared Services Agreement to extend the Company's right of termination of the Shared Services Agreement. NOW THEREFORE, in consideration of the foregoing, and the covenants and agreements set forth in this Amendment, the parties agree as follows: Section 1. DEFINITIONS. Except as otherwise defined in this Amendment, capitalized terms used herein shall have the meanings ascribed thereto in the Shared Services Agreement. Section 2. AMENDMENTS. Effective as of the date hereof subparagraph 3.3 of the Shared Services Agreement is amended in full to read as follows: "3.3 COMPANY TERMINATION. In the event the Company's Board of Directors shall not have ratified this Agreement following the spin-off of the Company from Senior Housing prior to February 28, 2002, the Company shall have the option to terminate this Agreement by giving written notice to RMR on or before February 28, 2002. Any termination of this Agreement pursuant to this subparagraph 3.3 shall be effective as of February 28, 2002." Section 3. MISCELLANEOUS. (a) Except as herein provided, the Shared Services Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed. (b) This Amendment shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts. (c) This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall together be considered one and the same agreement, and it shall not be necessary in making proof of this Amendment or the terms of this Amendment to produce or account for more than one of such counterparts. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. FIVE STAR QUALITY CARE, INC.
By: /s/ Bruce J. Mackey Jr. --------------------------------------------Name: Bruce J. Mackey Jr. Title: Chief Financial Officer and Treasurer

REIT MANAGEMENT & RESEARCH LLC
By: /s/ Jennifer B. Clark --------------------------------------------Name: Jennifer B. Clark Title: Vice President

-2-

Exhibit 10.8 PLEDGE OF SHARES OF BENEFICIAL INTEREST AGREEMENT THIS PLEDGE OF SHARES OF BENEFICIAL INTEREST AGREEMENT (this "AGREEMENT") is made and given as of December 31, 2001 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the "PLEDGOR"), for the benefit of each of the other parties identified on the signature page hereof (together with their respective successors and assigns, collectively, the "SECURED PARTIES"). W I T N E S S E T H: WHEREAS, pursuant to a Master Lease Agreement, dated as of the date hereof (the "MASTER LEASE"), the Secured Parties leased to Five Star Quality Care Trust, a Maryland business trust (the "TENANT"), and the Tenant leased from the Secured Parties, certain premises as more particularly described in the Master Lease, subject to and upon the terms and conditions set forth therein; and WHEREAS, pursuant to a Guaranty Agreement, dated as of the date hereof (the "GUARANTY"), Five Star Quality Care, Inc., a Maryland corporation (the "GUARANTOR"), guaranteed to the Secured Parties the payment and performance of all of the obligations of the Tenant to the Secured Parties with respect to the Master Lease and other related documents, subject to and upon the terms and conditions set forth therein; and WHEREAS, the Pledgor owns all of the outstanding shares of beneficial interest in the Tenant and is a wholly-owned subsidiary of the Guarantor; and WHEREAS, the Pledgor shall derive direct substantial benefit from the transactions contemplated by the Master Lease and the Guaranty; and WHEREAS, it is a condition precedent to the Secured Parties' entering into the Master Lease and accepting the Guaranty that the Pledgor pledge all of the shares of beneficial interest in the Tenant to the Secured Parties as security for the payment and performance of (i) all of the obligations of the Tenant to the Secured Parties with respect to the Master Lease and other related documents and (ii) all of the obligations of the Guarantor to the Secured Parties with respect to the Guaranty and other related documents; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and

legal sufficiency of which are hereby acknowledged, the Pledgor hereby agrees as follows: SECTION 1. CERTAIN TERMS. Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the Master Lease. The Master Lease, the Incidental Documents and the Guaranty are herein collectively referred to as the "TRANSACTION DOCUMENTS." SECTION 2. PLEDGE. The Pledgor hereby pledges to the Secured Parties all of the shares of beneficial interest in the Tenant (the "PLEDGED SHARES") listed in EXHIBIT A attached hereto and all other shares of beneficial interest in the Tenant in which the Pledgor may have rights from time to time and any other securities or other investment property and other collateral of the Pledgor now owned or hereafter acquired which under this Agreement are required to be pledged to the Secured Parties, and in each case, all certificates representing such Pledged Shares or other investment property or collateral, and all rights, options, warrants, stock or other securities or other property which may hereafter be received, receivable or distributed in respect of the Pledged Shares, together with all proceeds of the foregoing, including, without limitation, all dividends, cash, notes, securities or other property from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, the foregoing, (the Pledged Shares and any additional securities or collateral pledged hereunder, collectively, the "PLEDGED COLLATERAL"), and the Pledgor hereby grants to the Secured Parties a security interest in all of the Pledged Collateral and the proceeds thereof as security for the due and punctual payment and performance of the Secured Obligations (as hereinafter defined). The Pledgor has delivered to and deposited with the Secured Parties any and all certificates or other instruments representing the Pledged Collateral and undated trust share powers endorsed in blank, as security for the payment and performance of all of the Secured Obligations. If in the future the Pledgor possesses or controls any other certificates or other instruments representing the Pledged Collateral, the Pledgor shall immediately and without notice deliver the same to the Secured Parties together with undated trust share powers endorsed in blank, as security for the payment and performance of all of the Secured Obligations. SECTION 3. SECURED OBLIGATIONS. For purposes of this Agreement, the term "SECURED OBLIGATIONS" shall mean the payment and performance of each and every obligation of the Tenant and -2-

the Guarantor under the Transaction Documents or relating thereto, whether now existing or hereafter arising, and including, without limitation, the payment of the full amount of the Rent payable under the Master Lease. SECTION 4. REPRESENTATIONS OF THE PLEDGOR. The Pledgor covenants that the Pledged Shares are duly and validly pledged to the Secured Parties in accordance with law and the Pledgor shall warrant and defend the Secured Parties' right, title and security interest in and to the Pledged Shares against the claims and demands of all persons whomsoever. The Pledgor represents and warrants to the Secured Parties that the Pledgor has good and marketable title to all the Pledged Shares, free and clear of all claims, mortgages, pledges, liens, security interests and other encumbrances of every nature whatsoever; that the Pledged Shares are not subject to any restriction on transfer contained in the Declaration of Trust or any other charter documents of the Tenant or in any agreement or instrument to which the Tenant or the Pledgor is a party or by which the Tenant or the Pledgor is bound which would prohibit or restrict the pledge of the Pledged Shares hereunder or the disposition thereof upon default hereunder; that all of the Pledged Shares have been duly and validly issued and are fully paid for and nonassessable; and that the Pledged Shares constitute all of the presently issued and outstanding shares of the beneficial interests of the Tenant. SECTION 5. COVENANTS OF THE PLEDGOR. The Pledgor hereby covenants and agrees that it shall not sell, convey or otherwise dispose of any of the Pledged Collateral nor create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever with respect to any of the Pledged Collateral or the proceeds thereof, other than the liens on and security interests in the Pledged Collateral created hereby. The Pledgor further covenants and agrees that it shall not consent to or approve the issuance of any additional shares of beneficial interest in the Tenant. The Pledgor further covenants and agrees that, until the Secured Obligations are paid in full, the Pledgor shall not change the state of its incorporation or its corporate name without providing the Secured Parties with thirty (30) days' prior written notice and making all filings and taking all such other actions as the Secured Party determines are necessary or appropriate to continue or perfect the security interest granted hereunder. SECTION 6. FILING OF FINANCING STATEMENTS ETC. The Pledgor authorizes the Secured Parties to file from time to time one or more financing statements describing the Pledged -3-

Collateral. The Pledgor will cooperate with the Secured Parties at their request from time to time in obtaining control agreements in form and substance reasonably satisfactory to the Secured Parties with respect to any collateral investment property, deposit accounts, or other Pledged Collateral as to which the Secured Parties determine such agreements are necessary or appropriate to perfect the security interest granted hereunder. SECTION 7. DISTRIBUTIONS, ETC. Upon the dissolution, winding up, liquidation or reorganization of the Tenant, whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Tenant, if any sum shall be paid or any property shall be distributed upon or with respect to any of the Pledged Collateral, such sum shall be paid over to the Secured Parties, to be held as collateral security for the Secured Obligations. If any dividend shall be declared on any of the Pledged Collateral (excluding cash dividends), or any share of beneficial interest or fraction thereof shall be issued pursuant to any split of beneficial interests involving any of the Pledged Collateral, or any distribution of capital shall be made on any of the Pledged Collateral, or any property shall be distributed upon or with respect to the Pledged Collateral pursuant to recapitalization or reclassification of the capital of the Tenant, the shares or other property so distributed shall be delivered to the Secured Parties to be held as collateral security for the Secured Obligations. SECTION 8. EVENT OF DEFAULT. For purposes of this Agreement, the term "EVENT OF DEFAULT" shall mean (a) the occurrence of an Event of Default under the Transaction Documents; (b) the failure of the Guarantor to comply with any of its covenants or obligations under the Guaranty and the continuation thereof for a period of ten (10) Business Days after written notice thereof; (c) the failure of the Pledgor to comply with any of its covenants or obligations under this Agreement and the continuation thereof for a period of ten (10) Business Days after written notice thereof; or (d) any representation or warranty contained herein or made by the Pledgor in connection herewith shall prove to have been false or misleading in any material respect when made. SECTION 9. REMEDIES. (a) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties may cause all or any of the Pledged Collateral to be transferred into its name or into the name of its nominee or nominees, -4-

subject to the provisions of the Uniform Commercial Code or other applicable law. (b) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties shall be entitled to exercise the voting power with respect to the Pledged Collateral, to receive and retain, as collateral security for the Secured Obligations, any and all dividends or other distributions at any time and from time to time declared or made upon any of the Pledged Collateral, and to exercise any and all such rights of payment, conversion, exchange, subscription or any other rights, privileges or options pertaining to the Pledged Collateral as if it were the absolute owner thereof, including, without limitation, all such rights under the Declaration of Trust or any other charter document of the Tenant, and further including, without limitation, the right to exchange, at its discretion, any and all of the Pledged Collateral upon the merger, consolidation, reorganization, recapitalization or other readjustment of the Tenant, upon the exercise of any such right, privilege or option pertaining to the Pledged Collateral, and in connection therewith, to deposit and deliver any and all of the Pledged Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Parties may determine. (c) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or other applicable law and shall have the right to sell, resell, assign and deliver all or any of the Pledged Collateral in one or more parcels at any exchange or broker's board or at public or private sale. The Secured Parties shall give the Pledgor at least ten (10) days' prior written notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. Any such notice shall be deemed to meet any requirement hereunder or under any applicable law (including the Uniform Commercial Code) that reasonable notification be given of the time and place of such sale or other disposition. Such notice may be given without any demand of performance or other demand, all such demands being hereby expressly waived by the Pledgor to the extent permitted by applicable law. All such sales shall be at such commercially reasonable price or prices as the Secured Parties shall deem best and either for cash or on credit or for future delivery (without assuming any responsibility for credit risk). At any such sale or sales, the Secured Parties may purchase any or all of the Pledged -5-

Collateral to be sold thereat upon such terms as the Secured Parties may deem best. Upon any such sale or sales, the Pledged Collateral so purchased shall be held by the purchaser absolutely free from any claims or rights of any kind or nature of the Pledgor, including any equity of redemption and any similar rights, all such equity of redemption and any similar rights being hereby expressly waived and released by the Pledgor to the extent permitted by applicable law. In the event any consent, approval or authorization of any governmental agency will be necessary to effectuate any such sale or sales, the Pledgor shall execute, and hereby agrees to cause the Tenant to execute, all such applications or other instruments as may be required. The proceeds of any such sale or sales, together with any other additional collateral security at the time received and held hereunder, shall be received and applied: FIRST, to the payment of all costs and expenses of such sale, including attorneys' fees; and SECOND, to the payment of the Secured Obligations in such order of priority as the Secured Parties shall determine; and any surplus thereafter remaining shall be paid to the Pledgor or to whomever may be legally entitled thereto (including, if applicable, any subordinated creditor of the Pledgor). The Pledgor recognizes that the Secured Parties may be unable to effect a public sale of all or a part of the Pledged Collateral by reason of certain prohibitions contained in the Securities Act of 1933, and may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Pledged Collateral for their own accounts, for investment and not with a view to the distribution or resale thereof. The Pledgor agrees that private sales so made may be at prices and upon other terms less favorable to the seller than if such Pledged Collateral were sold at public sales, and that the Secured Parties shall have no obligation to delay sale of any such Pledged Collateral for the period of time necessary to permit such Pledged Collateral to be registered for public sale under the Securities Act of 1933. The Pledgor agrees that private sales made under the foregoing circumstances may be deemed to have been made in a commercially reasonable manner. Nothing herein shall be deemed to require the Pledgor to effect a registration of the Pledged Collateral under the Securities Act of 1933. (d) Upon the occurrence and during the continuance of any Event of Default, the Secured Parties, in their discretion, may demand, sue for and/or collect any money or property at any time due, payable or receivable, to which it may be entitled hereunder, on account of or in exchange for any of the Pledged -6-

Collateral. Upon the occurrence and during the continuance of any Event of Default, the Secured Parties shall further have the right, for and in the name, place and stead of the Pledgor, to execute endorsements, assignments, or other instruments of conveyance or transfer with respect to all or any of the Pledged Collateral. (e) The Secured Parties shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Parties elect to do any such act, the Secured Parties shall not be responsible to the Pledgor, other than for gross negligence or willful misconduct. (f) The Secured Parties shall have no obligation to marshal any assets in favor of the Pledgor, or against or in payment of the Secured Obligations or any other obligation owed to the Secured Parties by the Pledgor or any other person. SECTION 10. RIGHTS OF SECURED PARTIES. No course of dealing between the Pledgor and the Secured Parties nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, power or privilege hereunder or under any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided and provided under any of the Secured Obligations are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law, including, without limitation, the rights and remedies of a Secured Parties under the Uniform Commercial Code. SECTION 11. ASSIGNMENT, ETC. No waiver by the Secured Parties or by any other holder of Secured Obligations of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default on a future occasion. In the event of a sale or assignment by any Secured Party of its interest under the Transaction Documents, such Secured Party may assign or transfer its rights and interest under this Agreement in whole or in part to the purchaser or assignee of such interest, whereupon such purchaser or purchasers shall become vested with all of the powers and rights given to such Secured Party hereunder, and such Secured Party shall thereafter be forever released and fully discharged from any liability or responsibility thereafter arising hereunder with respect to the rights and interests so assigned. -7-

SECTION 12. DUTY OF SECURED PARTIES. Beyond the exercise of reasonable care to assure the safe custody of the Pledged Collateral while held hereunder, the Secured Parties shall have no duty or liability to collect any sums due in respect thereof or to protect or preserve rights pertaining thereto, and shall be relieved of all responsibility for the Pledged Collateral upon surrendering the same to the Pledgor. SECTION 13. WAIVERS, ETC. To the extent permitted by applicable law, the Pledgor, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, payment, notice of dishonor, protest and, except as otherwise provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights of the Secured Parties hereunder or in connection with any Secured Obligations. The Secured Parties may release, supersede, exchange or modify any collateral security it may from time to time hold and release, surrender or modify the liability of any third party without giving notice hereunder to the Pledgor. The Secured Parties shall be under no duty to exhaust its rights against any such collateral security or any such third party before realizing on the Pledged Collateral. Such modifications, changes, renewals, releases or other actions shall in no way affect the Pledgor's obligations hereunder. The Pledgor further waives any right it may have under the Constitution of the Commonwealth of Massachusetts (or under the constitution of any other state in which the any of the Pledged Collateral may be located), or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Parties, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing. THE PLEDGOR'S WAIVERS UNDER THIS SECTION 13 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE PLEDGOR HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS. SECTION 14. FURTHER ASSURANCES AS TO COLLATERAL; ATTORNEY-IN-FACT. From time to time hereafter, the Pledgor shall execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, collateral assignments and other security documents), and shall take all such actions, as the Secured Parties may reasonably -8-

request, for the purposes of implementing or effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Parties' rights with respect to the Pledged Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Pledgor which may be deemed to be a part of the Pledged Collateral) pursuant hereto and thereto. The Secured Parties are hereby appointed the attorney-in-fact, with full power of substitution, of the Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation, assignments, conveyances and transfers which are required to be taken or executed by the Pledgor under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Pledgor. SECTION 15. NOTICES. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with electronic confirmation of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of electronic confirmation of receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. -9-

(c) All such notices shall be addressed, if to the Secured Parties to: c/o Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: Mr. David J. Hegarty [Telecopier No. (617) 796-8349] if to the Pledgor to: 400 Centre Street Newton, Massachusetts 02458 Attn: Mr. Evrett W. Benton [Telecopier No. (617) 332-2261] (d) By notice given as herein provided, the parties hereto and their respective successor and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America or to such other address as the party to whom such notice is directed may have designated in writing to the other parties hereto. SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and the term "Secured Parties" shall be deemed to include any other holder or holders of any of the Secured Obligations. Where the context so permits or requires, terms defined herein in the singular number shall include the plural, and in the plural number, the singular. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, each of which, when so executed and delivered, shall be an original and all of which shall together constitute one and the same agreement. SECTION 17. APPOINTMENT OF AGENT FOR SECURED PARTIES. Each of the Secured Parties hereby appoints SPTMNR Properties Trust as its agent for the following purposes under this Agreement (including, without limitation, the full power and authority to act of the Secured Parties' behalf for such purposes): (i) to give or receive notices, demands, claims and other communications on behalf of the Secured Parties under this Agreement and (ii) to receive and hold any and all certificates -10-

or other instruments representing the Pledged Collateral which are to be delivered from time to time by the Pledgor to the Secured Parties in accordance with the terms and conditions of this Agreement. SECTION 18. REINSTATEMENT. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time any amount received by the Secured Parties in respect of the Pledged Collateral is rescinded or must otherwise be restored or returned by the Secured Parties upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Pledgor or upon the appointment of any intervenor or conservator of, or trustee or similar official for the Pledgor or any substantial part of its or property, or otherwise, all as though such payments had not been made. SECTION 19. RESTRICTIONS ON TRANSFER. To the extent that any restrictions imposed by the Declaration of Trust or any other charter documents of the Tenant or any other document or instrument would in any way affect or impair the pledge of the Pledged Collateral hereunder or the exercise by the Secured Parties of any right granted hereunder including, without limitation, the right of the Secured Parties to dispose of the Pledged Collateral upon the occurrence of any Event of Default, the Pledgor hereby waives such restrictions, and the Pledgor hereby agrees that it will take any action which the Secured Parties may reasonably request in order that the Secured Parties may obtain and enjoy the full rights and benefits granted to the Secured Parties by this Agreement free of any such restrictions. SECTION 20. APPLICABLE LAW. This Agreement and any other instruments executed and delivered to evidence, complete or perfect the transactions contemplated hereby and thereby shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts regardless of (i) where any such instrument is executed or delivered; or (ii) where any payment or other performance required by any such instrument is made or required to be made; or (iii) where any breach of any provision of any such instrument occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing. -11-

SECTION 21. ARBITRATION. The Secured Parties or the Pledgor may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder. Any such dispute shall be resolved in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties. In the event the Secured Parties or the Pledgor shall elect to submit any such dispute to arbitration hereunder, the Secured Parties and the Pledgor shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either the Secured Parties or the Pledgor shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Parties and the Pledgor, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Parties and one to the Pledgor. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in -12-

accordance with the rules and statutes applicable thereto then obtaining. The Secured Parties and the Pledgor acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager's Management Agreement, the Secured Parties and the Pledgor shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding. SECTION 22. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, but this Agreement shall be reformed and construed and enforced to the maximum extent permitted by applicable law. SECTION 23. ENTIRE CONTRACT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof. SECTION 24. HEADINGS; COUNTERPARTS. Headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one of such counterparts. SECTION 25. NONLIABILITY OF TRUSTEES. THE DECLARATIONS OF TRUST ESTABLISHING THE SECURED PARTIES, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATIONS"), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES "HRES2 PROPERTIES TRUST," "SPTIHS PROPERTIES TRUST," "SPT-MICHIGAN TRUST" AND "SPTMNR PROPERTIES TRUST" REFER TO THE TRUSTEES UNDER EACH DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE SECURED PARTIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF OR CLAIM AGAINST, THE SECURED PARTIES. ALL PERSONS DEALING WITH THE SECURED PARTIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE SECURED PARTIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -13-

WITNESS the execution hereof under seal as of the date above first written. PLEDGOR: FIVE STAR QUALITY CARE, INC., a Maryland corporation
By: /s/ Bruce J. Mackey Jr. ----------------------------Treasurer and Chief Financial Officer

SECURED PARTIES: HRES2 PROPERTIES TRUST
By: /s/ David J. Hegarty -----------------------------Its: President -------------------------

SPTIHS PROPERTIES TRUST
By: /s/ David J. Hegarty -----------------------------Its: President -------------------------

SPT-MICHIGAN TRUST
By: /s/ David J. Hegarty -----------------------------Its: President -------------------------

SPTMNR PROPERTIES TRUST
By: /s/ David J. Hegarty -----------------------------Its: President -------------------------

-14-

Omitted Exhibits The following exhibit to the Pledge of Shares of Beneficial Interest Agreement has been omitted:
Exhibit Letter -------------A Exhibit Title -------------Pledged Shares of Beneficial Interest

The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibit to the Securities and Exchange Commission upon request.

Exhibit 10.9 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "AGREEMENT") is entered into as of this 31st day of December, 2001, by and among (i) FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the "TENANT"), and (ii) each of the other parties identified on the signature page hereof (collectively, the "SECURED PARTIES"). W I T N E S S E T H: WHEREAS, pursuant to that certain Master Lease Agreement, dated as of the date hereof (as amended from time to time, the "MASTER LEASE"), the Secured Parties leased to the Tenant and the Tenant leased from the Secured Parties, certain premises as more particularly described in the Master Lease, subject to and upon the terms and conditions set forth in the Master Lease; and WHEREAS, as security for the payment and performance of each and every obligation and liability of the Tenant to the Secured Parties, whether now existing or hereafter arising, under the Master Lease or any other document or agreement executed and delivered pursuant thereto, including, without limitation, the payment of the Rent (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in SECTION 1), and the payment and performance of each and every other obligation of the Tenant to the Secured Parties, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due (collectively, the "OBLIGATIONS"), the Tenant has agreed to grant to the Secured Parties a first and perfected lien and security interest in the Collateral; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings specified below. Except as otherwise defined, terms defined in the Uniform Commercial Code and used herein without definition shall have the meanings given such terms in the Uniform Commercial Code. "AFFILIATED PERSON" shall have the meaning given such term in the Master Lease.

"BUSINESS DAY" shall have the meaning given such term in the Master Lease. "COLLATERAL" shall mean all of the Tenant's right, title and interest in and under or arising out of all and any personal property, intangibles and fixtures of any type or description (other than Excluded Collateral), wherever located and now existing or hereafter arising, or which constitute or arise from the operation, maintenance or repair of the Leased Property or any portion thereof, together with any and all additions and accessions thereto and replacements, products, proceeds (including, without limitation, proceeds of insurance) and supporting obligations thereof, including, but not limited to, the following: (a) all goods, including, without limitation, all Equipment; and (b) all General Intangibles; and (c) all other personal property or fixtures of any nature whatsoever which relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, and all property from time to time described in any financing statement signed by the Tenant naming the Secured Parties as Secured Parties; and (d) all claims, rights, powers or privileges and remedies relating to the foregoing or arising in connection therewith, including, without limitation, all Licenses and Permits which Tenant legally may grant a security interest in, rights to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, waiver or approval; all liens, security, guaranties, endorsements, warranties and indemnities and all insurance, eminent domain and condemnation awards and claims therefor relating thereto or arising in connection therewith; all rights to property forming the subject matter of any of the foregoing, including, without limitation, rights to stoppage in transit and rights to returned or repossessed property; all writings relating to the foregoing or arising in connection therewith; and (e) all contract rights, general intangibles and other property rights of any nature whatsoever arising out of or in connection with any of the foregoing (other than Excluded Collateral), including, without -2-

limitation, payments due or to become due, whether as repayments, reimbursements, contractual obligations, indemnities, damages or otherwise. "EQUIPMENT" shall mean all buildings, structures, improvements, fixtures and items of machinery, equipment and other tangible personal property which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property or any portion thereof, together with all repairs, replacements, improvements, substitutions, extensions or renewals thereof or additions thereto, all parts, additions and accessories incorporated therein or affixed thereto, and all "equipment" as such term is defined in the Uniform Commercial Code, and all cash and non-cash proceeds therefrom. "EVENT OF DEFAULT" shall have the meaning given such term in SECTION 6. "EXCLUDED COLLATERAL" shall mean Accounts or Chattel Paper, Support Obligations, General Intangibles or Deposit Accounts relating to such Accounts or Chattel Paper, Instruments or Investment Property evidencing or arising from such Accounts or Chattel Paper, any documents, books, records or other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to any of the foregoing or any Proceeds of any of the foregoing. "FACILITIES" shall have the meaning given such term in the Master Lease. "GENERAL INTANGIBLES" shall mean all present and future general intangibles and contract rights (other than Excluded Collateral) which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, including, but not limited to, all causes of action, corporate or business records, inventions, designs, patents, patent applications, trademarks, trademark registrations and applications therefor, goodwill, trade names, trade secrets, trade processes, copyrights, copyright registrations and applications therefor, franchises, customer lists, computer programs, claims under guaranties, tax refund claims, rights and claims against carriers and shippers, leases, claims under insurance policies, all rights to indemnification and all other intangible personal property of every kind and nature which constitutes, arises from or relates to the operation, maintenance or repair of the Leased Property, or any portion thereof. -3-

"INSTRUMENT" shall have the meaning give such term in Article 9 of the Uniform Commercial Code. "MASTER LEASE" shall have the meaning given such term in the preambles to this Agreement. "LEASED PROPERTY" shall have the meaning given such term in the Master Lease. "LICENSES" shall mean all certificates of need, licenses, permits, rights of use, covenants or rights otherwise benefiting or permitting the use and operation of each applicable Property or any part thereof pertaining to the operation, maintenance or repair of such Property or any portion thereof. "OBLIGATIONS" shall have the meaning given such term in the preambles to this Agreement. "OVERDUE RATE" shall have the meaning given such term in the Master Lease. "PERMITS" shall mean all permits, approvals, consents, waivers, exemptions, variances, franchises, orders, authorizations, rights and licenses obtained or hereafter obtained from any federal, state or other governmental authority or agency relating to the operation, maintenance or repair, each applicable Property, or any portion thereof. "PERSON" shall have the meaning given such term in the Master Lease. "PROPERTY" shall have the meaning given such term in the Master Lease. "RENT" shall have the meaning given such term in the Master Lease. "UNIFORM COMMERCIAL CODE" means Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts from time to time. SECTION 2. SECURITY INTEREST. As security for the prompt payment and performance of all the Obligations, the Tenant hereby grants, pledges, transfers and assigns to the Secured Parties, their successors and assigns and all other holders from time to time of the Obligations, a continuing security interest under the Uniform Commercial Code from time to time in effect in the jurisdiction in which any of the Collateral is located in and a continuing lien upon all of the Tenant's right, title and -4-

interest in the Collateral, together with any and all additions thereto and replacements, products and proceeds thereof, whether now existing or hereafter arising or acquired and wherever located. SECTION 3. GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS. The Tenant represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: (a) Each of the warranties and representations of the Tenant contained herein, in the Master Lease or in any other document executed in connection herewith or therewith are true and correct on the date hereof. (b) Except for the lien granted to the Secured Parties pursuant to this Security Agreement and any liens permitted under the Master Lease, the Tenant is, and as to the Collateral acquired from time to time after the date hereof the Tenant will be, the owner of all the Collateral free from any lien, security interest, encumbrance or other right, title or interest of any Person, except for the security interest of the Secured Parties therein, and the Tenant shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Secured Parties. The lien granted in this Agreement by the Tenant to the Secured Parties in the Collateral is not prohibited by and does not constitute a default under any agreements or other instruments constituting a part of the Collateral, and no consent is required of any Person to effect such lien which has not been obtained. (c) Except as permitted under the Master Lease, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) now on file or registered in any public office covering any interest of any kind in the Collateral, or intended so to be, which has not been terminated, and so long as this Agreement remains in effect or any of the Obligations or any obligations of any Affiliated Person of the Tenant to the Secured Parties remain unpaid, the Tenant will not execute and there will not be on file in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interest of the Secured Parties. (d) The chief executive office and the principal place of business of the Tenant are as set forth in SCHEDULE 1 -5-

and the Tenant will not move its chief executive office or establish any other principal place of business except to such new location as the Tenant may establish in accordance with this SECTION 3(D). The location of each Facility comprising a portion of the Leased Property is as set forth in SCHEDULE 2. The originals of all documents evidencing Collateral and the only original books of account and records of the Tenant relating thereto are, and will continue to be, kept at such chief executive office or the applicable Facility, as the case may be, or at such new location as the Tenant may establish in accordance with this SECTION 3(D). The Tenant shall not move its chief executive office or establish any other principal place of business until (i) the Tenant shall have given to the Secured Parties not less than ten (10) days' prior written notice of its intention to do so, which notice shall clearly describe such new location and provide such other information in connection therewith as the Secured Parties may reasonably request, and (ii) with respect to such new location, the Tenant shall have taken such action, satisfactory to the Secured Parties (including, without limitation, all action required by SECTION 5), to maintain the security interest of the Secured Parties in the Collateral. (e) All tangible personal property owned on the date hereof by the Tenant to be used in connection with the operation or maintenance of the Leased Property, or any portion thereof, is located at each applicable Property or is in transit to such Property from the vendor thereof. The Tenant agrees that (i) all such property held by the Tenant on the date hereof, once at each applicable Property, shall remain at such Property and (ii) all such property subsequently acquired by the Tenant shall immediately upon acquisition be transferred to and remain at the applicable Property. (f) The Tenant's corporate name and organizational identification number are as set forth on the signature page hereto. The name under which each of the Facilities is operated is set forth on SCHEDULE 2. The Tenant shall not (i) change such names without providing the Secured Parties with thirty (30) days' prior written notice and making all filings and taking all such other actions as the Secured Parties determines are necessary or appropriate to continue or perfect the security interest granted hereunder, (ii) change its corporate organizational number, nor (iii) conduct its business in any other name or take title to any Collateral in any other name while this Agreement remains in effect. Except as otherwise set forth on SCHEDULE 1, the Tenant has not ever had any other name nor conducted business in any other name in any jurisdiction. -6-

The Tenant is organized as a Maryland business trust. Subject to the terms and conditions of the Master Lease, the Tenant shall not change its organizational structure or jurisdiction of organization without giving at least thirty (30) days' prior written notice thereof to the Secured Parties. (g) The Secured Parties are authorized (but are under no obligation) to make, upon ten (10) Business Days' notice to the Tenant (except in the case of exigent circumstances, in which circumstances upon such notice, if any, as may then be reasonably practical), any payments which in the Secured Parties' opinion are necessary to: (i) discharge any liens which have or may take priority over the lien hereof; and (ii) pay all premiums payable on the insurance policies referred to in the Master Lease or any other document or agreement executed in connection therewith or herewith, upon the failure of the Tenant to make such payments within the time permitted therein. The Tenant shall have no claim against the Secured Parties by reason of its decision not to make any payments or perform such obligations permitted under this SECTION 3(G). The Tenant shall repay to the Secured Parties any sums paid by the Secured Parties upon demand. Any sums paid and expenses incurred by the Secured Parties pursuant to this paragraph shall bear interest at the Overdue Rate. (h) If any of the Collateral at any time becomes evidenced by an Instrument, the Tenant shall promptly deliver such Instrument to the Secured Parties, appropriately endorsed to the order of the Secured Parties, to be held pursuant to this Agreement. (i) The Tenant shall not sell, transfer, change the registration, if any, of, dispose of, attempt to dispose of, or substantially modify or abandon the Collateral or any material part thereof, other than as permitted under the Master Lease, without the prior written consent of the Secured Parties. Except as permitted under the Master Lease, the Tenant shall not create, incur, assume or suffer to exist any lien upon any of the Collateral without the prior written consent of the Secured Parties. (j) The Tenant shall not assert against the Secured Parties any claim or defense which the Tenant may have against -7-

any seller of the Collateral or any part thereof or against any Person with respect to the Collateral or any part thereof. (k) The Tenant shall, upon demand, pay to the Secured Parties the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Parties may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Secured Parties hereunder and under such other agreements or (iv) the failure by the Tenant to perform or observe any of the provisions hereof. (l) The Tenant shall indemnify and hold harmless the Secured Parties from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Secured Parties in any way relating to or arising out of this Agreement or arising out of the Tenant's obligations under any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or of any such other documents. SECTION 4. SPECIAL PROVISIONS CONCERNING EQUIPMENT. The Tenant shall not impair the rights of the Secured Parties in the Equipment. Regardless of the manner of the affixation of any Equipment to real property, the Equipment so attached shall at all times constitute and remain personal property. The Tenant retains all liability and responsibility in connection with the Equipment and the liability of the Tenant to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Equipment may be lost, destroyed, stolen or damaged or for any reason whatsoever have become unavailable to the Tenant. Upon the request of the Secured Parties, the Tenant shall provide to the Secured Parties a current list of Equipment. SECTION 5. FINANCING STATEMENTS; DOCUMENTARY STAMP TAXES. (a) The Tenant shall, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Secured Parties from time to time such lists, descriptions and designations of inventory, warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and -8-

other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, which the Secured Parties reasonably deem appropriate or advisable to perfect, preserve or protect their security interest in the Collateral. The Tenant authorizes the Secured Parties to file any such financing statements without the signature of the Tenant and the Tenant will pay all applicable filing fees and related expenses. To the extent permitted by law, a carbon, photographic or other reproduction of this Agreement or a financing statement shall be sufficient as a financing statement. (b) The Tenant shall procure, pay for, affix to any and all documents and cancel any documentary tax stamps required by and in accordance with, applicable law, and the Tenant shall indemnify and hold harmless the Secured Parties from and against any liability (including interest and penalties) in respect of such documentary stamp taxes. SECTION 6. EVENT OF DEFAULT. For purposes of this Agreement, the term "EVENT OF DEFAULT" shall mean (a) the occurrence of an Event of Default under the Master Lease or any document or agreement executed in connection therewith; (b) the failure of the Tenant to comply with any of its covenants or obligations under this Agreement and the continuance thereof for a period of ten (10) Business Days after written notice thereof; (c) any representation or warranty contained herein or made by the Tenant in connection herewith shall prove to have been false or misleading in any material respect when made; or (d) the occurrence of any default or event of default under any document, instrument or agreement evidencing the Obligations. SECTION 7. REMEDIES. (a) Upon the occurrence and during the continuance of an Event of Default, in addition to any rights and remedies now or hereafter granted under applicable law, under the Master Lease or under any other documents or agreements entered into in connection herewith or therewith, and not by way of limitation of any such rights and remedies, the Secured Parties shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any applicable jurisdiction, and the right, without notice to, or assent by, the Tenant, in the name of the Tenant or in the name of the Secured Parties or otherwise: (i) with respect to the General Intangibles to ask for, demand, collect, receive, compound and give acquittance therefor or any part thereof, to -9-

extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any thereof, to exercise and enforce any rights and remedies in respect thereof, and to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Secured Parties necessary or advisable for the purpose of collecting or enforcing payment and performance thereof; (ii) to take possession of any or all of the Collateral and to use, hold, store, operate, merge and/or control the same and to exclude the Tenant and all Persons claiming under it wholly or partly therefrom, and, for that purpose, to enter, with the aid and assistance of any Person or Persons and with or without legal process, any premises where the Collateral, or any part thereof, are, or may be, placed or assembled, and to remove any such Collateral; (iii) from time to time, at the expense of the Tenant, to make all such repairs, replacements, alterations, additions and improvements to and of the Collateral as the Secured Parties may reasonably deem proper; to carry on the business and to exercise all rights and powers of the Tenant in respect to the Collateral, as the Secured Parties shall deem best, including the right to enter into any and all such agreements with respect to the leasing, management and/or operation of the Collateral or any part thereof as the Secured Parties may see fit; to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof which rents, issues, profits, fees, revenues and other income may be applied to pay the expenses of holding and operating the Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which the Secured Parties may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Collateral or any part thereof, and all other payments which the Secured Parties may be required or authorized to -10-

make under any provision of this Agreement (including, without limitation, reasonable legal costs and attorneys' fees); (iv) to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated hereby; (v) upon notice to such effect, to require the Tenant to deliver, at the Tenant's expense, any or all Collateral which is reasonably movable to the Secured Parties at a place designated by the Secured Parties, and after delivery thereof the Tenant shall have no further claim to or interest in the Collateral; and (vi) without obligation to resort to other security, at any time and from time to time, to sell, re-sell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as the Secured Parties may determine, with the amounts realized from any such sale to be applied to the Secured Obligations in the manner determined by the Secured Parties. The Tenant hereby agrees that all of the foregoing may be effected without demand, advertisement or notice (except as hereinafter provided or as may be required by law), all of which (except as hereinafter provided) are hereby expressly waived, to the maximum extent permitted by law. The Secured Parties shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Parties elects to do any such act, the Secured Parties shall not be responsible to the Tenant. (b) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties may take legal proceedings for the appointment of a receiver or receivers (to which the Secured Parties shall be entitled as a matter of right) to take possession of the Collateral pending the sale thereof pursuant either to the powers of sale granted by this Agreement or to a judgment, order or decree made in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement. If, after the exercise of any or all of such -11-

rights and remedies, any of the Obligations shall remain unpaid or unsatisfied, the Tenant shall remain liable for any deficiency or performance thereof, as applicable. (c) Upon any sale of any of the Collateral, whether made under the power of sale hereby given or under judgment, order or decree in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement: (i) the Secured Parties may bid for and purchase the property being sold and, upon compliance with the terms of sale, may hold, retain and possess and dispose of such property in its own absolute right without further accountability, and may, in paying the purchase money therefor, deliver any instruments evidencing the Obligations or agree to the satisfaction of all or a portion of the Obligations in lieu of cash in payment of the amount which shall be payable thereon, and such instruments, in case the amounts so payable thereon shall be less than the amount due thereon, shall be returned to the Secured Parties after being appropriately stamped to show partial payment; (ii) the Secured Parties may make and deliver to the purchaser or purchasers a good and sufficient deed, bill of sale and instrument of assignment and transfer of the property sold; (iii) all right, title, interest, claim and demand whatsoever, either at law or in equity or otherwise, of the Tenant of, in and to the property so sold shall be divested; such sale shall be a perpetual bar both at law and in equity against the Tenant, its successors and assigns, and against any and all Persons claiming or who may claim the property sold or any part thereof from, through or under the Tenant, its successors or assigns; (iv) the receipt of the Secured Parties or of the officers thereof making such sale shall be a sufficient discharge to the purchaser or purchasers at such sale for his or their purchase money, and such purchaser or purchasers, and his or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the -12-

Secured Parties or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misapplication or nonapplication thereof; and (v) to the extent that it may lawfully do so, the Tenant agrees that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take advantage of, any appraisement, valuation, stay, extension or redemption laws, or any law permitting it to direct the order in which the Collateral or any part thereof shall be sold, now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance or enforcement of this Agreement or any other document, the Master Lease or any other document or agreement entered into in connection herewith or therewith, and the Tenant hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power granted or delegated to the Secured Parties in this Agreement, but will suffer and permit the execution of every such power as though no such laws were in force. In the event of any sale of Collateral pursuant to this SECTION 7, the Secured Parties shall, at least ten (10) days before such sale, give the Tenant written notice of its intention to sell, except that, if the Secured Parties shall determine in its reasonable discretion that any of the Collateral threatens to decline in value, any such sale may be made upon three (3) days' written notice to the Tenant, which time periods the Tenant hereby agrees are reasonable. (d) The Secured Parties are hereby irrevocably appointed the true and lawful attorney-in-fact of the Tenant in its name and stead, to make all necessary deeds, bills of sale and instruments of assignment and transfer of the property sold pursuant to this SECTION 7 and for such other purposes as are necessary or desirable to effectuate the provisions of this Agreement, and for that purpose it may execute and deliver all necessary deeds, bills of sale and instruments of assignment and transfer, and may substitute one or more Persons with like power, the Tenant hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully -13-

do by virtue hereof. If so requested by the Secured Parties or by any purchaser, the Tenant shall ratify and confirm any such sale or transfer by executing and delivering to the Secured Parties or to such purchaser all property, deeds, bills of sale, instruments or assignment and transfer and releases as may be designated in any such request. SECTION 8. APPLICATION OF MONEYS. All moneys which the Secured Parties shall receive pursuant hereto shall first be applied (to the extent thereof) to the payment of all reasonable costs and expenses incurred in connection with the administration and enforcement of, or the preservation of any rights under, this Agreement or any of without limitation, the reasonable fees and disbursements of its counsel and agents), and the balance, if any, shall be applied first to accrued and unpaid interest, charges and fees on, and then to outstanding principal of, any Obligations of the Tenant (or its affiliates) to the Secured Parties, and then to any other amounts outstanding on any such Obligations and then as required by law to any other parties having an interest therein. SECTION 9. WAIVERS, ETC. The Tenant, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, notice, protest and, except as is otherwise specifically provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights of the Secured Parties hereunder or in connection with any Obligations or any Collateral; waives all rights to require a marshaling of assets by the Secured Parties; consents to and waives notice of (i) the substitution, release or surrender of any Collateral, (ii) the addition or release of Persons primarily or secondarily liable on any Obligation or on any Collateral, (iii) the acceptance of partial payments on any Collateral and/or the settlement or compromise thereof, (iv) any requirement of diligence or promptness on the part of the Secured Parties in the enforcement of any rights in respect of any Collateral or any other agreement or instrument directly or indirectly relating thereto, and (v) any enforcement of any present or future agreement or instrument relating directly or indirectly to the Collateral. No delay or omission on the part of the Secured Parties or any holder of Obligations in exercising any right hereunder shall operate as a waiver of such right or of any other right hereunder. No waiver of any such right on any one occasion shall be construed as a bar to or waiver of any such right on any future occasion. No course of dealing between the Tenant and the Secured Parties or any holder of -14-

Obligations, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties or any holder of Obligations, any right, power or privilege hereunder or under any of the Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The Tenant further waives any right it may have under the constitution of any state or commonwealth in which any of the Collateral may be located, or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Parties, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing. THE TENANT'S WAIVERS UNDER THIS SECTION 9 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE TENANT HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS. The Secured Parties shall not be required to marshal any present or future security for (including without limitation this Agreement and the Collateral pledged hereunder), or guaranties of, the Obligations or any of them, or to resort to such security or guaranties in any particular order; and all of the rights hereunder and in respect of such securities and guaranties shall be cumulative and in addition to all other rights, however existing or arising. To the maximum extent permitted by applicable law, the Tenant hereby agrees that it will not invoke any law relating to the marshalling of collateral which, might cause delay in or impede the enforcement of the Secured Parties' rights under this Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and, to the maximum extent permitted by applicable law, the Tenant hereby irrevocably waives the benefits of all such laws. SECTION 10. FURTHER ASSURANCES AS TO COLLATERAL; ATTORNEY-IN-FACT. From time to time hereafter, the Tenant will execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, mortgages, collateral assignments and other security documents), and will take all such actions as the Secured Parties may reasonably request, for the purposes of implementing or -15-

effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Parties' rights with respect to the Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Tenant which may be deemed to be a part of the Collateral) pursuant hereto and thereto. The Secured Parties are hereby appointed the attorney-in-fact, with full power of substitution, of the Tenant for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation financing or continuation statements, deeds to secure debt, mortgages, assignments, conveyances, assignments and transfers which are required to be taken or executed by the Tenant under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Tenant. SECTION 11. ARBITRATION. The Secured Parties or the Tenant may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder. Any such dispute shall be resolved in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties. In the event the Secured Parties or the Tenant shall elect to submit any such dispute to arbitration hereunder, the Secured Parties and the Tenant shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either the Secured Parties or the Tenant shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree -16-

upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Parties and the Tenant, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Parties and one to the Tenant. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. The Secured Parties and the Tenant acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager's Management Agreement, the Secured Parties and the Tenant shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding. SECTION 12. APPOINTMENT OF AGENT FOR SECURED PARTIES. Each of the Secured Parties hereby appoints SPTMNR Properties Trust as its agent for the following purposes under this Agreement (including, without limitation, the full power and authority to act of the Secured Parties' behalf for such purposes): (i) to give or receive notices, demands, claims and other communications on behalf of the Secured Parties under this Agreement and (ii) to receive and hold any and all Collateral which is to be delivered from time to time by the Tenant to the Secured Parties in accordance with the terms and conditions of this Agreement. SECTION 13. MISCELLANEOUS. (a) The Tenant agrees that its obligations and the rights of the Secured Parties hereunder and in respect of the Obligations may be enforced by specific performance hereof and thereof and by temporary, preliminary and/or final injunctive relief relating hereto and thereto, without necessity for proof -17-

by the Secured Parties or any holder of the Obligations that it would otherwise suffer irreparable harm, and the Tenant hereby consents to the issuance of such specific and injunctive relief. (b) Any notice or demand upon the Tenant or the Secured Parties shall be deemed to have been sufficiently given when given in accordance with the provisions of the Master Lease. (c) None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by the Tenant and the Secured Parties. No notice to or demand on the Tenant in any case shall entitle the Tenant to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Secured Parties to any other or further action in any circumstances without notice or demand. (d) The obligations of the Tenant hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (i) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of the Tenant; (ii) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement, the Master Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; or (iii) any amendment to or modification of any of the Master Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; whether or not the Tenant shall have notice or knowledge of any of the foregoing. The rights and remedies of the Secured Parties herein provided for are cumulative and not exclusive of any rights or remedies which the Secured Parties would otherwise have, including, without limitation, under the Master Lease or any document or agreement executed in connection herewith or therewith. This Agreement is intended as a supplement for and is not intended to supersede in any respect the Master Lease or any document or agreement executed in connection herewith or therewith. (e) This Agreement shall be binding upon the Tenant and its successors and assigns and shall inure to the benefit of the Secured Parties, and its respective successors and assigns. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement. -18-

(f) The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibitions or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (h) This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principle place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing. Notwithstanding the foregoing, to the extent that matters of title, or creation, perfection and priority of the security interests created hereby, or procedural issues of foreclosures are required to be governed by the laws of the state in which the Collateral, or relevant part thereof, is located, the laws of such State shall apply. SECTION 12. NONLIABILITY OF TRUSTEES. THE DECLARATIONS OF TRUST ESTABLISHING THE SECURED PARTIES, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATIONS"), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES "HRES2 PROPERTIES TRUST," "SPTIHS PROPERTIES TRUST," "SPT-MICHIGAN TRUST" AND "SPTMNR PROPERTIES TRUST" REFER TO THE TRUSTEES UNDER EACH DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE SECURED PARTIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF OR CLAIM AGAINST, THE SECURED PARTIES. ALL PERSONS DEALING WITH THE -19-

SECURED PARTIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE SECURED PARTIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -20-

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal as of the date first above written. TENANT: FIVE STAR QUALITY CARE TRUST
By: /s/ Bruce J. Mackey Jr. --------------------------------Treasurer and Chief Financial Officer

Corporate Organizational Number:

SECURED PARTIES: HRES2 PROPERTIES TRUST
By: /s/ David J. Hegarty --------------------------------Its: President ----------------------------

SPTIHS PROPERTIES TRUST
By: /s/ David J. Hegarty --------------------------------Its: President ----------------------------

SPT-MICHIGAN TRUST
By: /s/ David J. Hegarty --------------------------------Its: President ----------------------------

SPTMNR PROPERTIES TRUST
By: /s/ David J. Hegarty --------------------------------Its: President ----------------------------

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SCHEDULE 1 CHIEF EXECUTIVE OFFICE: 400 Centre Street Newton, Massachusetts 02458 PRINCIPAL PLACE OF BUSINESS: 400 Centre Street Newton, Massachusetts 02458

SCHEDULE 2 THE FACILITIES ARIZONA: LA MESA HEALTHCARE CENTER 2470 S. Arizona Avenue Yuma, Arizona 85364 SUNQUEST VILLAGE OF YUMA 265 E. 24th Street Yuma, Arizona 85364 VILLAGE GREEN HEALTHCARE CENTER 2932 N. 14th Street Phoenix, Arizona 85014 CALIFORNIA: LANCASTER HEALTHCARE CENTER 1642 West Avenue J Lancaster, California 93534 LA SALETTE HEALTH AND REHABILITATION CENTER 537 E. Fulton Street Stockton, California 95204 THOUSAND OAKS HEALTH CARE CENTER 93 W. Avenida de Los Arboles Thousand Oaks, California 91360 VALLEY VIEW 9120 Woodman Boulevard Arleta, California 91331 VAN NUYS HEALTH CARE CENTER 6835 Hazeltine Street Van Nuys, California 91405 COLORADO: CEDARS HEALTHCARE CENTER 1599 Ingals Street Lakewood, Colorado 80214

CHERRELYN HEALTHCARE CENTER 5555 South Elati Street Littleton, Colorado 80120 LA VILLA GRANDE CARE CENTER 2501 Little Bookcliff Drive Grand Junction, Colorado 81501 MANTEY HEIGHTS REHABILITATION & CARE CENTER 2835 Patterson Road Grand Junction, Colorado 81501 SKYLINE RIDGE NURSING & REHABILITATION CENTER 515 Fairview Canon City, Colorado 81212 SPRINGS VILLAGE CARE CENTER 110 West Van Buren Colorado Springs, Colorado 80907 WILLOW TREE CARE CENTER 2050 South Main Delta, Colorado 81416 CONNECTICUT: CLIFTON HOUSE REHABILITATION CENTER 181 Clifton Street New Haven, Connecticut 06513 HEALTH CENTER OF GREATER WATERBURY 177 Whitewood Road Waterbury, Connecticut 06705

GEORGIA: AUTUMN BREEZE HEALTHCARE CENTER 1480 Sandtown Road Marietta, Georgia 30060 COLLEGE PARK HEALTHCARE CENTER 1765 Temple Avenue College Park, Georgia 30337 GLENWOOD CARE CENTER 303 Fifth Street N.P.O. Box 601 Glenwood, Georgia 30428 SOUTHLAND CARE CENTER 606 Simmons Street Dublin, Georgia 31021 IOWA: NORTHCREST CARE & REHABILITATION 34 Northcrest Drive Council Bluffs, Iowa 51503 PACIFIC PLACE 20937 State Highway 385 Pacific Junction, Iowa 51561 PARK PLACE 114 East Green Street Glenwood, Iowa 51534 PRAIRIE RIDGE CARE & REHABILITATION 308 Prairie Street Mediapolis, Iowa 52637 UNION PARK HEALTH SERVICES 2348 East 9th Street Des Moines, Iowa 50316 WEST BRIDGE CARE & REHABILITATION 1015 West Summit Winterset, Iowa 50273 WESTRIDGE QUALITY CARE & REHABILITATION 600 Manor Drive Clarinda, Iowa 51632

KANSAS: WOODHAVEN CARE CENTER 510 W 7th Street Ellinwood, Kansas 67526 MICHIGAN: FARMINGTON HEALTH CARE CENTER 34225 Grand River Avenue Farmington, Michigan 48335 HOWELL CARE CENTER 3003 West Grand River Howell, Michigan 48843 MISSOURI: NORTHVIEW MANOR 300 Cedar Street Tarkio, Missouri 64491 NEBRASKA: AINSWORTH CARE CENTER 143 North Fullerton Ainsworth, Nebraska 69210 ASHLAND CARE CENTER 1700 Furnace Street Ashland, Nebraska 68003 BLUE HILL CARE CENTER 414 North Wilson Street Blue Hill, Nebraska 68930 CENTRAL CITY CARE CENTER 2720 South 17th Avenue Central City, Nebraska 68462 CRESTVIEW HEALTHCARE CENTER 1100 West First Street Milford, Nebraska 68405

EXETER CARE CENTER 425 South Empire Avenue Exeter, Nebraska 68351 GRANDVIEW MANOR Broad Street and Highway 4 Campbell, Nebraska 68932 GRETNA COMMUNITY CARE CENTER 700 South Highway 6 Gretna, Nebraska 68028 LOGAN VALLEY MANOR 1035 Diamond Street Lyons, Nebraska 68038 MORYS HAVEN 1112 15th Street Columbus, Nebraska 68601 ROSE BROOK CARE CENTER Route 1 Box 83A Edgar, Nebraska 68935 SUTHERLAND CARE CENTER 333 Maple Sutherland, Nebraska 69165 UTICA COMMUNITY CARE CENTER 1350 Centenial Avenue Utica, Nebraska 68456 WAVERLY CARE CENTER 11041 North 137th Street Waverly, Nebraska 68462 WEDGEWOOD CARE CENTER 800 Stoeger Drive Grand Island, Nebraska 68803 WISCONSIN: CHRISTOPHER EAST HEALTH & REHABILITATION CENTER 1132 E. Knapp Street Milwaukee, Wisconsin 53202

GREENTREE HEALTH & REHABILITATION CENTER 70 Greentree Road Clintonville, Wisconsin 54929 PINE MANOR HEALTHCARE CENTER Route 4, Box 549 Clintonville, Wisconsin 54929 RIVER HILLS WEST HEALTHCARE CENTER 321 Riverside Drive Pewaukee, Wisconsin 53072 SUNNY HILLS HEALTH CARE CENTER 4325 Nakoma Road Madison, Wisconsin 53711 THE VIRGINIA HEALTH & REHABILITATION CENTER 1451 Cleveland Avenue Waukesha, Wisconsin 53186 WOODLAND HEALTHCARE CENTER 18741 West Bluemound Road Brookfield, Wisconsin 53045 WYOMING: LARAMIE CARE CENTER 503 South 18th Street Laramie, Wyoming 82070 WORLAND HEALTHCARE & REHABILITATION CENTER 1901 Howell Avenue Worland, Wyoming 82401

Exhibit 10.12 PLEDGE OF SHARES OF BENEFICIAL INTEREST AGREEMENT THIS PLEDGE OF SHARES OF BENEFICIAL INTEREST AGREEMENT (this "AGREEMENT") is made and given as of January 11, 2002 by FSQ, INC., a Delaware corporation (the "PLEDGOR"), for the benefit of each of the other parties identified on the signature page hereof (together with their respective successors and assigns, collectively, the "SECURED PARTIES"). W I T N E S S E T H: WHEREAS, pursuant to a Master Lease Agreement, dated as of January 7, 2002 (together with all amendments, modifications and supplements thereto, collectively, the "MASTER LEASE") the Secured Parties leased to FS Tenant Holding Company Trust, a Maryland business trust (the "TENANT"), and the Tenant leased from the Secured Parties, certain premises as more particularly described in the Master Lease, subject to and upon the terms and conditions set forth therein; and WHEREAS, pursuant to a Guaranty Agreement, dated as of the date hereof (the "GUARANTY"), Five Star Quality Care, Inc., a Maryland corporation (the "GUARANTOR"), guaranteed to the Secured Parties the payment and performance of all of the obligations of the Tenant to the Secured Parties with respect to the Master Lease and other related documents, subject to and upon the terms and conditions set forth therein; and WHEREAS, the Pledgor owns all of the outstanding shares of beneficial interest in the Tenant and is a wholly-owned subsidiary of the Guarantor; and WHEREAS, the Pledgor shall derive direct substantial benefit from the transactions contemplated by the Master Lease and the Guaranty; and WHEREAS, it is a condition precedent to the Secured Parties' entering into the Master Lease and accepting the Guaranty that the Pledgor pledge all of the shares of beneficial interest in the Tenant to the Secured Parties as security for the payment and performance of (i) all of the obligations of the Tenant to the Secured Parties with respect to the Master Lease and other related documents and (ii) all of the obligations of the Guarantor to the Secured Parties with respect to the Guaranty and other related documents; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and

legal sufficiency of which are hereby acknowledged, the Pledgor hereby agrees as follows: SECTION 1. CERTAIN TERMS. Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the Master Lease. The Master Lease, the Incidental Documents and the Guaranty are herein collectively referred to as the "TRANSACTION DOCUMENTS." SECTION 2. PLEDGE. The Pledgor hereby pledges to the Secured Parties all of the shares of beneficial interest in the Tenant (the "PLEDGED SHARES") listed in EXHIBIT A attached hereto and all other shares of beneficial interest in the Tenant in which the Pledgor may have rights from time to time and any other securities or other investment property and other collateral of the Pledgor now owned or hereafter acquired which under this Agreement are required to be pledged to the Secured Parties, and in each case, all certificates representing such Pledged Shares or other investment property or collateral, and all rights, options, warrants, stock or other securities or other property which may hereafter be received, receivable or distributed in respect of the Pledged Shares, together with all proceeds of the foregoing, including, without limitation, all dividends, cash, notes, securities or other property from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, the foregoing, (the Pledged Shares and any additional securities or collateral pledged hereunder, collectively, the "PLEDGED COLLATERAL"), and the Pledgor hereby grants to the Secured Parties a security interest in all of the Pledged Collateral and the proceeds thereof as security for the due and punctual payment and performance of the Secured Obligations (as hereinafter defined). The Pledgor has delivered to and deposited with the Secured Parties any and all certificates or other instruments representing the Pledged Collateral and undated trust share powers endorsed in blank, as security for the payment and performance of all of the Secured Obligations. If in the future the Pledgor possesses or controls any other certificates or other instruments representing the Pledged Collateral, the Pledgor shall immediately and without notice deliver the same to the Secured Parties together with undated trust share powers endorsed in blank, as security for the payment and performance of all of the Secured Obligations. SECTION 3. SECURED OBLIGATIONS. For purposes of this Agreement, the term "SECURED OBLIGATIONS" shall mean the payment and performance of each and every obligation of the Tenant and -2-

the Guarantor under the Transaction Documents or relating thereto, whether now existing or hereafter arising, and including, without limitation, the payment of the full amount of the Rent payable under the Master Lease. SECTION 4. REPRESENTATIONS OF THE PLEDGOR. The Pledgor covenants that the Pledged Shares are duly and validly pledged to the Secured Parties in accordance with law and the Pledgor shall warrant and defend the Secured Parties' right, title and security interest in and to the Pledged Shares against the claims and demands of all persons whomsoever. The Pledgor represents and warrants to the Secured Parties that the Pledgor has good and marketable title to all the Pledged Shares, free and clear of all claims, mortgages, pledges, liens, security interests and other encumbrances of every nature whatsoever; that the Pledged Shares are not subject to any restriction on transfer contained in the Declaration of Trust or any other charter documents of the Tenant or in any agreement or instrument to which the Tenant or the Pledgor is a party or by which the Tenant or the Pledgor is bound which would prohibit or restrict the pledge of the Pledged Shares hereunder or the disposition thereof upon default hereunder; that all of the Pledged Shares have been duly and validly issued and are fully paid for and nonassessable; and that the Pledged Shares constitute all of the presently issued and outstanding shares of the beneficial interests of the Tenant. SECTION 5. COVENANTS OF THE PLEDGOR. The Pledgor hereby covenants and agrees that it shall not sell, convey or otherwise dispose of any of the Pledged Collateral nor create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever with respect to any of the Pledged Collateral or the proceeds thereof, other than the liens on and security interests in the Pledged Collateral created hereby. The Pledgor further covenants and agrees that it shall not consent to or approve the issuance of any additional shares of beneficial interest in the Tenant. The Pledgor further covenants and agrees that, until the Secured Obligations are paid in full, the Pledgor shall not change the state of its incorporation or its corporate name without providing the Secured Parties with thirty (30) days' prior written notice and making all filings and taking all such other actions as the Secured Party determines are necessary or appropriate to continue or perfect the security interest granted hereunder. SECTION 6. FILING OF FINANCING STATEMENTS ETC. The Pledgor authorizes the Secured Parties to file from time to time one or more financing statements describing the Pledged -3-

Collateral. The Pledgor will cooperate with the Secured Parties at their request from time to time in obtaining control agreements in form and substance reasonably satisfactory to the Secured Parties with respect to any collateral investment property, deposit accounts, or other Pledged Collateral as to which the Secured Parties determine such agreements are necessary or appropriate to perfect the security interest granted hereunder. SECTION 7. DISTRIBUTIONS, ETC. Upon the dissolution, winding up, liquidation or reorganization of the Tenant, whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Tenant, if any sum shall be paid or any property shall be distributed upon or with respect to any of the Pledged Collateral, such sum shall be paid over to the Secured Parties, to be held as collateral security for the Secured Obligations. If any dividend shall be declared on any of the Pledged Collateral (excluding cash dividends), or any share of beneficial interest or fraction thereof shall be issued pursuant to any split of beneficial interests involving any of the Pledged Collateral, or any distribution of capital shall be made on any of the Pledged Collateral, or any property shall be distributed upon or with respect to the Pledged Collateral pursuant to recapitalization or reclassification of the capital of the Tenant, the shares or other property so distributed shall be delivered to the Secured Parties to be held as collateral security for the Secured Obligations. SECTION 8. EVENT OF DEFAULT. For purposes of this Agreement, the term "EVENT OF DEFAULT" shall mean (a) the occurrence of an Event of Default under the Transaction Documents; (b) the failure of the Guarantor to comply with any of its covenants or obligations under the Guaranty and the continuation thereof for a period of ten (10) Business Days after written notice thereof; (c) the failure of the Pledgor to comply with any of its covenants or obligations under this Agreement and the continuation thereof for a period of ten (10) Business Days after written notice thereof; or (d) any representation or warranty contained herein or made by the Pledgor in connection herewith shall prove to have been false or misleading in any material respect when made. SECTION 9. REMEDIES. (a) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties may cause all or any of the Pledged Collateral to be transferred into its name or into the name of its nominee or nominees, -4-

subject to the provisions of the Uniform Commercial Code or other applicable law. (b) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties shall be entitled to exercise the voting power with respect to the Pledged Collateral, to receive and retain, as collateral security for the Secured Obligations, any and all dividends or other distributions at any time and from time to time declared or made upon any of the Pledged Collateral, and to exercise any and all such rights of payment, conversion, exchange, subscription or any other rights, privileges or options pertaining to the Pledged Collateral as if it were the absolute owner thereof, including, without limitation, all such rights under the Declaration of Trust or any other charter document of the Tenant, and further including, without limitation, the right to exchange, at its discretion, any and all of the Pledged Collateral upon the merger, consolidation, reorganization, recapitalization or other readjustment of the Tenant, upon the exercise of any such right, privilege or option pertaining to the Pledged Collateral, and in connection therewith, to deposit and deliver any and all of the Pledged Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Parties may determine. (c) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or other applicable law and shall have the right to sell, resell, assign and deliver all or any of the Pledged Collateral in one or more parcels at any exchange or broker's board or at public or private sale. The Secured Parties shall give the Pledgor at least ten (10) days' prior written notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. Any such notice shall be deemed to meet any requirement hereunder or under any applicable law (including the Uniform Commercial Code) that reasonable notification be given of the time and place of such sale or other disposition. Such notice may be given without any demand of performance or other demand, all such demands being hereby expressly waived by the Pledgor to the extent permitted by applicable law. All such sales shall be at such commercially reasonable price or prices as the Secured Parties shall deem best and either for cash or on credit or for future delivery (without assuming any responsibility for credit risk). At any such sale or sales, the Secured Parties may purchase any or all of the Pledged -5-

Collateral to be sold thereat upon such terms as the Secured Parties may deem best. Upon any such sale or sales, the Pledged Collateral so purchased shall be held by the purchaser absolutely free from any claims or rights of any kind or nature of the Pledgor, including any equity of redemption and any similar rights, all such equity of redemption and any similar rights being hereby expressly waived and released by the Pledgor to the extent permitted by applicable law. In the event any consent, approval or authorization of any governmental agency will be necessary to effectuate any such sale or sales, the Pledgor shall execute, and hereby agrees to cause the Tenant to execute, all such applications or other instruments as may be required. The proceeds of any such sale or sales, together with any other additional collateral security at the time received and held hereunder, shall be received and applied: FIRST, to the payment of all costs and expenses of such sale, including attorneys' fees; and SECOND, to the payment of the Secured Obligations in such order of priority as the Secured Parties shall determine; and any surplus thereafter remaining shall be paid to the Pledgor or to whomever may be legally entitled thereto (including, if applicable, any subordinated creditor of the Pledgor). The Pledgor recognizes that the Secured Parties may be unable to effect a public sale of all or a part of the Pledged Collateral by reason of certain prohibitions contained in the Securities Act of 1933, and may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Pledged Collateral for their own accounts, for investment and not with a view to the distribution or resale thereof. The Pledgor agrees that private sales so made may be at prices and upon other terms less favorable to the seller than if such Pledged Collateral were sold at public sales, and that the Secured Parties shall have no obligation to delay sale of any such Pledged Collateral for the period of time necessary to permit such Pledged Collateral to be registered for public sale under the Securities Act of 1933. The Pledgor agrees that private sales made under the foregoing circumstances may be deemed to have been made in a commercially reasonable manner. Nothing herein shall be deemed to require the Pledgor to effect a registration of the Pledged Collateral under the Securities Act of 1933. (d) Upon the occurrence and during the continuance of any Event of Default, the Secured Parties, in their discretion, may demand, sue for and/or collect any money or property at any time due, payable or receivable, to which it may be entitled hereunder, on account of or in exchange for any of the Pledged -6-

Collateral. Upon the occurrence and during the continuance of any Event of Default, the Secured Parties shall further have the right, for and in the name, place and stead of the Pledgor, to execute endorsements, assignments, or other instruments of conveyance or transfer with respect to all or any of the Pledged Collateral. (e) The Secured Parties shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Parties elect to do any such act, the Secured Parties shall not be responsible to the Pledgor, other than for gross negligence or willful misconduct. (f) The Secured Parties shall have no obligation to marshal any assets in favor of the Pledgor, or against or in payment of the Secured Obligations or any other obligation owed to the Secured Parties by the Pledgor or any other person. SECTION 10. RIGHTS OF SECURED PARTIES. No course of dealing between the Pledgor and the Secured Parties nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, power or privilege hereunder or under any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided and provided under any of the Secured Obligations are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law, including, without limitation, the rights and remedies of a Secured Parties under the Uniform Commercial Code. SECTION 11. ASSIGNMENT, ETC. No waiver by the Secured Parties or by any other holder of Secured Obligations of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default on a future occasion. In the event of a sale or assignment by any Secured Party of its interest under the Transaction Documents, such Secured Party may assign or transfer its rights and interest under this Agreement in whole or in part to the purchaser or assignee of such interest, whereupon such purchaser or purchasers shall become vested with all of the powers and rights given to such Secured Party hereunder, and such Secured Party shall thereafter be forever released and fully discharged from any liability or responsibility thereafter arising hereunder with respect to the rights and interests so assigned. -7-

SECTION 12. DUTY OF SECURED PARTIES. Beyond the exercise of reasonable care to assure the safe custody of the Pledged Collateral while held hereunder, the Secured Parties shall have no duty or liability to collect any sums due in respect thereof or to protect or preserve rights pertaining thereto, and shall be relieved of all responsibility for the Pledged Collateral upon surrendering the same to the Pledgor. SECTION 13. WAIVERS, ETC. To the extent permitted by applicable law, the Pledgor, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, payment, notice of dishonor, protest and, except as otherwise provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights of the Secured Parties hereunder or in connection with any Secured Obligations. The Secured Parties may release, supersede, exchange or modify any collateral security it may from time to time hold and release, surrender or modify the liability of any third party without giving notice hereunder to the Pledgor. The Secured Parties shall be under no duty to exhaust its rights against any such collateral security or any such third party before realizing on the Pledged Collateral. Such modifications, changes, renewals, releases or other actions shall in no way affect the Pledgor's obligations hereunder. The Pledgor further waives any right it may have under the Constitution of the Commonwealth of Massachusetts (or under the constitution of any other state in which the any of the Pledged Collateral may be located), or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Parties, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing. THE PLEDGOR'S WAIVERS UNDER THIS SECTION 13 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE PLEDGOR HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS. SECTION 14. FURTHER ASSURANCES AS TO COLLATERAL; ATTORNEY-IN-FACT. From time to time hereafter, the Pledgor shall execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, collateral assignments and other security documents), and shall take all such actions, as the Secured Parties may reasonably -8-

request, for the purposes of implementing or effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Parties' rights with respect to the Pledged Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Pledgor which may be deemed to be a part of the Pledged Collateral) pursuant hereto and thereto. The Secured Parties are hereby appointed the attorney-in-fact, with full power of substitution, of the Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation, assignments, conveyances and transfers which are required to be taken or executed by the Pledgor under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Pledgor. SECTION 15. NOTICES. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with electronic confirmation of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of electronic confirmation of receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. -9-

(c) All such notices shall be addressed, if to the Secured Parties to: c/o Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: Mr. David J. Hegarty [Telecopier No. (617) 796-8349] if to the Pledgor to: c/o Five Star Quality Care, Inc. 400 Centre Street Newton, Massachusetts 02458 Attn: Mr. Evrett W. Benton [Telecopier No. (617) 332-2261] (d) By notice given as herein provided, the parties hereto and their respective successor and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America or to such other address as the party to whom such notice is directed may have designated in writing to the other parties hereto. SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and the term "Secured Parties" shall be deemed to include any other holder or holders of any of the Secured Obligations. Where the context so permits or requires, terms defined herein in the singular number shall include the plural, and in the plural number, the singular. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, each of which, when so executed and delivered, shall be an original and all of which shall together constitute one and the same agreement. SECTION 17. APPOINTMENT OF AGENT FOR SECURED PARTIES. Each of the Secured Parties hereby appoints CCC Financing I Trust as its agent for the following purposes under this Agreement (including, without limitation, the full power and authority to act of the Secured Parties' behalf for such purposes): (i) to give or receive notices, demands, claims and other communications on behalf of the Secured Parties under this -10-

Agreement and (ii) to receive and hold any and all certificates or other instruments representing the Pledged Collateral which are to be delivered from time to time by the Pledgor to the Secured Parties in accordance with the terms and conditions of this Agreement. SECTION 18. REINSTATEMENT. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time any amount received by the Secured Parties in respect of the Pledged Collateral is rescinded or must otherwise be restored or returned by the Secured Parties upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Pledgor or upon the appointment of any intervenor or conservator of, or trustee or similar official for the Pledgor or any substantial part of its or property, or otherwise, all as though such payments had not been made. SECTION 19. RESTRICTIONS ON TRANSFER. To the extent that any restrictions imposed by the Declaration of Trust or any other charter documents of the Tenant or any other document or instrument would in any way affect or impair the pledge of the Pledged Collateral hereunder or the exercise by the Secured Parties of any right granted hereunder including, without limitation, the right of the Secured Parties to dispose of the Pledged Collateral upon the occurrence of any Event of Default, the Pledgor hereby waives such restrictions, and the Pledgor hereby agrees that it will take any action which the Secured Parties may reasonably request in order that the Secured Parties may obtain and enjoy the full rights and benefits granted to the Secured Parties by this Agreement free of any such restrictions. SECTION 20. APPLICABLE LAW. This Agreement and any other instruments executed and delivered to evidence, complete or perfect the transactions contemplated hereby and thereby shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts regardless of (i) where any such instrument is executed or delivered; or (ii) where any payment or other performance required by any such instrument is made or required to be made; or (iii) where any breach of any provision of any such instrument occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of -11-

a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing. SECTION 21. ARBITRATION. The Secured Parties or the Pledgor may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder. Any such dispute shall be resolved in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties. In the event the Secured Parties or the Pledgor shall elect to submit any such dispute to arbitration hereunder, the Secured Parties and the Pledgor shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either the Secured Parties or the Pledgor shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Parties and the Pledgor, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Parties and -12-

one to the Pledgor. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. The Secured Parties and the Pledgor acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager's Management Agreement, the Secured Parties and the Pledgor shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding. SECTION 22. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, but this Agreement shall be reformed and construed and enforced to the maximum extent permitted by applicable law. SECTION 23. ENTIRE CONTRACT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof. SECTION 24. HEADINGS; COUNTERPARTS. Headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one of such counterparts. SECTION 25. NONLIABILITY OF TRUSTEES. THE DECLARATIONS OF TRUST ESTABLISHING CERTAIN OF THE SECURED PARTIES, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATIONS"), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES "CCC FINANCING I TRUST," "CCC OF KENTUCKY TRUST," "CCC OHIO HEALTHCARE TRUST" AND "CCC PUEBLO NORTE TRUST" REFER TO THE TRUSTEES UNDER THE DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, ANY AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SUCH ENTITIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SUCH ENTITIES. ALL PERSONS DEALING WITH SUCH ENTITIES, IN ANY WAY, SHALL LOOK ONLY TO THE -13-

ASSETS OF SUCH ENTITIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. [Remainder of page intentionally left blank.] -14-

WITNESS the execution hereof under seal as of the date above first written. PLEDGOR: FSQ, INC., a Delaware corporation
/s/ Bruce J. Mackey Jr. ------------------------------------Its: Treasurer and Chief Financial Officer By:

SECURED PARTIES: CCC FINANCING I TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC FINANCING LIMITED, L.P., a Delaware limited partnership By: CCC RETIREMENT TRUST, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC INVESTMENTS I, L.L.C., a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -15-

CCC OF KENTUCKY TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC OHIO HEALTHCARE TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC PUEBLO NORTE TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC RETIREMENT COMMUNITIES II, L.P., a Delaware limited partnership By: CRESTLINE VENTURES LLC, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCCP SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -16-

CCDE SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCFL SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCOP SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCSL SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

LEISURE PARK VENTURE LIMITED PARTNERSHIP, a Delaware limited partnership By: CCC LEISURE PARK CORPORATION, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -17-

LTJ SENIOR COMMUNITIES LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

PANTHER HOLDINGS LEVEL I, L.P., a Delaware limited partnership By: PANTHER GENPAR TRUST, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

-18-

Omitted Exhibits The following exhibit to the Pledge of Shares of Beneficial Interest Agreement has been omitted:
Exhibit Letter -------------A Exhibit Title -------------Pledged Shares of Beneficial Interest

The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibit to the Securities and Exchange Commission upon request.

Exhibit 10.13 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "AGREEMENT") is entered into as of this 11th day of January, 2002, by and among (i) FS TENANT HOLDING COMPANY TRUST, a Maryland business trust (the "TENANT"), and (ii) each of the other parties identified on the signature page hereof (collectively, the "SECURED PARTIES"). W I T N E S S E T H: WHEREAS, pursuant to that certain Master Lease Agreement, dated as of January 7, 2002 (together with all amendments, modifications and supplements thereto, collectively, the "MASTER LEASE"), the Secured Parties leased to the Tenant and the Tenant leased from the Secured Parties, certain premises as more particularly described in the Master Lease, subject to and upon the terms and conditions set forth in the Master Lease; and WHEREAS, as security for the payment and performance of each and every obligation and liability of the Tenant to the Secured Parties, whether now existing or hereafter arising, under the Master Lease or any other document or agreement executed and delivered pursuant thereto, including, without limitation, the payment of the Rent (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in SECTION 1), and the payment and performance of each and every other obligation of the Tenant to the Secured Parties, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due (collectively, the "OBLIGATIONS"), the Tenant has agreed to grant to the Secured Parties a first and perfected lien and security interest in the Collateral; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings specified below. Except as otherwise defined, terms defined in the Uniform Commercial Code and used herein without definition shall have the meanings given such terms in the Uniform Commercial Code. "AFFILIATED PERSON" shall have the meaning given such term in the Master Lease.

"BUSINESS DAY" shall have the meaning given such term in the Master Lease. "COLLATERAL" shall mean all of the Tenant's right, title and interest in and under or arising out of all and any personal property, intangibles and fixtures of any type or description (other than Excluded Collateral), wherever located and now existing or hereafter arising, or which constitute or arise from the operation, maintenance or repair of the Leased Property or any portion thereof, together with any and all additions and accessions thereto and replacements, products, proceeds (including, without limitation, proceeds of insurance) and supporting obligations thereof, including, but not limited to, the following: (a) all goods, including, without limitation, all Equipment; and (b) all General Intangibles; and (c) all other personal property or fixtures of any nature whatsoever which relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, and all property from time to time described in any financing statement signed by the Tenant naming the Secured Parties as Secured Parties; and (d) all claims, rights, powers or privileges and remedies relating to the foregoing or arising in connection therewith, including, without limitation, all Licenses and Permits which Tenant legally may grant a security interest in, rights to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, waiver or approval; all liens, security, guaranties, endorsements, warranties and indemnities and all insurance, eminent domain and condemnation awards and claims therefor relating thereto or arising in connection therewith; all rights to property forming the subject matter of any of the foregoing, including, without limitation, rights to stoppage in transit and rights to returned or repossessed property; all writings relating to the foregoing or arising in connection therewith; and (e) all contract rights, general intangibles and other property rights of any nature whatsoever arising out of or in connection with any of the foregoing (other than Excluded Collateral), including, without -2-

limitation, payments due or to become due, whether as repayments, reimbursements, contractual obligations, indemnities, damages or otherwise. "EQUIPMENT" shall mean all buildings, structures, improvements, fixtures and items of machinery, equipment and other tangible personal property which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property or any portion thereof, together with all repairs, replacements, improvements, substitutions, extensions or renewals thereof or additions thereto, all parts, additions and accessories incorporated therein or affixed thereto, and all "equipment" as such term is defined in the Uniform Commercial Code, and all cash and non-cash proceeds therefrom. "EVENT OF DEFAULT" shall have the meaning given such term in SECTION 6. "EXCLUDED COLLATERAL" shall mean Accounts or Chattel Paper, Support Obligations, General Intangibles or Deposit Accounts relating to such Accounts or Chattel Paper, Instruments or Investment Property evidencing or arising from such Accounts or Chattel Paper, any documents, books, records or other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to any of the foregoing or any Proceeds of any of the foregoing. "FACILITIES" shall have the meaning given such term in the Master Lease. "GENERAL INTANGIBLES" shall mean all present and future general intangibles and contract rights (other than Excluded Collateral) which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, including, but not limited to, all causes of action, corporate or business records, inventions, designs, patents, patent applications, trademarks, trademark registrations and applications therefor, goodwill, trade names, trade secrets, trade processes, copyrights, copyright registrations and applications therefor, franchises, customer lists, computer programs, claims under guaranties, tax refund claims, rights and claims against carriers and shippers, leases, claims under insurance policies, all rights to indemnification and all other intangible personal property of every kind and nature which constitutes, arises from or relates to the operation, maintenance or repair of the Leased Property, or any portion thereof. -3-

"INSTRUMENT" shall have the meaning give such term in Article 9 of the Uniform Commercial Code. "MASTER LEASE" shall have the meaning given such term in the preambles to this Agreement. "LEASED PROPERTY" shall have the meaning given such term in the Master Lease. "LICENSES" shall mean all certificates of need, licenses, permits, rights of use, covenants or rights otherwise benefiting or permitting the use and operation of each applicable Property or any part thereof pertaining to the operation, maintenance or repair of such Property or any portion thereof. "OBLIGATIONS" shall have the meaning given such term in the preambles to this Agreement. "OVERDUE RATE" shall have the meaning given such term in the Master Lease. "PERMITS" shall mean all permits, approvals, consents, waivers, exemptions, variances, franchises, orders, authorizations, rights and licenses obtained or hereafter obtained from any federal, state or other governmental authority or agency relating to the operation, maintenance or repair, each applicable Property, or any portion thereof. "PERSON" shall have the meaning given such term in the Master Lease. "PROPERTY" shall have the meaning given such term in the Master Lease. "RENT" shall have the meaning given such term in the Master Lease. "UNIFORM COMMERCIAL CODE" means Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts from time to time. SECTION 2. SECURITY INTEREST. As security for the prompt payment and performance of all the Obligations, the Tenant hereby grants, pledges, transfers and assigns to the Secured Parties, their successors and assigns and all other holders from time to time of the Obligations, a continuing security interest under the Uniform Commercial Code from time to time in effect in the jurisdiction in which any of the Collateral is located in and a continuing lien upon all of the Tenant's right, title and -4-

interest in the Collateral, together with any and all additions thereto and replacements, products and proceeds thereof, whether now existing or hereafter arising or acquired and wherever located. SECTION 3. GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS. The Tenant represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: (a) Each of the warranties and representations of the Tenant contained herein, in the Master Lease or in any other document executed in connection herewith or therewith are true and correct on the date hereof. (b) Except for the lien granted to the Secured Parties pursuant to this Security Agreement and any liens permitted under the Master Lease, the Tenant is, and as to the Collateral acquired from time to time after the date hereof the Tenant will be, the owner of all the Collateral free from any lien, security interest, encumbrance or other right, title or interest of any Person, except for the security interest of the Secured Parties therein, and the Tenant shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Secured Parties. The lien granted in this Agreement by the Tenant to the Secured Parties in the Collateral is not prohibited by and does not constitute a default under any agreements or other instruments constituting a part of the Collateral, and no consent is required of any Person to effect such lien which has not been obtained. (c) Except as permitted under the Master Lease, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) now on file or registered in any public office covering any interest of any kind in the Collateral, or intended so to be, which has not been terminated, and so long as this Agreement remains in effect or any of the Obligations or any obligations of any Affiliated Person of the Tenant to the Secured Parties remain unpaid, the Tenant will not execute and there will not be on file in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interest of the Secured Parties. (d) The chief executive office and the principal place of business of the Tenant are as set forth in SCHEDULE 1 -5-

and the Tenant will not move its chief executive office or establish any other principal place of business except to such new location as the Tenant may establish in accordance with this SECTION 3(d). The location of each Facility comprising a portion of the Leased Property is as set forth in SCHEDULE 2. The originals of all documents evidencing Collateral and the only original books of account and records of the Tenant relating thereto are, and will continue to be, kept at such chief executive office or the applicable Facility, as the case may be, or at such new location as the Tenant may establish in accordance with this SECTION 3(d). The Tenant shall not move its chief executive office or establish any other principal place of business until (i) the Tenant shall have given to the Secured Parties not less than ten (10) days' prior written notice of its intention to do so, which notice shall clearly describe such new location and provide such other information in connection therewith as the Secured Parties may reasonably request, and (ii) with respect to such new location, the Tenant shall have taken such action, satisfactory to the Secured Parties (including, without limitation, all action required by SECTION 5), to maintain the security interest of the Secured Parties in the Collateral. (e) All tangible personal property owned on the date hereof by the Tenant to be used in connection with the operation or maintenance of the Leased Property, or any portion thereof, is located at each applicable Property or is in transit to such Property from the vendor thereof. The Tenant agrees that (i) all such property held by the Tenant on the date hereof, once at each applicable Property, shall remain at such Property and (ii) all such property subsequently acquired by the Tenant shall immediately upon acquisition be transferred to and remain at the applicable Property. (f) The Tenant's corporate name and organizational identification number are as set forth on the signature page hereto. The name under which each of the Facilities is operated is set forth on SCHEDULE 2. The Tenant shall not (i) change such names without providing the Secured Parties with thirty (30) days' prior written notice and making all filings and taking all such other actions as the Secured Parties determines are necessary or appropriate to continue or perfect the security interest granted hereunder, (ii) change its corporate organizational number, nor (iii) conduct its business in any other name or take title to any Collateral in any other name while this Agreement remains in effect. Except as otherwise set forth on SCHEDULE 1, the Tenant has not ever had any other name nor conducted business in any other name in any jurisdiction. -6-

The Tenant is organized as a Maryland business trust. Subject to the terms and conditions of the Master Lease, the Tenant shall not change its organizational structure or jurisdiction of organization without giving at least thirty (30) days' prior written notice thereof to the Secured Parties. (g) The Secured Parties are authorized (but are under no obligation) to make, upon ten (10) Business Days' notice to the Tenant (except in the case of exigent circumstances, in which circumstances upon such notice, if any, as may then be reasonably practical), any payments which in the Secured Parties' opinion are necessary to: (i) discharge any liens which have or may take priority over the lien hereof; and (ii) pay all premiums payable on the insurance policies referred to in the Master Lease or any other document or agreement executed in connection therewith or herewith, upon the failure of the Tenant to make such payments within the time permitted therein. The Tenant shall have no claim against the Secured Parties by reason of its decision not to make any payments or perform such obligations permitted under this SECTION 3(g). The Tenant shall repay to the Secured Parties any sums paid by the Secured Parties upon demand. Any sums paid and expenses incurred by the Secured Parties pursuant to this paragraph shall bear interest at the Overdue Rate. (h) If any of the Collateral at any time becomes evidenced by an Instrument, the Tenant shall promptly deliver such Instrument to the Secured Parties, appropriately endorsed to the order of the Secured Parties, to be held pursuant to this Agreement. (i) The Tenant shall not sell, transfer, change the registration, if any, of, dispose of, attempt to dispose of, or substantially modify or abandon the Collateral or any material part thereof, other than as permitted under the Master Lease, without the prior written consent of the Secured Parties. Except as permitted under the Master Lease, the Tenant shall not create, incur, assume or suffer to exist any lien upon any of the Collateral without the prior written consent of the Secured Parties. (j) The Tenant shall not assert against the Secured Parties any claim or defense which the Tenant may have against -7-

any seller of the Collateral or any part thereof or against any Person with respect to the Collateral or any part thereof. (k) The Tenant shall, upon demand, pay to the Secured Parties the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Parties may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Secured Parties hereunder and under such other agreements or (iv) the failure by the Tenant to perform or observe any of the provisions hereof. (l) The Tenant shall indemnify and hold harmless the Secured Parties from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Secured Parties in any way relating to or arising out of this Agreement or arising out of the Tenant's obligations under any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or of any such other documents. SECTION 4. SPECIAL PROVISIONS CONCERNING EQUIPMENT. The Tenant shall not impair the rights of the Secured Parties in the Equipment. Regardless of the manner of the affixation of any Equipment to real property, the Equipment so attached shall at all times constitute and remain personal property. The Tenant retains all liability and responsibility in connection with the Equipment and the liability of the Tenant to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Equipment may be lost, destroyed, stolen or damaged or for any reason whatsoever have become unavailable to the Tenant. Upon the request of the Secured Parties, the Tenant shall provide to the Secured Parties a current list of Equipment. SECTION 5. FINANCING STATEMENTS; DOCUMENTARY STAMP TAXES. (a) The Tenant shall, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Secured Parties from time to time such lists, descriptions and designations of inventory, warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and -8-

other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, which the Secured Parties reasonably deem appropriate or advisable to perfect, preserve or protect their security interest in the Collateral. The Tenant authorizes the Secured Parties to file any such financing statements without the signature of the Tenant and the Tenant will pay all applicable filing fees and related expenses. To the extent permitted by law, a carbon, photographic or other reproduction of this Agreement or a financing statement shall be sufficient as a financing statement. (b) The Tenant shall procure, pay for, affix to any and all documents and cancel any documentary tax stamps required by and in accordance with, applicable law, and the Tenant shall indemnify and hold harmless the Secured Parties from and against any liability (including interest and penalties) in respect of such documentary stamp taxes. SECTION 6. EVENT OF DEFAULT. For purposes of this Agreement, the term "EVENT OF DEFAULT" shall mean (a) the occurrence of an Event of Default under the Master Lease or any document or agreement executed in connection therewith; (b) the failure of the Tenant to comply with any of its covenants or obligations under this Agreement and the continuance thereof for a period of ten (10) Business Days after written notice thereof; (c) any representation or warranty contained herein or made by the Tenant in connection herewith shall prove to have been false or misleading in any material respect when made; or (d) the occurrence of any default or event of default under any document, instrument or agreement evidencing the Obligations. SECTION 7. REMEDIES. (a) Upon the occurrence and during the continuance of an Event of Default, in addition to any rights and remedies now or hereafter granted under applicable law, under the Master Lease or under any other documents or agreements entered into in connection herewith or therewith, and not by way of limitation of any such rights and remedies, the Secured Parties shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any applicable jurisdiction, and the right, without notice to, or assent by, the Tenant, in the name of the Tenant or in the name of the Secured Parties or otherwise: (i) with respect to the General Intangibles to ask for, demand, collect, receive, compound and give acquittance therefor or any part thereof, to -9-

extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any thereof, to exercise and enforce any rights and remedies in respect thereof, and to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Secured Parties necessary or advisable for the purpose of collecting or enforcing payment and performance thereof; (ii) to take possession of any or all of the Collateral and to use, hold, store, operate, merge and/or control the same and to exclude the Tenant and all Persons claiming under it wholly or partly therefrom, and, for that purpose, to enter, with the aid and assistance of any Person or Persons and with or without legal process, any premises where the Collateral, or any part thereof, are, or may be, placed or assembled, and to remove any such Collateral; (iii) from time to time, at the expense of the Tenant, to make all such repairs, replacements, alterations, additions and improvements to and of the Collateral as the Secured Parties may reasonably deem proper; to carry on the business and to exercise all rights and powers of the Tenant in respect to the Collateral, as the Secured Parties shall deem best, including the right to enter into any and all such agreements with respect to the leasing, management and/or operation of the Collateral or any part thereof as the Secured Parties may see fit; to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof which rents, issues, profits, fees, revenues and other income may be applied to pay the expenses of holding and operating the Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which the Secured Parties may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Collateral or any part thereof, and all other payments which the Secured Parties may be required or authorized to -10-

make under any provision of this Agreement (including, without limitation, reasonable legal costs and attorneys' fees); (iv) to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated hereby; (v) upon notice to such effect, to require the Tenant to deliver, at the Tenant's expense, any or all Collateral which is reasonably movable to the Secured Parties at a place designated by the Secured Parties, and after delivery thereof the Tenant shall have no further claim to or interest in the Collateral; and (vi) without obligation to resort to other security, at any time and from time to time, to sell, re-sell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as the Secured Parties may determine, with the amounts realized from any such sale to be applied to the Secured Obligations in the manner determined by the Secured Parties. The Tenant hereby agrees that all of the foregoing may be effected without demand, advertisement or notice (except as hereinafter provided or as may be required by law), all of which (except as hereinafter provided) are hereby expressly waived, to the maximum extent permitted by law. The Secured Parties shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Parties elects to do any such act, the Secured Parties shall not be responsible to the Tenant. (b) Upon the occurrence and during the continuance of an Event of Default, the Secured Parties may take legal proceedings for the appointment of a receiver or receivers (to which the Secured Parties shall be entitled as a matter of right) to take possession of the Collateral pending the sale thereof pursuant either to the powers of sale granted by this Agreement or to a judgment, order or decree made in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement. If, after the exercise of any or all of such -11-

rights and remedies, any of the Obligations shall remain unpaid or unsatisfied, the Tenant shall remain liable for any deficiency or performance thereof, as applicable. (c) Upon any sale of any of the Collateral, whether made under the power of sale hereby given or under judgment, order or decree in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement: (i) the Secured Parties may bid for and purchase the property being sold and, upon compliance with the terms of sale, may hold, retain and possess and dispose of such property in its own absolute right without further accountability, and may, in paying the purchase money therefor, deliver any instruments evidencing the Obligations or agree to the satisfaction of all or a portion of the Obligations in lieu of cash in payment of the amount which shall be payable thereon, and such instruments, in case the amounts so payable thereon shall be less than the amount due thereon, shall be returned to the Secured Parties after being appropriately stamped to show partial payment; (ii) the Secured Parties may make and deliver to the purchaser or purchasers a good and sufficient deed, bill of sale and instrument of assignment and transfer of the property sold; (iii) all right, title, interest, claim and demand whatsoever, either at law or in equity or otherwise, of the Tenant of, in and to the property so sold shall be divested; such sale shall be a perpetual bar both at law and in equity against the Tenant, its successors and assigns, and against any and all Persons claiming or who may claim the property sold or any part thereof from, through or under the Tenant, its successors or assigns; (iv) the receipt of the Secured Parties or of the officers thereof making such sale shall be a sufficient discharge to the purchaser or purchasers at such sale for his or their purchase money, and such purchaser or purchasers, and his or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the -12-

Secured Parties or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misapplication or nonapplication thereof; and (v) to the extent that it may lawfully do so, the Tenant agrees that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take advantage of, any appraisement, valuation, stay, extension or redemption laws, or any law permitting it to direct the order in which the Collateral or any part thereof shall be sold, now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance or enforcement of this Agreement or any other document, the Master Lease or any other document or agreement entered into in connection herewith or therewith, and the Tenant hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power granted or delegated to the Secured Parties in this Agreement, but will suffer and permit the execution of every such power as though no such laws were in force. In the event of any sale of Collateral pursuant to this SECTION 7, the Secured Parties shall, at least ten (10) days before such sale, give the Tenant written notice of its intention to sell, except that, if the Secured Parties shall determine in its reasonable discretion that any of the Collateral threatens to decline in value, any such sale may be made upon three (3) days' written notice to the Tenant, which time periods the Tenant hereby agrees are reasonable. (d) The Secured Parties are hereby irrevocably appointed the true and lawful attorney-in-fact of the Tenant in its name and stead, to make all necessary deeds, bills of sale and instruments of assignment and transfer of the property sold pursuant to this SECTION 7 and for such other purposes as are necessary or desirable to effectuate the provisions of this Agreement, and for that purpose it may execute and deliver all necessary deeds, bills of sale and instruments of assignment and transfer, and may substitute one or more Persons with like power, the Tenant hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully -13-

do by virtue hereof. If so requested by the Secured Parties or by any purchaser, the Tenant shall ratify and confirm any such sale or transfer by executing and delivering to the Secured Parties or to such purchaser all property, deeds, bills of sale, instruments or assignment and transfer and releases as may be designated in any such request. SECTION 8. APPLICATION OF MONEYS. All moneys which the Secured Parties shall receive pursuant hereto shall first be applied (to the extent thereof) to the payment of all reasonable costs and expenses incurred in connection with the administration and enforcement of, or the preservation of any rights under, this Agreement or any of without limitation, the reasonable fees and disbursements of its counsel and agents), and the balance, if any, shall be applied first to accrued and unpaid interest, charges and fees on, and then to outstanding principal of, any Obligations of the Tenant (or its affiliates) to the Secured Parties, and then to any other amounts outstanding on any such Obligations and then as required by law to any other parties having an interest therein. SECTION 9. WAIVERS, ETC. The Tenant, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, notice, protest and, except as is otherwise specifically provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights of the Secured Parties hereunder or in connection with any Obligations or any Collateral; waives all rights to require a marshaling of assets by the Secured Parties; consents to and waives notice of (i) the substitution, release or surrender of any Collateral, (ii) the addition or release of Persons primarily or secondarily liable on any Obligation or on any Collateral, (iii) the acceptance of partial payments on any Collateral and/or the settlement or compromise thereof, (iv) any requirement of diligence or promptness on the part of the Secured Parties in the enforcement of any rights in respect of any Collateral or any other agreement or instrument directly or indirectly relating thereto, and (v) any enforcement of any present or future agreement or instrument relating directly or indirectly to the Collateral. No delay or omission on the part of the Secured Parties or any holder of Obligations in exercising any right hereunder shall operate as a waiver of such right or of any other right hereunder. No waiver of any such right on any one occasion shall be construed as a bar to or waiver of any such right on any future occasion. No course of dealing between the Tenant and the Secured Parties or any holder of Obligations, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties or any holder of -14-

Obligations, any right, power or privilege hereunder or under any of the Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The Tenant further waives any right it may have under the constitution of any state or commonwealth in which any of the Collateral may be located), or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Parties, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing. THE TENANT'S WAIVERS UNDER THIS SECTION 9 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE TENANT HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS. The Secured Parties shall not be required to marshal any present or future security for (including without limitation this Agreement and the Collateral pledged hereunder), or guaranties of, the Obligations or any of them, or to resort to such security or guaranties in any particular order; and all of the rights hereunder and in respect of such securities and guaranties shall be cumulative and in addition to all other rights, however existing or arising. To the maximum extent permitted by applicable law, the Tenant hereby agrees that it will not invoke any law relating to the marshalling of collateral which, might cause delay in or impede the enforcement of the Secured Parties' rights under this Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and, to the maximum extent permitted by applicable law, the Tenant hereby irrevocably waives the benefits of all such laws. SECTION 10. FURTHER ASSURANCES AS TO COLLATERAL; ATTORNEY-IN-FACT. From time to time hereafter, the Tenant will execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, mortgages, collateral assignments and other security documents), and will take all such actions as the Secured Parties may reasonably request, for the purposes of implementing or -15-

effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Parties' rights with respect to the Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Tenant which may be deemed to be a part of the Collateral) pursuant hereto and thereto. The Secured Parties are hereby appointed the attorney-in-fact, with full power of substitution, of the Tenant for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation financing or continuation statements, deeds to secure debt, mortgages, assignments, conveyances, assignments and transfers which are required to be taken or executed by the Tenant under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Tenant. SECTION 11. ARBITRATION. The Secured Parties or the Tenant may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder. Any such dispute shall be resolved in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties. In the event the Secured Parties or the Tenant shall elect to submit any such dispute to arbitration hereunder, the Secured Parties and the Tenant shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either the Secured Parties or the Tenant shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree -16-

upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Parties and the Tenant, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Parties and one to the Tenant. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. The Secured Parties and the Tenant acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager's Management Agreement, the Secured Parties and the Tenant shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding. SECTION 12. APPOINTMENT OF AGENT FOR SECURED PARTIES. Each of the Secured Parties hereby appoints CCC Financing I Trust as its agent for the following purposes under this Agreement (including, without limitation, the full power and authority to act of the Secured Parties' behalf for such purposes): (i) to give or receive notices, demands, claims and other communications on behalf of the Secured Parties under this Agreement and (ii) to receive and hold any and all Collateral which is to be delivered from time to time by the Tenant to the Secured Parties in accordance with the terms and conditions of this Agreement. SECTION 13. MISCELLANEOUS. (a) The Tenant agrees that its obligations and the rights of the Secured Parties hereunder and in respect of the Obligations may be enforced by specific performance hereof and thereof and by temporary, preliminary and/or final injunctive relief relating hereto and thereto, without necessity for proof -17-

by the Secured Parties or any holder of the Obligations that it would otherwise suffer irreparable harm, and the Tenant hereby consents to the issuance of such specific and injunctive relief. (b) Any notice or demand upon the Tenant or the Secured Parties shall be deemed to have been sufficiently given when given in accordance with the provisions of the Master Lease. (c) None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by the Tenant and the Secured Parties. No notice to or demand on the Tenant in any case shall entitle the Tenant to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Secured Parties to any other or further action in any circumstances without notice or demand. (d) The obligations of the Tenant hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (i) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of the Tenant; (ii) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement, the Master Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; or (iii) any amendment to or modification of any of the Master Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; whether or not the Tenant shall have notice or knowledge of any of the foregoing. The rights and remedies of the Secured Parties herein provided for are cumulative and not exclusive of any rights or remedies which the Secured Parties would otherwise have, including, without limitation, under the Master Lease or any document or agreement executed in connection herewith or therewith. This Agreement is intended as a supplement for and is not intended to supersede in any respect the Master Lease or any document or agreement executed in connection herewith or therewith. (e) This Agreement shall be binding upon the Tenant and its successors and assigns and shall inure to the benefit of the Secured Parties, and its respective successors and assigns. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement. -18-

(f) The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibitions or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (h) This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principle place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing. Notwithstanding the foregoing, to the extent that matters of title, or creation, perfection and priority of the security interests created hereby, or procedural issues of foreclosures are required to be governed by the laws of the state in which the Collateral, or relevant part thereof, is located, the laws of such State shall apply. SECTION 12. NONLIABILITY OF TRUSTEES. THE DECLARATIONS OF TRUST ESTABLISHING CERTAIN OF THE SECURED PARTIES, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATIONS"), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES "CCC FINANCING I TRUST," "CCC OF KENTUCKY TRUST," "CCC OHIO HEALTHCARE TRUST" AND "CCC PUEBLO NORTE TRUST" REFER TO THE TRUSTEES UNDER THE DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, ANY AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SUCH ENTITIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SUCH ENTITIES. ALL PERSONS -19-

DEALING WITH SUCH ENTITIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SUCH ENTITIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. [Remainder of page intentionally left blank.] -20-

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal as of the date first above written. TENANT: FS TENANT HOLDING COMPANY TRUST, a Maryland business trust
By: /s/ Bruce J. Mackey Jr. -------------------------------------Its Treasurer and Chief Financial Officer

Corporate Organizational Number: MD B06518245 SECURED PARTIES: CCC FINANCING I TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC FINANCING LIMITED, L.P., a Delaware limited partnership By: CCC RETIREMENT TRUST, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC INVESTMENTS I, L.L.C., a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -21-

CCC OF KENTUCKY TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC OHIO HEALTHCARE TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC PUEBLO NORTE TRUST, a Maryland business trust
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCC RETIREMENT COMMUNITIES II, L.P., a Delaware limited partnership By: CRESTLINE VENTURES LLC, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCCP SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -22-

CCDE SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCFL SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCOP SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

CCSL SENIOR LIVING LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

LEISURE PARK VENTURE LIMITED PARTNERSHIP, a Delaware limited partnership By: CCC LEISURE PARK CORPORATION, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

[Signatures continue on following page.] -23-

LTJ SENIOR COMMUNITIES LLC, a Delaware limited liability company
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

PANTHER HOLDINGS LEVEL I, L.P., a Delaware limited partnership By: PANTHER GENPAR TRUST, its General Partner
By: /s/ John R. Hoadley -------------------------------------Its: Treasurer ---------------------------------

-24-

SCHEDULE 1 CHIEF EXECUTIVE OFFICE: 400 Centre Street Newton, Massachusetts 02458 PRINCIPAL PLACE OF BUSINESS 400 Centre Street Newton, Massachusetts 02458

Omitted Schedules The following schedule to the Security Agreement has been omitted:
Schedule Number --------------2 Schedule Title -------------THE FACILITIES

The Registrant agrees to furnish supplementally a copy of the foregoing omitted schedule to the Securities and Exchange Commission upon request.

Exhibit 10.14

FORM OF COMPOSITE COPY OF OPERATING AGREEMENT AS AMENDED THROUGH DECEMBER 13, 2001 BETWEEN [OWNER OF APPLICABLE RETIREMENT COMMUNITY] ("OWNER") AND MARRIOTT SENIOR LIVING SERVICES, INC. ("OPERATOR") FOR [NAME OF RETIREMENT COMMUNITY] MARRIOTT SENIOR LIVING COMMUNITY [CITY, STATE] EFFECTIVE AS OF [DATE]

TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITION OF TERMS.........................................................................1 Section 1.01 Definition Of Terms...........................................................1 ARTICLE 2 Section Section Section Section Section Section Section Section Section 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 APPOINTMENT OF OPERATOR....................................................................15 Appointment; Exclusive License...............................................15 Authority of Operator; Right of Possession...................................15 Management Functions.........................................................15 Limitations on Authority of Operator.........................................18 Title Encumbrances...........................................................19 Licenses and Permits.........................................................20 Credit.......................................................................20 Representations and Warranties of Owner......................................20 Representations and Warranties of Operator...................................21

ARTICLE 3 OWNERSHIP OF RETIREMENT COMMUNITY..........................................................21 Section 3.01 Ownership of Retirement Community............................................21 ARTICLE 4 Section Section Section Section 4.01 4.02 4.03 4.04 TERM.......................................................................................22 Term.........................................................................22 Actions to be Taken Upon Termination.........................................22 Performance Termination......................................................23 Owner's Termination Option...................................................25

ARTICLE 5 COMPENSATION OF OPERATOR...................................................................25 Section 5.01 Base Fee, Incentive Fee and Bonus Fee........................................26 ARTICLE 6 Section Section Section Section Section Section Section Section Section Section Section 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 FINANCING OF THE RETIREMENT COMMUNITY......................................................26 Amendments of Management Agreement...........................................26 Notice and Opportunity to Cure...............................................27 Assignment of Management Agreement...........................................28 Subordination of Management Agreement........................................28 Non-Disturbance Agreement....................................................29 Attornment...................................................................29 No Modification or Termination of Agreement..................................30 Owner's Right to Finance the Retirement Community............................30 Sale/Leaseback Transactions..................................................31 REIT Transactions............................................................31 Covenant to Pay Debt Service.................................................32

ARTICLE 7 WORKING CAPITAL AND FIXED ASSET SUPPLIES...................................................32 Section 7.01 Working Capital..............................................................33 Section 7.02 Fixed Asset Supplies.........................................................33 ARTICLE 8 REPAIRS, MAINTENANCE AND REPLACEMENTS......................................................33 Section 8.01 Routine Repairs and Maintenance..............................................33 Section 8.02 FF&E Reserve.................................................................34

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TABLE OF CONTENTS (continued)
Section 8.03 Section 8.04 Section 8.05 ARTICLE 9 Section Section Section Section ARTICLE 10 Section Section Section Section Section Section ARTICLE 11 Section Section Section Section Section ARTICLE 12 Section Section Section Section Section 9.01 9.02 9.03 9.04 PAGE Building Alterations, Improvements, Renewals, and Replacements.................................................................37 Liens........................................................................38 Ownership of Replacements....................................................38 BOOKKEEPING AND BANK ACCOUNTS................................................................ Books and Records............................................................39 Retirement Community Accounts, Expenditures..................................40 Annual Operating Projection..................................................41 Operating Losses.............................................................42 PROPRIETARY MARKS; TRADEMARK LICENSE; INTELLECTUAL PROPERTY......................................................................42 Proprietary Marks............................................................42 Trademark License............................................................42 Purchase of Inventories and Fixed Asset Supplies.............................42 Computer Software and Equipment..............................................43 Intellectual Property........................................................43 Breach of Covenant...........................................................43

10.01 10.02 10.03 10.04 10.05 10.06

POSSESSION AND USE OF RETIREMENT COMMUNITY.................................................43 11.01 Quiet Enjoyment..............................................................43 11.02 Use..........................................................................44 11.03 Central Administrative Services..............................................44 11.04 Owner's Right to Inspect.....................................................45 11.05 Indemnity....................................................................45 INSURANCE..................................................................................46 12.01 Interim Insurance............................................................46 12.02 Property and Operational Insurance...........................................46 12.03 General Insurance Provisions.................................................47 12.04 Cost and Expense.............................................................48 12.05 Owner's Option to Obtain Certain Insurance...................................48

ARTICLE 13 TAXES......................................................................................49 Section 13.01 Real Estate and Personal Property Taxes......................................49 ARTICLE 14 RETIREMENT COMMUNITY EMPLOYEES.............................................................50 Section 14.01 Employees....................................................................50 ARTICLE 15 DAMAGE, CONDEMNATION AND FORCE MAJEURE.....................................................52 Section 15.01 Damage and Repair............................................................52 Section 15.02 Condemnation.................................................................53 Section 15.03 Force Majeure................................................................53 ARTICLE 16 DEFAULTS...................................................................................54 Section 16.01 Definition of "Default"......................................................54

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TABLE OF CONTENTS (continued)
Section 16.02 Section 16.03 Section 16.04 Section 16.05 PAGE Definition of "Event of Default".............................................55 Remedies Upon an Event of Default............................................55 Operator's Right to Specific Performance for Owner's Wrongful Termination.........................................................56 Owner's Estate...............................................................57

ARTICLE 17 ASSIGNMENT.................................................................................57 Section 17.01 Assignment...................................................................57 ARTICLE 18 SALE OF THE RETIREMENT COMMUNITY...........................................................58 Section 18.01 Sale of the Retirement Community.............................................58 Section 18.02 Assumption Agreement of Successor Owner......................................61 ARTICLE 19 Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section 19.01 19.02 19.03 19.04 19.05 19.06 19.07 19.08 19.09 19.10 19.11 19.12 19.13 19.14 19.15 19.16 19.17 19.18 MISCELLANEOUS..............................................................................61 Right to Make Agreement......................................................61 Consents.....................................................................62 Relationship Between the Parties.............................................62 Confidentiality..............................................................62 Applicable Law...............................................................63 Covenants Running with the Land; Recordation.................................63 Headings.....................................................................63 Notices......................................................................63 Environmental Matters........................................................64 Estoppel Certificates........................................................65 Arbitration..................................................................65 Affiliates...................................................................66 Equity and Debt Offerings....................................................66 Restriction on Operator......................................................67 Entire Agreement.............................................................69 Waiver.......................................................................69 Partial Invalidity...........................................................69 Construction.................................................................69

EXHIBITS
EXHIBIT A.........Legal Description of the Land EXHIBIT B.........Existing Title Encumbrances EXHIBIT C.........Pro Forma Fees EXHIBIT D.........Owner's Initial Cost

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OPERATING AGREEMENT THIS OPERATING AGREEMENT ("Agreement") is effective as of the 21st day of June, 1997 ("Effective Date"), by [Name and address of owner] ("Owner"), and MARRIOTT SENIOR LIVING SERVICES, INC. ("Operator"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. RECITALS: A. Owner, a wholly-owned subsidiary of CCC Financing Limited, L.P. ("CCC") (f k a FRP Financing Limited, L.P.), is the owner of the Retirement Community (as hereinafter defined) commonly known as [name of Retirement Community], located in [City, State]; B. Operator is in the business of managing and operating senior living residence facilities and communities; C. Operator is the owner of the Proprietary Marks that are used to identify retirement communities in the Marriott Retirement Community System; D. Operator desires to assure itself that it will be able to conduct and enhance its business at Owner's Retirement Community by obtaining from Owner an irrevocable (but subject in every respect to all of the provisions of this Agreement, including those providing for termination prior to the expiration of the full Term) license to operate Operator's business in Owner's Retirement Community; E. Owner desires to assure that it will have the benefit of Operator's experience, services and Proprietary Marks in establishing, enhancing and maintaining a successful Retirement Community. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITION OF TERMS SECTION 1.01 DEFINITION OF TERMS The following terms when used in this Agreement shall have the meanings indicated: "ACCOUNTING PERIOD" means the four (4) week accounting periods having the same beginning and ending dates as Operator's four (4) week accounting periods, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Operator's accounting system to the calendar. In the event that the Effective Date is not the first day of Operator's four (4) week accounting periods, the first Accounting Period under this Agreement shall consist of the first four (4) week accounting period of Operator commencing after the Effective Date and the period from the Effective Date until the commencement of such first four (4) week accounting period. 1

"ADDITIONAL INVESTED CAPITAL" shall mean the cumulative total, as of any given date during the Term, of the following: (i) any contribution made by Owner pursuant to Section 7.01A (provided that Additional Invested Capital shall be decreased by any return to Owner of excess Working Capital pursuant to Section 7.01B); (ii) any expenditures made by Owner pursuant to Section 8.03, and any expenditures by Owner pursuant to Section 19.09; (iii) any contributions by Owner to the FF&E Reserve (beyond the funding described in Section 8.02B), other than those contributions which are reimbursed to Owner under Section 8.02F; (iv) consideration paid and reasonable costs incurred by Owner or any Affiliate of Owner in connection with the purchase of any interest (direct or indirect) held in Owner by any party which is not an Affiliate of Owner; and (v) Expansion Payments paid pursuant to the Expansion Agreement or Stock Purchase Agreement, and (vi) any additional amounts advanced or funded by Owner pursuant to this Agreement which do not constitute Owner Deductions. "AFFILIATE" means any individual or entity directly or indirectly through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to the exercise, directly or indirectly, of more than fifty percent (50%) of the voting rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "AGREEMENT" shall mean this Operating Agreement as the same may be amended from time to time. "AGREEMENT YEAR" shall mean an annual period; the first Agreement Year shall commence on the Effective Date and each subsequent Agreement Year shall commence on the succeeding anniversaries of the Effective Date. "ANNUAL FINANCIAL REPORT" shall have the meaning specified in Section 9.01. "ANNUAL OPERATING PROJECTION" shall have the meaning set forth in Section 9.03. "AREA A" shall have the meaning set forth in Section 19.14D. "AREA B" shall have the meaning set forth in Section 19.14D. "BASE FEE" shall have the meaning set forth in Section 5.01A. "BONUS FEE" shall have the meaning set forth in Section 5.01B. "BUILDING ESTIMATE" shall have the meaning set forth in Section 8.03A. "BUSINESS DAY(S)" means Monday through Friday except for New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. "CANCELED TERM" shall have the meaning set forth in Section 4.04. 2

"CAPITAL EXPENDITURES" shall have the meaning set forth in Section 8.03A. "CAPITALIZATION MULTIPLE" shall mean the number ten (10). "CASE GOODS" means furniture and furnishings used in the Retirement Community, including, without limitation: chairs, beds, chests, headboards, desks, lamps, tables, television sets, mirrors, pictures, wall decorations and similar items. "CENTRAL ADMINISTRATIVE SERVICES" shall have the meaning set forth in Section 11.03. "CENTRAL ADMINISTRATIVE SERVICES FEE" shall have the meaning set forth in Section 11.03. "CONSUMER PRICE INDEX" or "CPI" means the Consumer Price Index from time to time issued by the United States Government Bureau of Labor Statistics for Urban Wage Earners and Clerical Workers, All Items, for the United States of America (1982-84=100), or if the aforesaid Consumer Price Index is not at such time so prepared and published, any comparable index selected by Owner and reasonably satisfactory to Operator (a "Substitute Index") then prepared and published by an agency of the Government of the United States, appropriately adjusted for changes in the manner in which such index is prepared and/or year upon which such index is based. Any dispute regarding the selection of the Substitute Index or the adjustments to be made thereto shall be settled by arbitration in accordance with Section 19.11. Except as otherwise expressly stated herein, when a number or amount is required to be "adjusted by the Consumer Price Index", or similar terminology, such adjustment shall be equal to the percentage increase or decrease (except that for purposes of this Agreement, the Consumer Price Index shall not be reduced below its level as of the Effective Date) in the Consumer Price Index which is issued for the month in which such adjustment is to be made (or, if the Consumer Price Index for such month is not yet publicly available, the Consumer Price Index for the most recent month for which the Consumer Price Index is publicly available) as compared to the Consumer Price Index which was issued for the prior month in which the Effective Date occurred unless another base month is indicated herein. "COVERAGE RATIO" shall mean the number one and one-quarter (1.25), or one and two-tenths (1.2) in the case of a mortgage issued or insured by an agency of the United States Government, or Fannie Mae or Freddie Mac or lending institutions established by the federal government. "CURE NOTICE" shall have the meaning set forth in Section 4.03B. "DAY(S)" means one or more calendar days(s). "DEBT SERVICE" means all installments of principal and interest required to be made under any Secured Loan or any replacement thereof. "EFFECTIVE DATE" shall have the meaning set forth in the Preamble. 3

"EMPLOYEE CLAIMS" means any and all claims (including all fines, judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and expenses, and costs of settlement with respect to any such claim) by any employee or employees of Operator against Owner or Operator with respect to the employment at the Retirement Community of such employee or employees. "Employee Claims" shall include, without limitation, the following: (i) claims which are eventually resolved by arbitration, by Litigation or by settlement; (ii) claims which also involve allegations that any applicable employment-related contracts affecting the employees at the Retirement Community have been breached; and (iii) claims which involve allegations that one or more of the Employment Laws has been violated; provided, however, that "Employee Claims" shall not include claims for worker compensation benefits (which shall be governed by Article 12 hereof) or for unemployment benefits. "EMPLOYMENT LAWS" means any federal, state or local law (including the common law), statute, ordinance, rule, regulation, order or directive with respect to employment, conditions of employment, benefits, compensation, or termination of employment that currently exists or may exist at any time during the Term of this Agreement, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers Adjustment and Retraining Act, the Occupational Safety and Health Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988 and the Americans With Disabilities Act of 1990. "ENVIRONMENTAL LAWS" shall mean: (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 ET SEQ., as now or hereafter amended, and the Resource Conservation and Recovery Act of 1976, as now or hereafter amended; (ii) the regulations promulgated thereunder, from time to time; and (iii) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, management, storage, disposal or abatement of Hazardous Materials or protection of human health or the environment. "EVENT OF DEFAULT" shall have the meaning set forth in Section 16.02. "EXISTING MORTGAGE" shall mean the Mortgages listed on Exhibit D, but for purposes of this Agreement shall not include any amendments or modifications thereof that would materially adversely affect the interests of Operator after the Effective Date. "EXISTING TITLE ENCUMBRANCES" shall have the meaning set forth in Section 2.05A. "EXPANSION AGREEMENT" means that certain Expansion Agreement of even date herewith between Owner and Marriott Senior Living Services, Inc. "EXPANSION UNITS" shall have the meaning set forth in the Expansion Agreement between the parties of even date herewith. "EXTENDED TERM" shall have the meaning set forth in Section 4.01. "FF&E" means furniture, furnishings, fixtures, Soft Goods, Case Goods, vehicles and equipment (including, but not limited to, telephone systems, facsimile machines, 4

communications and computer systems hardware) but shall not include Fixed Asset Supplies or any Software. "FF&E ESTIMATE" shall have the meaning set forth in Section 8.02C. "FF&E RESERVE" shall have the meaning set forth in Section 8.02A. "FF&E RESERVE PAYMENT" shall have the meaning set forth in Section 8.02B. "FIRST MORTGAGE" shall mean any Mortgage which is a first lien on the Retirement Community having priority over all other Mortgages that may then encumber the Retirement Community. "FISCAL YEAR" means Operator's Fiscal Year which now ends at midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. Any partial Fiscal Year between the Effective Date and the commencement of the first full Fiscal Year shall constitute a separate Fiscal Year. A partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement shall, for purposes of this Agreement, constitute a separate Fiscal Year. If Operator's Fiscal Year is changed in the future, appropriate adjustment to this Agreement's reporting and accounting procedures shall be made upon mutual consent of Owner and Operator; provided, however, that no such change or adjustment shall alter the Term of this Agreement or in any way reduce the distributions of Operating Profit or other payments due Owner hereunder, and Operator shall bear (not as an Operating Expense) any incidental accounting costs imposed on Owner necessitated by any such change in Operator's Fiscal Year. Fiscal Year shall not include any portion of a Fiscal Year prior to the Effective Date or after the Termination of this Agreement. "FIXED ASSET SUPPLIES" means supply items included within "Property and Equipment" under the Uniform System of Accounts, including linen, china, glassware, silver, uniforms, and similar items. "FORCE MAJEURE" means acts of God, acts of war, civil disturbance, governmental action (including the revocation or refusal to grant licenses or permits, where such revocation or refusal is not due to the fault of the party whose performance is to be excused for reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or any other causes beyond the reasonable control of either party. "FORECLOSURE" shall mean any exercise of the remedies available to a Holder, upon a default under the Secured Loan held by such Holder, which results in a transfer of title to or possession of the Retirement Community. The term "Foreclosure" shall include, without limitation, any one or more of the following events, if they occur in connection with a default under a Secured Loan: (i) a transfer by judicial foreclosure or exercise of a power of sale; (ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume possession of the Retirement Community; (iv) a transfer of either ownership or control of the Owner, by exercise of a stock pledge or otherwise; (v) if title to the Retirement Community is held by a tenant under a ground lease, an assignment of the tenant's interest in such ground lease; or (vi) any similar judicial or non-judicial exercise of the remedies held by the Holder. 5

"FORECLOSURE DATE" shall mean the date on which title to or possession of the Retirement Community is transferred by means of a Foreclosure. "FUTURE TITLE ENCUMBRANCE" shall have the meaning set forth in Section 2.05B. "GAAP" means Generally Accepted Accounting Principles as adopted by the American Institute of Certified Public Accountants. "GROSS REVENUES" shall mean, for each Accounting Period, all revenues and receipts of every kind derived by Owner from operating the Retirement Community and all departments and parts thereof, including, but not limited to: income (from both cash and credit transactions) from monthly occupancy fees (including the amortized portion of the "endowment" or like one-time payments received under "lifecare" or like contracts with residents), health care fees and ancillary services fees received pursuant to various agreements with residents of the Retirement Community; income from food and beverage, and catering sales; income from vending machines; and proceeds, if any, from business interruption or other loss of income insurance, all determined in accordance with GAAP; provided, however, that Gross Revenues shall not include: (i) gratuities to employees at the Retirement Community; (ii) federal, state or municipal excise, sales or use taxes or similar taxes imposed at the point of sale and collected directly from residents or guests of the Retirement Community or included as part of the sales price of any goods or services; (iii) proceeds from the sale of FF&E and any other capital asset; (iv) interest received or accrued with respect to the monies in any operating or reserve accounts of the Retirement Community; (v) any cash refunds, rebates or discounts to residents of the Retirement Community, or cash discounts and credits of a similar nature, given, paid or returned in the course of obtaining Gross Revenues or components thereof; (vi) proceeds from any Sale of the Retirement Community, or any other capital transaction; (vii) proceeds of any financing transaction affecting the Retirement Community; (viii) any endowment or like one-time payments received under lifecare or like contracts with residents, except as specifically set forth above in this paragraph; (ix) security deposits until such time as the same are applied to rent and other charges due and payable; (x) awards of damages, settlement proceeds and other payments received by Owner in respect of any Litigation; (xi) proceeds of any condemnation; (xii) proceeds of any casualty insurance, other than loss of rents or business interruption insurance; (xiii) any Shortfall Payment made by Operator to Owner pursuant to Section 4.03B; and (xiv) payments under any policy of title insurance. "HAZARDOUS MATERIALS" shall have the meaning set forth in Section 19.09D hereof. "HOLDER" means any holder, from time to time, of any Secured Loan. "IMPOSITIONS" means all real estate and personal property taxes, levies, assessments and similar charges (other than those which are specifically excluded pursuant to Section 13.01B) including, without limitation, the following: all water, sewer or similar fees, rents, rates, charges, excises or levies; vault license fees or rentals; license fees; permit fees; inspection fees and other authorization fees and other governmental charges of any kind or nature whatsoever, whether general or special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter levied or assessed of every character (including all interest and penalties thereon), which at any time during or in respect of the Term of this Agreement may be assessed, levied, 6

confirmed or imposed on Owner or Operator with respect to the Retirement Community or the operation thereof, or otherwise in respect of or be a lien upon the Retirement Community (including, without limitation on any of the FF&E, Inventories or Fixed Asset Supplies now or hereafter located therein). Impositions shall not include any income or franchise taxes payable by Owner or Operator. "INCENTIVE FEE" shall have the meaning set forth in Section 5.01A. "INITIAL TERM" shall have the meaning set forth in Section 4.01. "INTELLECTUAL PROPERTY" means: (i) all Software; and (ii) all manuals, instructions, policies, procedures and directives issued by Operator to its employees at the Retirement Community regarding the procedures and techniques to be used in operating the Retirement Community. "INTERIM REPORT" shall have the meaning specified in Section 9.01C. "INVENTORIES" means "Inventories" as defined by GAAP, such as provisions in storerooms, refrigerators, pantries and kitchens; medical supplies; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "LAND" means the land described in Exhibit A. "LEGAL REQUIREMENT" means any federal, state or local law, code, rule, ordinance, regulation or order of any governmental authority having jurisdiction over the business or operation of the Retirement Community or the matters which are the subject of this Agreement, including any resident care or health care, building, zoning or use laws, ordinances, regulations or orders, environmental protection laws and fire department rules. "LICENSE(S)" means any license, permit, decree, act, order, authorization or other approval (including Medicare/Medicaid certification to the extent applicable) or instrument which is necessary in order to operate the Retirement Community in accordance with Legal Requirements or pursuant to the Marriott Standards and otherwise in accordance with this Agreement. "LITIGATION" means: (i) any cause of action commenced in a federal, state or local court; or (ii) any claim brought before an administrative agency or body (for example, without limitation, employment discrimination claims) relating to the Retirement Community and/or the ownership and/or operation thereof. "MANAGEMENT ANALYSIS REPORT" shall mean a relatively brief, narrative report on the state of business and affairs of the Retirement Community, prepared on an annual basis by Operator and delivered to Owner at the time of delivery of the Annual Financial Report, which shall include a narrative description regarding the preceding Fiscal Year of: (i) the Retirement Community's operating performance, including significant variations from the Annual Operating Projection and (ii) an analysis of any significant variation of the actual resident fees and occupancy from what was set forth in the Annual Operating Projection. 7

"MARRIOTT RETIREMENT COMMUNITY SYSTEM" means at any particular time the entire system or group of full service (that is consisting of both independent living and health care accommodations and services) retirement communities then owned and/or operated or managed by Operator (or one or more of its Affiliates), under the "Marriott" name. "MARRIOTT STANDARDS" means from time to time both the operational standards (for example, staffing levels, accounting and fiscal management, resident care and health care policies and procedures, accounting and financial reporting policies and procedures) and the physical standards (for example, quality of FF&E, frequency of FF&E replacement) that are then generally and consistently (but not necessarily, absolutely or without exception) applied at or to retirement communities in the Marriott Retirement Community System which are of comparable size, age and market orientation as the Retirement Community, (provided, however, that the Marriott Standards shall in no event be lower than (i) what is required, from time-to-time during the Term, by Legal Requirements, or (ii) the operational and physical standards, as of the date in question, of comparable retirement communities in the quality segment of the retirement communities industry in the state in which the Retirement Community is located). "MORTGAGE" means any mortgage, deed of trust, or deed to secure debt or other security instrument recorded against the Project as security for a Secured Loan. "MORTGAGEE" means the Holder, from time to time, of a Mortgage or any replacement of a Mortgage. "NET OPERATING PROFIT" means Operating Profit less Owner's Priority. "NON-DISTURBANCE AGREEMENT" shall mean an agreement, in recordable form in the jurisdiction in which the Retirement Community is located, executed and delivered by a Holder (which agreement shall by its terms be binding upon all assignees of such Holder), for the benefit of Operator, pursuant to which, in the event such Holder (or its assignee) comes into possession of or acquires title to the Retirement Community as a result of a Foreclosure, such Holder (and its assignees) shall (x) recognize Operator's rights under this Agreement, and (y) shall not name Operator as a party in any Foreclosure action or proceeding, and (z) shall not disturb Operator in its right to continue to manage the Retirement Community pursuant to this Agreement; provided, however, that at such time, (i) this Agreement has not expired or otherwise been earlier terminated in accordance with its terms, and (ii) there are no outstanding Events of Default by Operator, and (iii) no material event has occurred and no material condition exists which, after notice or the passage of time or both, would entitle Owner to terminate this Agreement (excluding events which would constitute an Event of Default, which are to be governed exclusively by clause (ii) hereof). "OPERATING EXPENSE(S)" means any or all, as the context requires, of the following: 1. All costs of operating the Retirement Community incurred in accordance with this Agreement, including, without limitation, all salaries, wages, fringe benefits, payroll taxes and other costs related to Retirement Community employees, Employee Claims (except to the extent specifically set forth to the contrary in Section 14.01), all departmental expenses, 8

administrative and general expenses, the cost of Retirement Community advertising and business promotion, heat, light, power, electricity, gas, telephone, cable and other utilities, and routine repairs, maintenance and minor alterations treated as Operating Expenses under Section 8.01; 2. The cost of Inventories and Fixed Asset Supplies consumed in the operation of the Retirement Community; 3. A reasonable reserve for uncollectible accounts receivable as determined by Operator; 4. All reasonable costs and fees of audit, legal, technical and other independent professionals or other third parties who are retained by Operator to perform services required or permitted hereunder; provided Operator will notify Owner at lease thirty (30) Days in advance of any proposed expenditure under this paragraph 4 which is in excess of Fifty Thousand Dollars ($50,000.00) (to be adjusted by the CPI) and which was not specifically identified in the Annual Operating Projection; and Operator shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Retirement Community or if immediate action is otherwise required, the above-described requirement regarding thirty (30) Days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances; 5. The reasonable cost and expense of technical consultants and operational experts who are employees of Operator or one of its Affiliates, and who perform specialized services in connection with non-routine Retirement Community work; provided, however, that the costs and expenses so incurred shall only be Operating Expenses to the extent such costs and expenses are reasonable and competitively priced, as compared to similar work done by outside consultants or experts; and provided, further, that Operator will notify Owner at least thirty (30) Days in advance of any proposed expenditure under this paragraph 5 which is in excess of Fifty Thousand Dollars ($50,000.00) (to be adjusted by CPI) and which is not specifically identified in the Annual Operating Projection, and Operator shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Retirement Community or if immediate action is otherwise required, the above-described requirement regarding thirty (30) Days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances; 6. Costs and expenses for preparation of Medicare and Medicaid cost reports and billing submissions; 7. The Base Fee and the Bonus Fee, if any; 8. Subject to the limitation set forth below in this definition, the Central Administrative Services Fee; 9. Insurance costs and expenses as provided in Sections 12.04 and 12.05; 10. All Impositions assessed against the Retirement Community; 9

11. Payments (other than the lump-sum contribution provided for in Section 8.02F2) into the FF&E Reserve pursuant to Section 8.02; 12. Such other non-capital costs and expenses incurred by Operator as are specifically provided for elsewhere in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Retirement Community in accordance with the Marriott Standards; all as determined in accordance with GAAP; 13. The reimbursement to Owner of the amount of any Owner Deductions; and 14. Lease payments for any equipment lease to the extent set forth in Section 8.02D. It is understood that the term "Operating Expenses" shall not include: (i) Debt Service payments pursuant to any Secured Loan or any other loans or borrowings of Owner; nor (ii) except as set forth above, payments pursuant to equipment leases or other forms of financing obtained for the FF&E located in or connected with the Retirement Community (such payments shall be paid out of the FF&E Reserve in accordance with Section 8.02), nor (iii) rental payments pursuant to any ground lease, nor (iv) any other payments which are designated as Owner's responsibility under any of the provisions of this Agreement and which are not Owner Deductions, all of which shall be paid by Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve. Unless otherwise specifically set forth in this Agreement, all the costs and expenses of the Retirement Community shall be Operating Expenses. Commencing with the second (2nd) Agreement Year and continuing thereafter until the earlier of (i) the end of the seventh (7th) Agreement Year, or (ii) the date on which the ratio of Operating Profit, to the Owner's Priority amount for any consecutive thirteen (13) Accounting Periods equals or exceeds one-and-one-quarter (1.25) (but in no event prior to the end of the fourth (4th) Agreement Year), fifty percent (50%) of the Central Administrative Services Fee shall be paid as an Operating Expense and fifty percent (50%) shall be paid (and to the extent paid shall constitute an Operating Expense) only after Owner receives Owner's Priority for the subject Fiscal Year, and only to the extent of Operating Profit remaining after payment of the Owner's Priority. "OPERATING PROFIT" shall mean for each Fiscal Year, the excess of Gross Revenues over Operating Expenses for such Fiscal Year. "OPERATING LOSS" shall mean for each Fiscal Year, a negative Operating Profit; that is, an excess of Operating Expenses over Gross Revenues. "OPERATOR" shall have the meaning set forth in the Preamble. "OWNER" shall have the meaning set forth in the Preamble. "OWNER DEDUCTION(S)" shall mean amounts paid by Owner with respect to: (i) reasonable third party out-of-pocket costs of any negotiations or Litigation with respect to any contest of Impositions, (ii) fees and expenses of technical consultants and operational experts which are retained by Owner, with the approval of Operator, to give advice with respect to the operation of the Retirement Community, and (iii) any other amount which under this Agreement 10

constitutes an Owner Deduction. The amount of any Owner Deductions paid by Owner shall be reimbursed to Owner (as an Operating Expense) in the Fiscal Year in which they were paid. "OWNER'S INITIAL COST" shall have the meaning set forth in Exhibit D. "OWNER'S INVESTMENT" shall mean the sum total, as of any given point in time during the Term, of: (i) the Owner's Initial Cost; plus (ii) any Additional Invested Capital expended by Owner; provided that each expenditure of Additional Invested Capital shall be added to the Owner's Investment (with respect to the Fiscal Year or Fiscal Years during which such expenditure(s) occurred) on a pro rata basis, beginning with the first full Accounting Period after such expenditures occurred, and thereafter over the remainder of the then current Fiscal Year. "OWNER'S PREFERRED RETURN" shall mean ten and three-quarters percent (10.75%) through Fiscal Year 1999, eleven percent (11%) for Fiscal Years 2000 through 2003, and